MojtabaBlockchain, particularly a widespread adopted one such as Ethereum, provides a platform for self-executing programs called smart contracts that can also be looked at as social contracts between participants. The interaction with these smart contracts, however, is orchestrated by humans participating in the blockchain. The smart contract functionality offered by Ethereum supports an emerging ecosystem of decentralized finance (DeFi) applications. These DeFi applications are often accompanied by a governance protocol that allows for a self-healing democratic system. This governance protocol empowers human participants in the DeFi application to vote on proposals for modifying the core functionalities of the DeFi application itself. This emerging digital landscape has also given rise to complex transaction networks that resemble real-world social networks.
Decentralized governance in the context of DeFi is a groundbreaking concept. It allows the community of users to propose, vote on, and implement changes to the DeFi platform itself. This means that the rules governing the platform can evolve based on the collective decision-making of its users. Governance protocols are the backbone of this democratic system, enabling a decentralized, autonomous organization (DAO) where every participant has a voice.
For the people, by the people
Abraham Lincoln
The first concept comes to my mind is less centrality and more democratic decision-making. In traditional finance, decisions are made by a centralized authority, be it a government body or the management of a financial institution. In contrast, decentralized governance allows for a more inclusive, equitable decision-making process. It represents a shift towards a more democratic, participatory form of governance, where power is distributed among the users rather than concentrated in the hands of a few.
There are also challenges:
Equality vs. Equity: Another problem emerges with “whales”— entities or individuals holding substantial amounts of cryptocurrency or governance tokens. These whales possess significant influence within DeFi platforms, particularly in voting processes that shape the platform’s direction and policies. While their investment and participation can drive stability and strategic foresight, their disproportionate voting power raises critical questions about the balance of influence and the ethos of decentralization. The challenge lies in ensuring that governance remains a democratic process, reflecting the collective will of the community rather than the preferences of a powerful few.
Democracy is two wolves and a lamb voting on what to have for lunch.
Unknown author, attributed to Ben Franklin
Complexity of participation: One of the major challenges of decentralized governance is the complexity of participating effectively. For the system to be truly democratic, users must be well-informed about the issues they are voting on, which can be a significant barrier to participation. In practice, this often leads to low voter turnout, which can skew decision-making towards a small group of highly engaged or invested participants, ironically creating a form of centralization.
The most common way people give up their power is by thinking they don’t have any.
Alice Walker
Now, the question is how democratic DeFi governance really is? Maybe a more precise measurement is necessary?
Interesting post. Perhaps this governance is more akin to a stockholders’ general assembly than democracy?
Hi Cyrille,
Thanks for the reply. Interesting point. Title updated. I will address this in another blog post.