Embezzlement alive and well in Decentralized Finance
Decentralized Autonomous Organizations were supposed to bring democracy to finance. But big money = big votes. A brief review of the Uni DeFi "eDuCaTiOn" Fund.
Hey reader, this one may be a bit tough to follow. I’ll try to keep it simple. Here’s the goal for this Off the Cuff:
Refresher on Uniswap
Refresher on Decentralized Autonomous Organizations (DAO)
The context of the “DeFi Education Fund” & Social Media reactions
How the vote ultimately went
My thoughts on the matter.
Uniswap is the largest automatic market maker (AMM) on decentralized finance. Both Uni v2 (standard liquidity pools) and Uni v3 (price bounded liquidity pools) serve multiple millions of dollars in exchange everyday. For a deeper dive on these check out my review of Uni v3 and how providing liquidity generates cash flow in DeFi.
Uniswap prided itself on not having a governance token. That is, it was focused on innovation and building products, not propping up the value of its “stock”, which takes a considerable amount of development time as you have to launch fluff to stay in the news cycle and get people to buy your tokens.
Andre Cronje, one of the most well known DeFi developers in the space, wrote in his Bull Market, Bear Development blog post:
In this market, releasing a product without a token is pointless, you can’t attract capital, you can’t build a contributor community, and the product can’t stand on its own merits.
In this market, if you don’t release a token, your code will be forked within 24 hours by an anon team, and a token will be added. Then you get to be told how much better the fork is than your own work.
Unfortunately, he was right. Uniswap was forked by Sushiswap which added a token and its been an arms race ever since.
So what did Uniswap do? It launched a token. Anyone who used Uniswap prior to September 1st, 2020 woke up to 400 UNI (worth several $1000s at the time!). I was a very happy camper when I got mine.
But with a token comes a cost. Now you have an entirely separate, financial stressor you have to manage on top of the stresses of developing great products.
The DeFi way to manage this financial stressor and build great products is to leverage the community that builds up around your product: users, liquidity providers, investors, advisors, and those who just want to see the DeFi space grow overall.
Decentralized Autonomous Organizations (DAOs) are formed around a treasury of funds and the idea is that using social media (especially Twitter, Discord, and Telegram) the community can make proposals on how to spend the treasury / what to build next, discuss the proposals, and come to a social consensus on whether the proposal should be passed.
Then, once the community feels like the proposal has broad support, they put it to a formal vote where votes are weighted by the amount of governance tokens each voter has. This formal vote goes “on-chain” - i.e. on the blockchain - to keep a historical record of voters and their votes.
This is where our story breaks down.
Uniswap is disproportionately owned by a very small number of accounts including famous investment firms like a16z. The idea that 1M Uni (worth > $10-30M depending on how chaotically you try to sell it all) is needed upfront to fund a 501(c)(4) nonprofit for lobbying in a single country (remember that DeFi is global) was seen as ludicrous by the community.
I don’t expect you to read all these threads, but I’ll link them for those curious in the chaotic world of building consensus: Here’s the final thread.
Here is a small sample of of reactions (across a few threads).
So how did the vote go? Well you saw up top. 37M for (33M from 4 large voters) and 17M against.
Now of course, maybe the group does have good intentions and has a plan to slowly draw down the 1M UNI to minimize negative price impact and explicitly communicate to the community how funds are spent in a transparent way.
Oh wait…
So let’s wrap this up with my thoughts.
DeFi isn’t decentralized yet. The reality is developers need money upfront and venture capital is the way to get that money when you want to build highly experimental products. So we shouldn’t be surprised that they have the votes to push through any proposal they want, including proposals to give themselves and their friends money out of the treasury.
This will be a stain on Uniswap and the DAO governance model for a long time.
DAOs are extremely immature relative to the amount of capital they control. I think one positive from this fiasco would be if people took a step back from purchasing governance tokens they don’t intend to actually use (i.e. vote with). It artificially raises the sticker value of the treasury, making it feel easy to allow 0.25% of funds to go to chaos.
Ultimately, the only check to these VCs power to treat the treasury as a slush fund is token holders actually voting. Every DAO should be putting considerable resources into getting their holders active. UNI has over 250,000 holders and yet the forums for discussing how to use >$20M got <1,000 comments from less than 100 people. One thing I think is underexplored is meta-governance. UNI is actively traded on centralized exchanges like Coinbase. I’d like to see these FinTech companies enable push notifications for token holders to alert them to proposals in the works and get their sentiment.
I’ll note, not all DAOs use pure token weighted democracy. Some alternatives include Synthetix representative democracy governance.
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