Apr 18, 2022
How DeFi Governance Works
“Code is neutral about the data and ignorant about the user,” says Harvard Law School’s Lawrence Lessig. The Code and Other Laws of Cyberspace author remark that the founders wrote constitutions to ward off federalism.
On the other hand, the progressives advanced market reforms to control any rising injustices. The American academic, political activist and attorney says that code is the newest regulator and latest bastion that stands against humanity and liberty.
Code is the regulator of the cyberspace age. But unfortunately, most internet users are too fixated on keeping their rights and liberties free from government control that code has stealthily taken over their freedoms.
Code runs software and hardware functions and is the architecture that sparks life in cyberspace. It “determines how easy it is to protect privacy, or how easy it is to censor speech. It determines whether access to information is general or whether the information is zoned. It affects who sees what, or what is monitored’, he says.
Professor Lessig warns that this new regulator is changing, and cyberspace’s character is evolving alongside it. Cyberspace is mutating from a sphere that protects free speech, individual control, and anonymity to a space that makes these freedoms harder to access.
Eventually, the complexity of code could hand over the control of cyberspace to individual experts. “Unless we understand how cyberspace can embed, or displace, values from our constitutional tradition, we will lose control over those values. The law in cyberspace — code — will displace them”, he says.
Code as a regulator in Web 2.0
Professor Lessig wrote Code and Other Laws of Cyberspace in 1999, at the tail end of the internet bubble and one year after the launch of the tech giant Google. At the time, the internet of the 90s or Web 1.0 was the home to thousands of “under construction” home pages, dancing baby memes, and nostalgic dial-up tones.
The Netscape navigator ruled the World Wide Web, and a 128kbps dial-up modem was state-of-the-art technology. The internet might have been a bare collection of information devoid of interactions, but it was trustworthy. Moreover, most of the users were genuine internet enthusiasts, and there was minimal need for censorship and control.
Today, tech giants have matured, and Google is one of the most complex tools built using code. Google’s code repository has over 2 billion lines. Its code drives all its tool’s functions and acts like a massive operating system, accessible to its team of engineers.
Its code has morphed into a control system, where its engineers can create one line of code, deploy it instantly across all its services, and update or change the behaviors of all its components. The tech giant’s most sensitive code, such as its PageRank search algorithm, is only accessible to a few of its employees.
Web 1.0, the original implementation of the web, had minimal content creators, and most of its users were content consumers. It was a melting pot of personal and static web pages that run on free web hosting or ISP web servers.
Adverts on websites were a rare occurrence till the rise of the current iteration of the internet or Web 2.0. Web 2.0 emphasizes usability, user-generated content, and participative social web activity. It is a blogger, podcaster, tagger, and web content curator’s paradise.
It is also a highly centralized internet. Its centralization is a cause of worry and is regarded as a fall from grace from its heyday when Web 1.0 symbolized freedom to access information. The early version of the internet was open, and anyone could publish their opinion online.
Users did not have to pay tribute to intermediaries such as cloud hosting services, search engines, and other online content hosting providers. While Web 2.0 is relatively decentralized, tech giants such as Facebook and Google have disrupted its balance of power.
These businesses now dominate the provision of most services that bolster up the functions of the internet. Additionally, they hold massive captive amounts of user data and attention. To this end, other internet companies have to pay them to access user attention.
Their content creation teams now have to surrender a large portion of their income to ensure that users discover their content on the World Wide Web. While it is true that these tech giants have spent countless resources on innovation and efficiency, the bottom line is that by centralizing internet service provision, they have a near-exclusive share of the World Wide Web’s returns.
Some disadvantages of acute centralization of the web include the creation of gatekeepers to data that may choose to wield their power to their benefit. For example, they could offer misleading content or favor their bottom-line to the disadvantage of their competitors.
While these businesses rose to power through the principle of innovation and hard work, their massive success makes this phenomenal rise much harder for smaller challenger businesses. As a result, competitors that wish to replicate their success must consent to takeovers, acquisitions, or eventual slow and painful deaths.
Data centralization also creates a single point of failure and massive privacy concerns. Only the select few have full knowledge of the operations of the walled gardens that these centralized businesses make.
The centralization of essential services makes the user but a cog in the wheels of these billion-dollar businesses. It makes them a product that generates data for profit. Consequently, as professor Lessig puts it, the fight for liberty today may no longer be about government regulation.
It is not a “regulation” and “no regulation” debate but a need to determine how much the ordinary person has a voice on how cyberspace regulation frameworks form.
“When the government steps aside, it’s not as if nothing takes its place. It’s not as if private interests have no interests; as if private interests don’t have ends that they will then pursue. To push the antigovernment button is not to teleport us to Eden. When the government’s interests are gone, other interests take their place. Do we know what those interests are? And are we so certain they are anything better?” he asks.
What is blockchain governance?
