Struggling On-Chain Governance Experiment Tests Itself With New Experiments
- On-chain governance remains very much in its experimental, developmental phase.
- “The exploits themselves create the scar tissue to do better and to learn from experience.”
- Many projects are now launching different tokens to separate the investment and financial incentives from the voting rights in the project.
Crypto governance is currently going through a rough patch right now. Sure, the market as a whole is experiencing a tough time, but with a consistent stream of million-dollar governance attacks having already taken place this year, it seems that the concept of on-chain voting is having it harder than most sub-sectors of crypto.
This concept has now been questioned by a range of high-profile individuals, with Ethereum (ETH) co-founder Vitalik Buterin tweeting in April that “we don’t have any ‘standard templates’ for any governance I would consider remotely acceptable.” And it seems that, with the recent Terra collapse also highlighting the clear-and-present danger of governance attacks, there’s no easy or especially convincing response to his doubts.
That said, figures working within the industry say that on-chain governance as an idea and practice is not fatally flawed. Speaking to Cryptonews.com, some argue that new approaches need to be developed, such as separating governance powers, while others suggest that governance simply needs to be given time to evolve.
Is on-chain governance fatally flawed?
Governance attacks seem to be one of the recurring themes of 2022, with the Terra blockchain being halted on May 13, after the price of LUNA fell so much that the cost of such an attack became pretty cheap.
The Terra blockchain was officially halted at a block height of 7603700.https://t.co/squ5MZ5VDK
— Terra 🌍 Powered by LUNA 🌕 (@terra_money) May 12, 2022
Terra validators have decided to halt the Terra chain to prevent governance attacks following severe $LUNA inflation and a significantly reduced cost of attack.
But even before the events of mid-May, governance took blow after blow as a variety of attacks were successfully conducted.
For instance, April 17 saw credit-based stablecoin protocol Beanstalk exploited for USD 182m, after a hacker acquired over 67% of the protocol’s governance token, Stalk, enabling them to vote through a code change enabling the theft.
Likewise, Build Finance experienced a governance attack in February that resulted in nearly half a million USD in ETH being purloined. And in the same month, Justin Sun was accused of accumulating DeFi protocol Compound’s governance token, COMP, in order to vote through self-serving proposals, something which was short of an ‘attack’ but which nonetheless showed that on-chain governance is vulnerable to unsavory influence.
An unplanned TUSD proposal has been proposed @compoundfinance to set TUSD’s collateral factor to 80% (currently 0%) https://t.co/Xf2oOEKJya
— GFX Labs (@labsGFX) February 4, 2022
However, despite such incidents raising serious questions, people within crypto wouldn’t go so far as arguing that on-chain governance is fatally flawed and/or should be abandoned.
“I don’t think the one-token, one-vote model is fatally flawed, and it’s modeled after the stock voting system which has been working for many many years. Of course, if too many tokens are concentrated into a few hands we may have a centralization problem, but that should be resolved by distributing the tokens to as many people as possible, not by changing the voting model,” said Jeff Liu, the co-founder of blockchain forensics company PeckShield, which reported on the recent Beanstalk exploit.
Other commentators agree with this analysis, with ConsenSys global fintech co-head Lex Sokolin suggesting that governance is at a very early stage of development, and that recent setbacks will help it grow back strongly.
“The experiments we are seeing in the market — especially where there is loss of capital — are an evolution to knowing the vectors of attack, and creating the systems to defend against them. In some sense, the exploits themselves create the scar tissue to do better and to learn from experience,” he told Cryptonews.com.
The senior DAO (decentralized autonomous organization) strategist at ConsenSys, Marta Piekarska-Geater, also highlights the fact that on-chain governance remains very much in its experimental, developmental phase.
“The concept of a company has been around for almost 1.5 thousands years — the first company was founded in 578 in Japan. In 2008, there were 5,586 companies older than 200 years. The oldest still functioning DAOs are Dash and Steem, both funded in 2015, MakerDAO started in 2017,” she said.
Piekarska-Geater adds that on-chain voting and governance is more or less where traditional corporate and financial governance was during the pre-industrial revolution, or before the crises 1928 and 2008. Of course, with the global economy still suffering serious turbulence and setbacks even now, we probably shouldn’t expect crypto governance to become perfect in the immediate future.
Future directions of on-chain governance
That said, the DAO strategist affirms she’s excited to see where governance is going, and how it’s evolving in the face of difficulties and scrutiny.,
“It is very encouraging to see more and more of social scientists and legal experts coming to the web3 helping to shape the way that DAOs are run,” she told Cryptonews.com.
One recent development that’s of particular interest to her and other figures is the increasing separation of governance rights and privileges. This is a simple measure to implement, but it could seriously reduce the scope for future governance attacks and abuses.
“For instance, many projects are now launching the vo- or ve- tokens to separate the investment and financial incentives from the voting rights in the project,” she added.
Lex Sokolin also highlights the separation of powers — as we generally find in constitutional, democratic governments — as probably the most promising development in on-chain governance right now.
“To me, it seems like the bundling of all decision making into a concept called ‘governance’ and then treating all decisions similarly is the main problem. Treasury management is different from product development is different from grants, and each requires different levels of controls in order to be reasonably safe and secure,” he said.
Sokolin notes that, with traditional companies, stockholders don’t give the board of directors the ability to instantly move the balance sheet from one bank account to another, while in the sovereign state, we don’t even give elected representatives the ability to immediately turn on or off central bank monetary policy. As such, why should things be any different in crypto, particularly when it claims to be ‘decentralized’?
“There is a separation of powers, and controls and checks to keep those in line. Similar fault lines are to be built in Web3, and for some things pure democracy may be correct, while for others it will be inappropriate,” he added.
That said, some analysts suggest that all that may be needed is a tweaking of the existing one-token, one-vote model, perhaps by adding an upper limit on how many tokens can be used to vote by one individual.
“I would still stick with a token-based voting system since it’s easy to execute and verify, but we can mitigate the centralization issue with measures such as limiting the amount of votes up to a threshold, e.g., an owner can only vote up to 10K tokens no matter how much she has,” said Jeff Liu.
There are other means of limiting the scope for governance dangers, such as starting a project from a decentralized base to begin with, so that decisions on the best possible voting architecture can be made in the interest of that project’s community.
“Another great development is that many projects nowadays start as DAO-first initiatives, which helps with building the right community and decision making process — it is much harder to start with a traditional style project and then slowly decentralize,” said Marta Piekarska-Geater.
While few people are certain of how exactly governance should be managed in the future, some seem to be confident that it can be modified and strengthened in such a way as to make attacks and abuses less common. And with crypto currently going through another downturn that lowers its reputation, it certainly needs fewer of these.
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Learn more:
– DeFi Governance Tokens Face Three Challenges
– The Compromises and Benefits of Ethereum Switching to a Proof-of-Stake Network
– Decentralization in Crypto Is a Hard to Measure Ideal
– Axie Infinity’s Ronin Hack Exposes Risks of Proof-of-Stake and Centralization – Analysts
– Centralization Caused Most Decentralized Finance Hacks in 2021
