Governance/delegation DAOs in DeFi
Introduction
DeFi (Decentralized Finance) transfers traditional financial instruments and technologies to the blockchain. DeFi, powered by smart contracts and dapps (decentralized applications) is mostly concentrated around Ethereum blockchain, leveraging from its accumulated liquidity. On top of traditional finance instruments, DeFi has invented its unique techs, such as flash loans, which are not otherwise possible outside of the blockchain.
Dapps have numerous use cases and one of the most promising is governance. Blockchain-based governance, such as DAOs (Decentralized Autonomous Organizations) and various voting dapps allow users to benefit from their governance tokens as decision-makers, affecting strategic decisions for the blockchain companies and protocols development.
As it was expected, two powerful blockchain technologies have finally met each other — DeFi protocols have started to issue governance tokens, which event resulted in a new term, called yield farming, which means staking of capital in DeFi, resulting in earning additional yield by gaining protocol governance tokens.
Governance tokens in DeFi were introduced by MakerDAO, but got its highest attention during spring 2020 when Compound Finance has introduced COMP token:
https://medium.com/@rleshner/ce13fcd4fe36
Compound was then followed by Balancer Labs BAL token: https://medium.com/balancer-protocol/bal-is-live-104ba56e1945
Curve protocol has announced Curve token implementation through Aragon powered DAO:
Now more and more governance DAOs are coming to DeFi. KyberDAO and SynthetixDAO governance protocols also were launched. DeFi projects with active governance you can find here: https://defirate.com/governance/
Hence, the suggestion to unite small token holders into delegation DAOs or governance DAOs was made:
here https://twitter.com/voronkovio/status/1274650272258838529?s=20
Therefore this idea is developed in more detail in this post.
DAO governance is not always an easy process and it brings a lot of various risks, such as lack of incentives, or 51% attack, manipulation risks, etc.
On the other side, it gives a lot of opportunities for the community to self-organize and mutually influence each other’s decisions and DeFi development directions.
Why Governance DAOs (GODAOs) may become popular?
What is good about governance DAOs? Governance DAOs help token holders to get united around common goals in DeFi. Governance DAO can hold multiple governance tokens and therefore influence the management of different DeFi protocols and even integrate them in an oligopoly-like style.
Use cases
Pumping/promoting your project
Let’s say you want your token to be used as a collateral underlying asset in some of the lending protocols (for example COMPOUND). What you need is to concentrate a certain amount of governance tokens, which will help you to pass your decisions.
Currently several projects are working on delegation smart contracts, which are going to help their communities to delegate their votes into compound.finance to make their ERC20 an underlying asset. If this will be a successful case, then many other projects will follow this path.
In case if one project has not enough resources/communities, then several projects can get united into voting alliances.
Voting alliances
Let’s say there are Project 1 with token X, Project 2 with token Y, and Project 3 with token Z.
Each of them wants to promote/pump their tokens. To do this, they need to start a voting process in services like Compound for tokens X, Y, and Z to become underlying collaterals assets in compound.finance.
As another option, they may want to vote for the listing of the X, Y, and Z tokens in Kyber Network, or create some special conditions for their token pools rewards in Balancer, or Curve, etc.
So, separately Projects 1, 2, and 3 can’t concentrate enough votes for passing a required decision through the governance, but together they can do it and pass mutually beneficial governance decisions.
From one side this imposes a certain threat to DeFi projects with a public governance system of hostile behavior and takeover when multiple crypto and tokens can become an underlying asset.
Some cross-border dispute resolution through Aragon Court policies will be introduced both for Projects 1–3 relations inside the Governance DAO and maybe also introduced into the DeFi governance protocols.
Digital jurisdictions like Aragon court may be a proper place for such disputes resolutions with terms and conditions implemented with governance smart contracts.
Rental pools for governance tokens
Even more simple can be a rental model (borrowing governance tokens for voting in DeFi protocols). In the future, this can create even a rental market for governance tokens. Let’s say I need 5% of COMP tokens to pass a certain decision (for making my ERC20 token an underlying collateral asset), then I just rent it for the voting period from the rental pool of governance tokens (which may be organized as a Governance DAOs, GODAOs).
Flash loans usage
In some DeFi governance protocols (this is not the case for compound governance, Aragon DAOs and most of the others), it may be even no need to concentrate the governance tokens, but flash loans can be used to buy the required amount from the exchanges, vote, and then pay the flash loan back. Then the price of passing the required decision will be even lower and equal for a flash loan fee.
OTC trades
Concentrated pools of governance tokens can be sold by GOVDAO with some premium in OTC trades.
The suggested governance model for GODAOs
The model, which is suggested here, will be similar to all public DAOs (on this picture).
- Step 1. Voting suggestions are discussed publicly in the community of Governance DAO (Discord, forum, etc.) and other involved communities (for example communities of Projects 1, 2, and 3).
- Once a voting suggestion accumulates enough supporters it is voted as a “Question” using Aragon DAO. This shows if there are enough tokens to support DAO decisions for the external governance protocol. For example, 1% of COMP tokens should be accumulated to start a vote on certain questions.
- Once enough tokens are shown to be ready to vote for a proposal to external governance (for example more than 1% of total COMP tokens are accumulated in Governance DAO and are ready to vote for the proposal), the voting for Action is started in Aragon DAO and Agent App executes the governance action in the external protocol (for example Compound). Questions (informative votes without actions) and Action votes (executed by Aragon Agent, for example, transactions) are two key types of Yes/No binary votings in the Aragon governance model.
Community discussion — Informative voting (preparedness checkup) — Action Voting
In terms of Aragon platform modules, the next Dapps will be useful for the GODAOs (besides the of standard template dapps like Voting, Tokens, Finance, and Agent)
- Transferable tokens (Dandelion)
- Redeem (Dandelion)
- Time lock (Dandelion)
- Dot voting (Open Enterprise)
So, what do you think?
You can join our Discord here, for discussion of Governance DAOs, or use a link: https://discord.gg/P4KgFpH
