What are Governance Mechanisms for Decentralized Finance?
Decentralized finance (DeFi) has evolved into a compound network of blockchain-based platforms that enable borrowers, lenders, and investors to conduct financial transactions without the involvement of traditional financial institutions.
In this blog, we’re going to talk about DeFi governance. While DeFi is essentially decentralized, the governance system in DeFi does not mean introducing a set of rules which are to be followed. They simply help influence the future direction of DeFi projects. While learning in-depth about governance, we’re also going to learn what governance tokens are, and what they essentially mean for DeFi applications.
With the growth in DeFi, all related parameters such as users, transactions, etc have grown with a steep upward slope. However, one of these factors, namely valuation is challenging to track and digest.
In conventional equities, the value of a firm is determined by its equity — or direct fractional ownership. This equity amounts to practical control over a company and provides equity investors with particular perks, such as a pro-rata share of profits (dividends).
Now, what are governance tokens?
Because the code is ideally the only “rule” in decentralized protocols, practical control is limited to what the code states. In this way, each DeFi application will have its own notion of ownership, since each protocol will have defined its own set of rules for what ownership entails. Some protocols, which were written with no regard for external ownership in mind, will just follow their original specific guidelines and never change. Most teams who build these protocols, on the other hand, acknowledge the need to adapt, upgrade, and modify, and hence include a concept of ownership that allows for the adjustment and alteration of certain parameters.
Here is where we introduce governance tokens. Developers offer governance tokens to enable token holders to help define the future of a protocol. Governance token holders have the ability to influence project choices such as submitting and voting on new feature requests, as well as changing the governance structure itself.
In many circumstances, smart contracts apply instantly the changes suggested, evaluated, and voted on using on-chain governance accessed via governance tokens. In other circumstances, the project’s maintenance staff is tasked with implementing the changes or recruiting someone to do so.
Governance tokens are often given to platform users as a thank you for using the protocol, and they cannot be purchased at first, however, they may later be traded on exchanges. Governance token awards have been used by DeFi platforms to attract liquidity and customers to their projects, and the tokens have frequently become commodities.
DeFi Governance Processes
After distribution, the process of governing actually begins. Following is the general process:
Discussion: The first step in DeFi governance is discussion, in which stakeholders try to gauge community sentiments on specific concerns and prospective adjustments.
Improvement proposals: They are indeed an attempt to put forward new improvements to the system systematically and transparently by using a standardized template that includes the proposal’s context, description, and prospective code change.
Quorum: A quorum is the number of people who must vote in order for a vote to be valid. For example, a proposal may have 100% approval from voters, but if the number of token holders voting falls short of the needed amount, the vote is often subsequently canceled.
On-chain vote: One token represents one vote in most DeFi systems, and only a majority of 50% is required to carry out a new proposal. The more tokens an entity owns, the more influence it has. A token holder’s voting authority can be transferred to another address if they’re not willing to vote directly. The plan can be implemented after a vote has been passed.
And then finally, these changes are implemented by making the necessary changes to the code.
Hybrid blockchain platform XinFin utilizes On-Chain Governance for XinFin DPOS. To give an overview, it is a built-in public governance mechanism in which any network changes (update proposal) must be accepted by 2/3 of the register validator (Master-node holder) via voting system before being implemented. Its goal is to give a straightforward road to consensus. On-chain governance systems are entirely web-based. Code updates are used to propose changes to a blockchain. Nodes can then vote on whether to accept or reject the update. Each node has the same voting power. If 2/3 validator nodes accept the update, it is added to the blockchain and validated. If the requested change fails, the changed code may be rolled back to a version prior to the baseline.
One can also become a Governance Member for XinFin Network. https://www.xinfin.org/governance-member
https://www.coingecko.com/en/categories/governance
Conclusion
DeFi solutions and platforms are at the forefront of blockchain governance, demonstrating that decentralization does not have to be sacrificed for effective governance. Despite the fact that DeFi governance is still in its early stages, the popularity of governance tokens suggests that its key processes will have a long-term impact on the blockchain ecosystem.
Further Readings
