The essential component of cryptocurrency or DeFi, especially, is non-custodial management and security of value. However, while decentralized governance systems are in place, the reality of the degree of control in DeFi is far from it.
In an analysis of yearn.finance (YFI) governance and decentralization, Hasu (alias), market researcher of Deribit Exchange notes that,
… users should stop looking at it as a non-custodial system but instead as an actively managed fund where the controller is the fund manager. Previously, that was Andre Cronje, today it is the 6-of-9 multi-sig.
The problem of controlled governance in DeFi tokens extends to projects like Aave, Chainlink, and Compound. This is because of the inequality in the stakeholdings of the tokens and the process of implementation of updates.
Chainlink [LINk] has been popular in the crypto circles as it reached $10 benchmark leading the altcoin bull-run. However, the problem of unequal distribution extends to LINK as well.
Don’t tell chainlink holders the top 100 addresses hold 83% of the supply.
— Charles (@CryptoCharles__) August 7, 2020
Analytics firm, Glassnode, tweeted at the beginning of August that,
$LINK Percent Balance of Top 1% Addresses just reached a 2-year high of 78.017%
Similarly, in Aave, the top 1% held more than 85% of the supply in the first week of July.
Furthermore, Hasu notes that the implementation of changes or process of voting also differs among protocols. In yearn.finance, Andre Cronje, the founder and lead developer implements the formal on-chain vote of an upgrade. However, given the degree of imbalance and his position as the executioner does give the project a managerial front.
It’s a Trust Issue
The issue of plutocracy in cryptocurrencies is, however, nothing now. It dates back to the unequal distribution of Bitcoin in the early days, to the pre-mine supply of Ethereum. Meltem Demirors, the CSO of Coinshares notes that,
…two years ago i re-hashed the same analysis for tezos when it launched. all protocols are plutocratic.
The behaviour and security of the controlling parties from here will be important until more a sufficient level of decentralization is reached.
Which DeFi from the current lot is more susceptible to governance problems? Please share your views with us.