Skip to content

Governance in many DeFi projects remains highly centralized

October 30, 2020

A new report jointly developed by DappRadar and Monday Capital discuss proposals for the distribution and control of tokens for key DeFi protocols. Despite efforts to decentralize control in the In the harvest management phase, the researchers argue that many projects, especially those with deep VC roots, remain highly centralized.

The researchers analyzed projects such as MakerDAO (MKR), Curve (CRV), Link (COMP) and Uniswap (UNI).

All of them have a very skewed distribution of tokens favoring those who have the mostn. Analysts noted that governance appears to be the most mature at Maker, as it is the oldest of those projects. The MakerDAO forum is where community members conduct preliminary discussions and analysis. It is open to everyone, regardless of their MKR involvement.

Governance in many DeFi projects remains highly centralized
Governance in many DeFi projects remains highly centralized

However, the voting process in the chain seems to be controlled mainly by large owners. The top 20 addresses own around 24% of the entire portfolio of assets. Compared to some of the other projects analyzed in the report, this distribution is still fairly even.

In the case of the Connection, The researchers found that The COMP owners rankings mostly include venture capitalists, team members and a few other blockchain projects, especially Dharma and Gauntlet.

Only 2.3% of the directorates have a delegation necessary to make and vote proposals. As a result, only a small fraction of the community is involved in governance, and the actual percentage is likely to be even lower, given the presence of exchange addresses in these numbers. The overall supply is also heavily skewed towards the top 20 directions.

Curve and Uniswap have similar problems. since the first has a single address that apparently owns 75% of the voting rights, while the second suffers from scandals and accusations of taking power from those involved in the project.

The researchers identified the three main reasons that led to this centralization of power. The first is that users see governance tokens as a reward rather than a voting tool:

“The protocols started using their government tokens as ‘rewards’ for users who joined the network. While the idea sounds good, the governance goes to those who use the product, in reality the financial incentives have been stronger than the governance – Incentives “.

The second is that the systems are designed as plutocracies in which wealth defines power. There are no minimum requirements for participation They can establish “adequate decentralization” and the large first-time owners can exercise their power largely without inconvenience. It’s worth noting that there is no easy way to prove chain identity, which is why plutocracy is the only practical mechanism of government.

To the last, The researchers found that initial investments play an important role in centralizing project governance. Venture investors and other investors often have large initial stakes, which can deter other users from gaining governance power as well.

In his conclusion, Analysts claim that it is distribution mechanisms that encourage centralization of power, so the report’s outcome is no surprise.