IOSG Ventures Newsletter #15: Governance & Community in Blue Chip DeFi
This is a continuation of IOSG’s #14 newsletter with a twist. In the new format of our newsletters, we will cover broad subjects like community, governance, token economics, etc. In the first category we’re going to discuss Community in DeFi.
As a new entrant in the blockchain/DeFi space, the idea of decentralized governance was intriguing to me. The fact that users of a project can propose ideas that can be voted on was fascinating and it obviously led to a few google searches like: what is governance in crypto? How do I quantify it? What are the best practices?
After falling in multiple internet rabbit holes that started with YFI governance and ended with reading tweet history of a vocal crypto tweeter, there was a clearer understanding on what governance in crypto is like and what are some of the big wins for the industry.
To start with, let’s set some parameters for good, decentralized governance –
- Participation — ability to participate in voting/decision making process (not available in private/public companies).
- Transparency — free flow of information and transparency in processes & operations.
- Responsiveness — decision makers can respond to concerns/grievances.
- Consensus-focused — decisions made for interest of the project rather than interest of individuals.
- Effectiveness & efficiency — ability to execute & implement ideas/thoughts without compromising transparency/participation/consensus. Ensuring results.
- Accountability — decision makers take accountability of the consequences, learn from the mistakes and actively amend them.
Since the crypto twitter loves referencing Vitalik (as they should! he’s earned it!), I’ve decided on introducing a new section: What does Vitalik say (WDVS)?
Tl;dr he thinks that centralised is crucial for base layer protocols but crypto applications like DeFi should experiment while urging them to explore design mechanisms beyond the existing coin-based voting.
Moving on to the main piece of the article — what really has happened in the crypto decentralized governance world? While it is nearly impossible to outline all the events that have shaped this space in the last few months, we’ll discuss some of the big wins by YFI, Uniswap and Sushiswap.
YFI had a strong sense of community even at launch which continues to resonate strongly in the DeFi industry. Uniswap has been resilient and has managed to take back its user’s trust by adapting and innovating. Sushiswap’s ninja-like maneuvers and ability to come up with creative ways of acquiring and retaining users has been interesting (Has Chef Nomi read Sun Tzu’s Art of War? I think so.)
Let’s dive into Yearn.Finance
- A good distribution model
30,000 YFI tokens were distributed on July 17th 2020 at $30, they appreciated to $790.0 the next day and by mid-September, YFI token value was at an ATH of $43k. YFI made a splash when they launched the YFI token with 100% of token allocation to Yearn users. To ensure a fair and ‘honest’ launch, the YFI token had no pre-mine, no VCs allocation and even no team reward. All the tokens were distributed to the users of the protocol.
- Led to a healthy dialogue in the community
Prop 0 at YFI proposed an allowance for mining of future YFI token (vs. initial 30k token distribution). The community was “against” the idea of introducing inflation to the YFI token with 69% votes against until a YFI_whale swung the vote in favour of the proposal last minute. The YFI_whale, comprising early YFI farmers, held 16% of voting rights and explained their decision on the official forum stating allowing farming will attract new users to the protocol at a relatively small cost and that other projects have been successful in growing their token value despite the inflation. They also proposed an emission schedule with 3–12k in new YFI tokens vested over the next 2–3 years.
- Which led to better reward & incentives
Originally, the plan was to distribute 30k YFI tokens equally across 3 pools. With the new amendment to this, new YFI tokens can be minted but it is yet undecided how or when this will happen. There have been multiple discussions about this on the forum with no positive outcome (no quorum or rejected).
- Which led to overall protocol growth (long run).
Fair launch of YFI tokens exponentially grew the protocol from a modest $7.87M to an ATH of $967M in August. YFI is just one example of how a good proposal, active engagement and good governance has allowed the project to grow with a greater inflow of capital and users.
Monitoring community engagement
YFI has seen strong community engagement with an average of 50 new proposals each month and has enjoyed the participation from distinct voters in its last few proposals as seen in fig below.
The community continues to remain active and engaged. Despite Andre’s insistence that YFI token is valueless, YFI’s strong community has appreciated YFI’s token value and is competing with Bitcoin! price. At one point, a single YFI token was valued at $43k!
Next, Battle of the Swaps: Uniswap & Sushiswap
- Token Distribution is a good tactic to acquire users
Uniswap grew into its prime from early August 2020 with an AuM of over $1B and became DeFi’s favourite AMM DEX (as well as favourite Ethereum project!).
Then on August 27, an unexpected fork, SushiSwap led by Chef Nomi was announced. Speedily, they fair-launched $SUSHI tokens with no pre-sale or VC allocation (reminds you of someone?) over the next 2 weeks that also provided lucrative rewards to their LPs (compared to Uni). Within a week, 71% of Uniswap’s smart contracts were staked in the SUSHI pool, bleeding out the Uniswap pools. SUSHI’s fall in TVL was as quick as its rise as yield farmers dumped the tokens now being earned in plethora.
