The Downside of DAOs
DAOs are meant to be run by the average user, but the reality seems to be that venture capital firms and other powerful investors rule the day for now.
DAOs were meant to shift global power in all sorts of ways back to the average people but today, that vision doesn’t seem to have materialized. In a recent piece last week, Decrypt.co pointed out that it’s likely most DAOs aren’t run by a mixture of average users and code (as they should be), but by deep-pocketed investors like venture capital firms.
In return for shelling out billions to DeFi projects like MakerDAO and Compound, these firms and others have received significant stashes of those projects’ governance tokens. In case you don’t already know what a governance token is, just imagine that a cryptocurrency can be used by its holder to vote on the future of the project it’s tied to. In MakerDAO’s case, this happens with the MKR token, while in Compound’s case, it occurs with the COMP token.
How are governance tokens earned?
Once tokens become listed on centralized or decentralized exchanges, they can typically be bought in exchange for Ether. The issue with this is that by the time these tokens go live to the public, they’ve often already been available to private investors for quite some time, which I dig into below.
What’s the problem with DeFi Governance?
Overall, the leading DeFi projects that have working governance tokens appear to be ruled by venture capital firms.
In Compound’s case, any COMP tokens that were initially distributed earlier this year were given to the Compound project’s “shareholders,” which include: A16z, Polychain Capital, and several other well-known venture capital firms. In February, Robert Leshner, Compound’s CEO said that it was essentially up to the discretion of the project’s shareholders whether they keep their tokens or sell them to the public. As of now, it’s unclear to me exactly how many COMP tokens these firms own.
MakerDAO, in its initial stages up to now, hasn’t really been any different. As of late 2019, A16z, Dragonfly Capital Partners, and Paradigm owned 11% of the total MKR supply (maybe more). While this may not seem like a lot since it leaves 88% still available, there’s no evidence that these groups haven’t been continuously adding to their stakes.
This May, the DeFi Lending space, which includes MakerDAO, Compound, and many others, was one of the only crypto sectors experiencing growth in institutional funding. According to Cointelegraph, this amounted to a 50% hike from April to May, with the wide majority of deals happening in the United States (where firms like A16z are located).
Regardless of exactly how much of a governance token’s supply VCs control, the fact that MakerDAO, Synthetix, and most existing cryptocurrency projects that have governance tokens run on one token, one vote models is the biggest issue.
That means that the more of a project’s tokens a particular user buys, the more say they have in that project’s future. This extends to Tezos, which is one network that’s truly run as a DAO, since voting occurs live on its blockchain, but users need to have 10,000 or more XTZ coins to vote.
Truthfully, I could go on forever, through many different projects across the industry because most existing DAO-driven projects have turned into plutocracies.
For now, however, let’s pump the brakes and consider an important question.
Is rule by the rich really what crypto development teams have had in mind since Bitcoin started it all?
How do we fix this?
In Compound’s case, it could point the way to a brighter future for all sorts of DAOs since project has just recently opened up governance(leadership) to its users and voting is weighted with a proportion, instead of using a one token, one vote model.
What this means is that even though a16z has placed 3 votes with a total of 345,043 COMP tokens, these votes only count for a 3.45% “weight” or stake in the project’s future so far. Still, since at least the top 23 voters are VC firms or affiliated with VC firms, this isn’t exactly the ideal alternative model to a direct plutocracy.
More changes need to be made.
Where Aave fits in
In my view, Aave may serve as an excellent case for how DeFi governance can truly be decentralized in the future. In my next post, I plan to explain why. For now, if there’s one key takeaway from all of this, it’s that to truly champion the crypto ethos, DAOs will have to show a true commitment to decentralization.
To do that, they’ll have to take measures to lessen the power of a user’s wallet on the voting process.
As always, if you enjoy my content, let me know below or on Twitter here. Additionally, keep in mind that my criticisms come from a good place. I’ve been in crypto since 2016, which includes working full-time in the space since 2017 and in keeping up with the space, I’ve seen a need for further, healthy criticism.
In the end, if we all offer our own criticisms openly, perhaps that’ll lead to a healthier culture of building together over tribalism. Finally, until next time, here’s to you, because anyone reading this is still an early crypto adopter.
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Disclaimer: None of this is meant to be financial advice. I’ve researched and worked in crypto since 2016 and I aim to merely educate people on the upsides and downsides of all sorts of projects and the market itself. Additionally, I’m a student just as all of us are. Therefore, my thoughts on projects evolve naturally over time as I learn more about them. Last but not least, none of these posts represent the thoughts of NBX unless otherwise stated and this includes all posts that preceded this one.