What is DeFi Governance's Purpose in the Cryptocurrency Industry?
Platforms that combine peer-to-peer (P2P) networks, algorithmic automation, and community incentive systems with decentralized finance (DeFi) have seen enormous growth in 2020, bringing the industry to the forefront of blockchain and financial technology (FinTech). Via the use of tokenized governance systems, DeFi aims to create more fair and decentralized organizations and industries than are now possible through traditional peer-to-peer trade or the blockchain nodal structure. Reiterating the blockchain community's persistent commitment to decentralization by giving users access to governance tokens. By using these governance tokens, the worldwide and decentralized community of stakeholders who utilize the platform and participate in the broader DeFi ecosystem may take over administration of the platform from the project's small group of founders, employees, and insiders. In order to make important choices concerning protocol updates, recruiting engineers, and even altering governance frameworks for DeFi initiatives, the project relies on governance procedures. For example, the governance process of a borrowing and lending platform may be used to decide the amount of collateral necessary to borrow money or to alter its interest rate model. Like a central exchange, a decentralized exchange (DEX) may modify the way its liquidity pools are handled by using its governance system. Another option is to leverage the governance process of a yield farming platform to employ a third-party code auditor.
Governance Models for Blockchain
Off-chain processes like as conferences, mailing lists, online forums, and other modes of coordination and decision-making were first used to establish the foundations of blockchain governance. Some stakeholders are more powerful than others in off-chain systems, though. Bitcoin core developers and miners, for example, have the greatest sway in the Bitcoin ecosystem since more casual users do not have the official methods of registering their participation. An on-chain governance system that allows stakeholders to vote directly on protocol updates was created to give individual users greater power in the governance process. If a proposal receives the necessary number of votes, it is implemented in a smart contract and becomes a reality. The majority of DeFi solutions rely on on-chain governance. In order to cast a vote or propose a proposal, you usually need to have some kind of "governance token". There is some evidence to support the claim that on-chain governance is plutocratic due to the fact that the number of tokens a user owns frequently affects the weight of their vote.
Tokens of Governance
If you want to vote or propose, you'll need to stake your governance tokens, which normally use the ERC-20 token standard and are commonly kept as collateral for that purpose. Initially, governance tokens cannot be acquired, however they may trade on exchanges following distribution as a reward for adopting the system. As a result, DeFi platform governance tokens have often been the subject of conjecture and speculation. A good protocol should thus make governance tokens more valuable since they provide protocol users greater influence over the allocation of resources and the ability to change incentives and capital flows.
Processes of DeFi Governance
A platform's governance can only commence after tokens have been issued. DeFi governance structures that are most often used all follow the same basic procedure: In the early stages of DeFi governance, stakeholders gather information about the community's views on particular concerns and possible adjustments. A platform's official governance forum and unofficial communication channels both host discussions. Ideally, discussion should focus on ideas and policy, however politicking is common as individuals strive to persuade others in the community to endorse their ideas or recommendations. In an effort to bring forth new modifications to the system in a systematic and transparent manner, improvement proposals use a generic template consisting of the proposal's context and description as well as the code that may be changed. For the time being, developers are the ones who are submitting the bulk of the upgrade ideas. It is possible to debate and examine a suggested code modification in the community, and then modify it if required. In order to have a valid vote, there must be a majority of those present, called a quorum. When a proposal has 100% support from voters, but the number of token holders who vote does not match the minimum percentage necessary, the vote is typically canceled. Low involvement in DeFi governance is a major issue. As a result, they may not be interested in participating in governance since it is time-consuming, less immediately rewarding, and/or they lack a strong opinion on the proposed modification to the protocol. In this case, they may not be interested in participating. For the majority of DeFi protocols, a simple majority of more than 50% is sufficient to implement a new proposal on the blockchain. When an entity has a larger number of tokens, their vote has greater sway. Token holders may assign their voting authority to another address if they do not want to vote themselves. Once a vote has been taken, the idea may be put into practice. Changing the code is the last phase in the decentralized governance process since recommendations are generally software modifications.
What Is Yield Farming? Examples of Compounds
As the first DeFi system to include a governance token, Compound set the standard for others to follow. A "yield farming" technique that aims to increase DeFi platform incentive structures was sparked by the launching of the COMP token in June 2020. People that contribute crypto assets to DeFi protocols in exchange for governance tokens are known as "yield farmers." DeFi dApps may then use these governance tokens to earn interest or get access to a variety of digital assets and financial instruments when they are deposited. Other DeFi systems followed Compound's example because of the efficiency of yield farming in bringing in fresh money and the skyrocketing value of governance tokens. Platforms and solutions developed by DeFi are at the forefront of blockchain governance, proving that decentralization need not be sacrificed for efficiency. For now, however, DeFi governance tokens and fair launches imply that its main procedures will likely have a long-term influence on the blockchain industry.