Election struggles weigh on DeFi efforts

Last Thursday, the billionaire founder of the Tron DApp platform borrowed $13 million from COMP, the governance token that gives owners a vote on how to run the DeFi lending platform Compound.

Justin Sun then used those tokens to force a vote on a proposal to add the True USD (TUSD) stablecoin to the list of assets that could be pledged as collateral for a compound loan, with borrowers able to take out loans worth 80% of their guarantee.

The next day, crypto developer GFX Labs bound the proposal loan, leading to allegations that Sun was launching a “governance attack” on Compound – essentially using its wealth to overwhelm the token-based voting procedures that are used to run decentralized finance and crypto projects .

While the incident turned out to be less threatening than outraged members of the crypto community thought, Sun had been discussing the move with lead developer Compound Labs for months and the founder of the company and the blockchain protocol. defended the move — it made very clear one of the biggest threats to DeFi: vote buying.

Sun has been embroiled in similar controversies before, including over a TUSD-related vote in MakerDAO, a lending platform and stablecoin issuer, CoinDesk reported. In this case, a similar loan of MKR governance tokens was spotted before the vote, but was not used.

Another was the Steem Network battle, where Sun purchased the vast majority of the blogging and social media project’s governance tokens from two of its founders, Decrypt reported.

Although not fully decentralized, it was a proof-of-stake platform controlled by a group of witnesses chosen by token holders, who pooled tokens with them. The 20 largest pools govern the project and the pooled tokens can be retrieved at any time. When the Sun purchase was announced, witnesses froze a large portion of its tokens.

Enraged, Sun called it hacker theft and convinced several major exchanges to vote with customer tokens to reverse the course. The fight escalated, with several exchanges reversing their votes. Eventually Sun took control of Steem, but a large number of users migrated to a blockchain fork that replicated Steem but without Sun’s tokens.

Decentralized vote buying

A DeFi project is controlled by a DAO, or Decentralized Autonomous Organization, which uses self-executing smart contracts to manage every part of the business. This means that everything from changing interest rates to installing a software patch to fix a bug allowing hackers to drain millions of dollars can take days or weeks to be approved.

See also: PYMNTS DeFi Series: Unboxing DeFi and DAO

Once a DAO is installed, no centralized control is necessary, or even possible – at least in theory. However, the way the process usually works is that a certain percentage of token holders must vote to submit a proposed change to a vote, and then a higher percentage must approve it. This is usually performed on the one token, one vote method. There are some vote-buying guarantees — quorums or giving extra voting weight to people who hold the tokens longer — but typically the percentages only count those who voted.

The problem with this method is that while it looks democratic, it’s actually plutocratic, Santi Siri, the founder of nonprofit organization Democracy Earth (which issues governance tokens), told CoinDesk he several years ago.

“It’s based on whoever has the most tokens or the greatest economic clout,” he said. Token holders “have no say in the decision-making. Voting is pretty much irrelevant if a single whale can decide the outcome of an election.

And due to the pseudonymous nature of blockchains, it’s rarely possible to identify the whale in question – Sun was only identified in the compound vote because he borrowed the COMP using a ten-digit wallet known to belong to him. If a wealthy person wants to do it quietly, all he has to do is divide his votes into small token denominations.

bribe proudly

This is often less than subtle, however.

Take for example Bribe Protocol, which is as subtle in its intentions as a hammer. His slogan ? “Where DAO token holders get paid to rule.”

He explains the process as follows: “Depositors stake governance tokens in the BRIBE pool. Bidders pay to borrow the entire pool to vote on governance proposals. The highest bid is distributed through the pool as income.

Former Messari Research Analyst Ryan Watkins Put the this way: “We wanted democratized finance, instead we got 3 layers of kickback protocols ultimately controlling plutocratic protocol governance systems.”

“Color me skeptical, this is the end state of DeFi,” Watkins added. “It’s hard to argue about the incorruptibility of these systems.”



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