Decentralized governance is one of blockchain technology’s most hyped innovations. Governance is a decision-making process that combines norms, laws, or rules to regulate and hold all task holders accountable.
Political governance and the democratic elections process administer the distribution of power and responsibility in governments. On the other hand, corporate governance leverages board meetings, shareholder voting, executives, and their committees in the administration and corporate decision-making.
Governance tools, therefore, support collective decision-making in complex and simple systems. The three main governance functions include rules that determine a governance system’s voting or power distribution mechanism.
All rules should be immutably recorded and verifiable. Then, a good governance system should support all stakeholders’ interaction with governance rules. Every interest group should efficiently interact with governance rules to ensure that a governance process meets its highest objective.
Last, all governance systems should have processes that enforce the rules. They should have systems that compel all participants to follow their rules. Rule enforcement processes can be legal processes or social norms.
Centralized governance systems are the classic decision-making process in Web 2.0 platforms. Blockchain technology, however, supports the decentralized governance paradigm, supporting operations, laws, rights, rules, and customs that accomplish the basic functions of governance via code.
Blockchain technology first records all data in an immutable and verifiable process then distributes it across a network of nodes, keeping it free of centralized control. As a result, anyone can access blockchain data and verify its authenticity.
Decentralized governance recognizes that the absence of government regulation on the interwebs has created a power vacuum that has made internet freedoms vulnerable to businesses that leverage code as a regulator.
Centralized governance of coded platforms supports private interests and, in the absence of constitutional values, limits, and checks, hands over the promise of free, equitable, and open internet to the hands of a few tech giants or “individual experts.”
How DeFi governance works
DeFi governance, therefore, recognizes the values and liberties that the World Wide Web presents to its users and the opportunity and threat that code presents. To this end, DeFi protocols such as Mimo Capital, Uniswap, Yearn.finance, and Compound have made DeFi governance a guiding priority.
While most decentralized governance processes are still experimental, these projects are successfully handing over the management and decision-making processes from their founding teams to globally distributed stakeholder communities through governance tokens.
To illustrate this point, in mid-December 2021, MIMO token holders exercised their voting power and voted in an executive proposal that established the MIMO Buy-Back feature.
“Before the proposal was executed, and as fees were produced by the usage of the protocol, they were all sent to the safety reserve contract, in charge of safeguarding liquidations in undercollateralized vaults… After the proposal was approved by the MIMO token holders, the new rules indicate that the fee distributor will send 40% of the total fees to the new Buy-Back contract. This Buy-Back contract has been specifically created in order to buy MIMO tokens on decentralized exchanges (DEXs) and lock them for (4) years in a fund. This new type of fund will be fully managed by the MIMO token holders”, says Mimo Capital.
DeFi platforms such as Mimo practice on-chain governance via the distribution of governance tokens. Blockchain governance was at first an off-chain process practiced on blockchain networks such as the Bitcoin or Ethereum networks.
The off-chain process’s governance system functions via mailing lists, conferences, and online forums. Off-chain governance processes, hand over the regulation of ‘code is law’ processes to the community, keeping centralized control of the new cyberspace-based financial system.
While the off-chain governance process made decentralized governance feasible, it has disadvantages. As an illustration, on the Bitcoin blockchain, the miners and core developers sway the governance process.
This is because other ordinary nodes may feel left out of the loop due to the absence of formal tools that support all stakeholders’ interaction with governance rules. On-chain governance gives all governance token stakeholders influence over a DeFi platform’s governance process.
The DeFi platform’s protocols will code governance proposals into a smart contract form and execute them as long as users that hold governance tokens such as Mimo vote them in. The on-chain governance process is more user inclusive than the off-chain system, but it is also imbalanced.
It is plutocratic, giving more weight to voters that hold more governance tokens. The on-chain governance structure functions via a process that kicks off with discussions. Here, stakeholders propose potential changes and issues that need to be addressed then discuss them on the DeFi platform’s informal and formal communication channels such as Telegram and Discord
The discussion process will engage all governance token holders on policies and ideas. A policy’s champions will politic at this phase to convince the rest of the community of the benefits of a particular approach.
After discussions, the on-chain governance process then goes into improvement proposal mode. Here, improvement proposals, generated often by developers, are reviewed by the community, ensuring that the ordinary person has a voice in DeFi protocol regulation and governance.
Afterward, governance token holders will vote on the improvement proposal. For an improvement proposal to sail through, votes must meet a minimum quorum percentage. To this end, protocols should sensitize all governance token holders on the value of the DeFi governance process.
This is because most governance token holders often invest in them for speculative purposes and often forgot the time-consuming discussions and voting process, which is the force of decentralization in DeFi. All in all, DeFi governance processes are proof that decentralized communities can govern the functions of code. They may be at the experimental stage, but their refinement will create a free and equitable Web 3.0.
