Dubai, UAE, 21st April 2024, A revolutionary force behind many recent crypto innovations, DeFi, is challenging the financial sector, questioning traditional governance and decision-making models. DeFi’s core lies in the power of crypto holders and users who work together to improve access to financial opportunities for all. Although DAOs appear to be the most common and talked-about governing model in blockchain, the truth is that the situation is far more intricate and varied.
DeFi Governance
DeFi governance pertains to different methods found within the DeFi landscape. It usually pertains to the cooperative and decentralized decision-making procedures that enable stakeholders (e.g., users and developers) to govern decentralized applications, platforms, protocols, etc. Typically, DeFi governance is based on a community-driven approach, which implies stakeholders coming together to make decisions on various aspects of the projects they manage, such as upgrades, ambassador campaigns, or additional token issuance.
Decentralization-focused approaches ensure no one has excessive influence over a particular project, minimizing the risks connected with centralization. However, it is crucial to note that certain projects choose to maintain a centralized governance approach, at least while their company is growing.
Lastly, DeFi governance is often focused on guaranteeing transparency, which contributes to building trusting relationships with the community supporting the project. Consequently, the project can ensure justness and accountability, motivating stakeholders to invest their time and passion in governance.
Typical Governance Models
One of the most favored governance models is DAO (Decentralized Autonomous Organization). This innovative governance model leverages the power of smart contracts to ensure proposing, voting, and executing proposals without intermediaries. This way, they provide a high level of decentralization and transparency, promoting a culture of openness and inclusivity. DAOs usually rely on governance tokens to distribute voting rights and decision-making power to users. Furthermore, projects may adopt various approaches to distributing these tokens, including liquidity mining, staking, or even ICOs. Governance tokens are unique in their ability to develop over time. As projects progress and adapt to changing market conditions or community needs, governance mechanisms can be altered, too. This adaptability guarantees that decentralized platforms remain responsive to the requirements of their user base while ensuring decentralization and security.
The second governance model is liquid democracy. This model was first discussed in the context of traditional politics but gradually shifted into the blockchain space. Such a form of democracy seeks to merge direct and representative democracy. With this approach, token holders can either vote directly on proposals or delegate their voting power to representatives they respect and trust. As a result, voting members can ensure that decisions genuinely represent the community’s wishes. Projects, in turn, can benefit from more flexibility and scalability in such a governance structure.
The third approach worth mentioning is futarchy. It relies on prediction markets to evaluate proposals regarding their benefit to the project or ecosystem. Although governance mechanisms inspired by futarchy are rare, they have the potential to increase participation among members by enabling them to bet on policies they believe are the most advantageous.
Distribution of Influence
Another method to differentiate governance models is to consider the influence distribution within the project. There are three primary approaches: founder-based, council-based, and community-based. In the founder-based governance model, a single individual, typically the project’s creator, has the final say.
The council-based model is more representative and decentralized, but it may not be ideal for upholding DeFi’s fundamental principles, such as accessibility and equality. The council generally comprises a small group of founders, early adopters, and other significant supporters who are accountable for making important decisions regarding the project. They may consider the community’s views while discussing the project’s development and associated changes, but they are not obliged to agree.
Lastly, the community-based model is a type of governance in which a significantly larger number of individuals make decisions that affect the project’s development. Most DeFi projects pick governance models that imply the community’s deep involvement, which is evident from the abovementioned governance models.
Conclusion
The governance models of DeFi signify a significant change in how systems can be governed, even beyond DeFi. They enable users to participate in establishing and expanding decentralized projects, thereby contributing to shaping the entire DeFi industry. Furthermore, such approaches to governance stimulate creativity, grit, and responsibility within the blockchain ecosystem, which significantly assists in its growth. Kinetex supports the notion of empowering the community and welcomes users to become members of Kinetex DAO.
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Disclaimer: The views, suggestions, and opinions expressed here are the sole responsibility of the experts. No Funds Spectrum journalist was involved in the writing and production of this article.