Buterin proposes scrapping token-based governance for DeFi projects

DeFi projects require decentralized governance, but token voting in its current form poses numerous risks to the sector’s development, said Vitalik Buterin.

Decentralized governance is necessary, but coin voting governance in its current form has many acknowledged and unacknowledged dangers. Augmenting or moving beyond coin voting is a key part of the solution:https://t.co/pZQ4sLAbEy

— vitalik.eth (@VitalikButerin) August 16, 2021

We need either to refine this form of governance or move beyond its bounds, says the Ethereum co-founder.

He identified two main problems with coin voting:

• inequality and misaligned incentives among governance token holders;
• the possibility of direct attacks through various forms of vote-buying.

While there are already many ways to mitigate the first—such as delegation—Buterin sees no solutions for the second within existing token-based governance mechanisms.

In coin voting, he noted several drawbacks:

• The ability of “whales” to better pursue their interests. Small token holders have little incentive to think through what they vote for;
• The expansion of governance rights for token holders at the expense of other community groups;
• Possible conflicts of interest among large voting blocs who may also hold tokens of other DeFi projects.

However, he regards vote-buying as a fundamental vulnerability.

“A token in a coin-voting protocol is a bundle of two rights merged into one asset: an economic interest in the protocol’s revenues and the right to participate in governance. This combination is intentional. Its aim is to combine power and responsibility. But in reality these two rights are very easy to separate from each other,” he said.

Governance token holders are typically project enthusiasts, and it is hard to suppose they would vote for pay at their own expense. However there are more tangled ways to obtain votes, for example through borrowing, Buterin noted. If a decision is made that negatively affects the token’s price, the attacker can simply reclaim the collateral, losing nothing.

“Thus we have achieved separation: the borrower gained governance authority without economic stake, and the lender has an economic stake without governance rights,” Buterin noted.

He outlined three main possible directions for solving the aforementioned problems:

• introduce governance limits — use it only for applications, not the base layer, control selective parameters and time delays before implementing decisions. It is also necessary to simplify for users the rapid approval of forks;
• abandon coin voting and move to account-based mechanisms, through proof of personhood or proof of participation;
• introduce individual accountability for token holders, so that those who vote against a bad decision bear the same losses as those who supported it.

Buterin says there are also a number of hybrid approaches.

Earlier in September 2020, he said that avoids the DeFi space and compared activity in the sector to the Federal Reserve’s aggressive monetary policy.