- But, a transparent governance is crucial to ensure trust in the system and its users
(11 Sept) A couple weeks into the rise of SUSHI, it’s creator Chef Nomi then gained a bad reputation in an ‘exit scam’ when he swapped 2.5M SUSHI for 18,000 ETH. These were removed from the Sushi Treasury without community approval (despite a governance mechanism in place).
A few days later, Uniswap announced its plans on introducing native UNI, governance tokens to retain its bleeding liquidity to SUSHI. This announcement met with resounding approval from the community. Considering Chef Nomi’s ‘exit scam’, Uni was back in the game. Proposal 1 was uploaded for voting and the community participated actively with over 320 unique voters.
· But a good design will lead the way for a robust & sovereign governance.
Although Uniswap was able to make a comeback and bring back trust in the community with its governance; transparency is not enough to ensure long term sustainability. A good governance mechanism ensures that the system’s sovereignty isn’t’ compromised is essential before rolling out. Uniswap is yet again, a keen example of this.
Uniswap’s first proposal by Dharma seeks to lower the thresholds (3M for proposals and 30M for passing votes) but it missed the quorum by 400k votes despite the vote having >85% turnout, >95% support, with 272 FOR — 48 AGAINST votes. This however worked in favour of UNI holders since Dharma’s single wallet holds ~15M UNI and together with Gauntlet (top UNI Delegate), both parties could easily swing any proposal in their favour and compromise the sovereignty of the governance.
Considering how both the projects had to fight for liquidity, they adopted different strategies to acquire & retain users without compromising on their long-term sustainability. Two months later (which is equivalent to 2 years in DeFi), as of Dec both projects have sturdy AuMs (figs below) and are progressing towards more engagements, partnerships etc.
Total Value locked in the projects as of writing are: Uniswap ($1.37B) and Sushiswap ($1.07B).
Monitoring Community Engagement
Uniswap has seen strong engagement post-proposal 1 as well with over 100 proposal topics lodged in the Uniswap governance forum.
Sushiswap has seen strong engagement from its community with over 60+ proposals created & voted on in the month of Nov and a total of 149 proposals executed via TimeLock.
Both the communities continue to contribute and participate in discussions around improving the protocol, incentives system and token distribution. It will be interesting to see how both the projects develop as they grow. Coin-based voting is also just one of the methods that has been tried and tested and there may be designs beyond this that projects may choose to implement in the future!
Idea to Implementation
Some of the challenges noted with adopting these governance systems from ideation stage to transition to implementation we gathered are as follows
- Timing the transition since there is a clear trade-off between fast execution vs. community led decision making.
- Getting the decentralized governance design right prior to transitioning with room for immediate improvements. It is critical for the leadership to implement a good design prior to the transition to ensure the community can engage, propose, vote, and implement after the transition. Designing realistic models for quorum & threshold so that proposals can be passed without compromising on the sovereignty of the platform.
- Engaging the community to participate actively and incentivise for good governance proposals.
- Handling conflicts, concerns & controversies. Early this year when Andre Cronje announced the merger between YFI & Pickle and started a thread on the YFI forum simultaneously. While the community was pleasantly surprised with this decision, some voiced their concern over lack of voting about the merger while some members lashed out. To ensure that community concerns were heard, the team retroactively conducted a vote. Moving forward, all the potential mergers & partnerships are set up for proposal by the YFI team to facilitate transparency.
- Using novel solutions to make governance for users easier. In light of the new decentralized governance trend that’s come up in the DeFi space, new solutions have come up to enable this process by either — a) providing/delegating insights to those more engaged or b) providing means to monitor and conduct all your voting via aggregation platforms. External DAOs like Fire Eyes aim to provide a voice of reason to the community. Selecting early-projects like Aave and YFI for higher impact. The team has been active in the Aave & YFI governance forums, providing insights on topics like “Spending the AAVE reserve on gas”. In fact, the YFI’s Proposal 0 was proposed by one of the members of the fire eyes DAO! Governance Dashboards & Management Portal like Boardroom App, one of its first aims to aggregate governance from all the protocols to their portal where users can access multiple forums, assign signals and vote for the respective governance token. The app is yet to be launched but has the early blessings of Metacartel DAO as well as VC funds like Variant, Coinfund, Framework and Slow Ventures in a $2.2M seed round.
Closing Remarks
In conclusion, there have been some great designs employed by the DeFi projects around governance and the projects have very successfully been able to incentivise and engage the contributors. Healthy discourse is north star of any governance and should be encouraged as well as incentivised by projects. The design space is massive and open for creators and builders to explore!
🦄 About IOSG
Founded in 2017, IOSG Ventures is research and community-driven with offices across China, US and Singapore. We focus on Open Finance, Web3.0 and cross-chain ecosystems, investing in teams with top potential worldwide. Our portfolio covers more than 60 projects, including Layer-1 blockchains (Near, Polkadot, Cosmos), middleware (Celer, Raiden, Reach) and applications including DeFi (MakerDAO, Synthetix, UMA). We have been actively involved in various developer & DAO communities. We believe in long-term partnership and we work closely with our portfolios to advise and support them along their journey of entrepreneurship.
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