NewsAug 18

Is Token-Based Decentralized Governance Holding DeFi Back? Vitalik Buterin Weighs In

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VB Says DeFi is Being Held Back by Tokens

Summary

• Ethereum co-founder weighs in on token-based decentralized governance

• Vitalik suggests proof of humanity or proof of participation as alternatives

• Voting should be exclusive to token holders with an economic interest

Ethereum co-founder Vitalik Buterin has weighed in on token-based decentralized governance citing flaws in the existing voting mechanisms. According to Vitalik, this is holding the decentralized finance sector back from realizing its full potential.

On a long blog published on 16 August, Vitalik stated that the cryptocurrency community should consider moving beyond a coin-based voting approach currently in use. Presently, protocol upgrades, issuance of rewards, and facets of governance elections are managed by DeFi projects, where votes for token holders are determined by the size of their holdings.

In the recent past, most decentralized finance projects have been criticized for allowing whales holding large holding tokens to dominate the voting process. This is seen to sway votes in one direction where their personal interests will be met.

According to Vitalik, token-based governance increases the risk of misaligning incentives among token communities. This poses a possible vulnerability to outright attacks and vote-buying, which influences governance - “The most important thing that can be done today is moving away from the idea that coin voting is the only legitimate form of governance decentralization.”

He further noted the possibility of ‘unbundling’ if vote-buying is achieved, giving way to the manipulation of governance systems through crypto-collateral borrowing and use of token assets to vote.

According to Buterin, unbundling allows borrowers to acquire governance power without an economic perspective, while the lender lacks governance power even though they have an economic interest. For this reason, Buterin advocates exploring proof-of-humanity governance where every token holder is entitled to a single vote.

He also added proof-of-participation as a possible method where voting is only available to protocol users who have contributed to projects or communities. Through this option, voter rights can only be earned by addresses that complete specific benefit tasks.

Buterin says that these alternatives could offer long-term benefits to decentralized finance.

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