Breakpoint 2022:How Much Transparency Is Enough in DeFi Governance
2:18AM Nov 15, 2022
Speakers:
Boaz Shoshan
Avi Meyer
Patrick Perlmutter
Emon Motamedi
Keywords:
protocol
governance
dao
token
decentralization
decentralized
decisions
community
proposal
transparency
teams
power
vote
token holders
users
problem
people
process
question
voting
Well, hello there, folks, thanks all for turning up today, we only have 20 minutes to discuss a question a subject, which is incredibly broad and complex so we won't be doing a huge amount of introductions at the beginning. Gentlemen, if you want to shill your bags or yourselves, you can be clever and weave it into your answers. And if you didn't know who these three gentlemen were already, please speak to me afterwards and I will slap you. Now just to get started: This is of course, a very broad topic of transparency in DeFi governance. But we'll try and keep it a little broad at the beginning. And then we can maybe go into something a little more complex later on. I thought I would start with you as at flip side, you do have a very high altitude when you're looking at all different blockchains all different protocols, and your thoughts on governance in general, and the amount of information that should be shared to protocol users. How much is too much? When are we oversharing? When are we under sharing?
Yeah, great question. Excited to be here. Thanks. I think it really depends on the use case of the protocol, you know, their efforts in how how fast they want to decentralize, I think there's always a balance between, you know, you have a community who wants to get involved. So you want them to feel like they have influence over some of the decisions that are being made. On the other hand, you know, you have founding teams that have products to ship, and they need to make sure that they're releasing the right things at the right times. So you know, I think you want to have a balance, especially early on and understanding, hey, here's a certain level of transparency that we can present to the community so that they feel involved. But then I think it's a matter of determining how much you want them to have decision making power over those things, right. So it's progressively happens, where you may have a protocol that's it's early on, that wants to develop product, and they feel like the founding team needs to have more control over the decisions being made. As that happens, you can start to decentralize further and give the give the community voting power. So it's a balance of making sure that you know, reacting to the community and saying, if they feel like there's too many closed door decisions being made, and really maybe defining and refining your processes to make sure that they are more looped in. But yeah, I think terms a bit on like the maturity of the protocol itself, as well.
But the nature of the protocol, totally, you make it all sound so simple Avi, if only it was! Patrick, when it comes to reputation, and the how much trust you put in your users, and ways to incentivize people, I thought it'd be interesting to hear some of your takes on that, from the work that you've done at Lighthouse. Tell us a little bit more about some of the big problems when it comes to transparency in defy government governance, what are the biggest obstacles you would say?
I think that there's a there's a factor of proximity to the protocol. So if you're a core team member, and you're actually building this out, then you know, a lot more than, say, a user that might be just using the protocol. So I think that there needs to be a distinction about how close you are to the actual product. And the decisions that are made are going to fundamentally be subjective based on that proximity. So in my in my view, from a reputation perspective, if you're really, really close to the core product, then you're going to have to make some calls about what level of transparency you want to provide to your users. And I think that that's almost inescapable.
Certainly, certainly, when it comes to Solana, specifically, Emon, and the trends that you're seeing when it comes to governance, of course, through realms and the SPL token voting system that we have. Where do you think we're going in general for protocols inside Solana?
Yeah. So I think the the questions being discussed, here are the right questions. And what Avi and Patrick talked about are exactly right, the challenges as you're decentralizing your protocol: How do you decide to give away the reins to the community versus keeping control as as a project administrator? And the way that we've tried to construct SPL governance actually to address this this problem and basically help DAOs on really what's a spectrum to decentralization, I think, you know, SPL governance realms, we focus on DAOs. And people have this tendency to hear the word DAO they imagine this fully decentralized entity, everyone's remote, no one knows each other. There's no central decision maker. And the reality is that the path to being a truly fully decentralized DAO is a long one. And every organization on Solana is on different parts of that path to becoming fully decentralized and becoming fully decentralized maybe doesn't make sense for everyone. And so the way that we've constructed SPL governance, which is the governance contract on Solana and realms is to allow for some of that nuance in that progression. So, specifically, we sort of make the distinction between what we call a council token and a community token. When when a project just starts maybe it's the four of us starting a project we might spin up a multi-sig each of us gets a council token eventually we bring on 100 community members, we want to give them community rights as well, we have a separate community token. But because we've preserved our council token, we can still do things like you know, maybe veto decisions, maybe community can only vote on certain decisions, maybe community needs to hit a higher threshold and what they're voting on. And then eventually, once we're down the pathway to decentralization, if we feel comfortable with what we set up among the community, we can actually vote to disband our council token and have it be fully decentralized. And so we try to meet projects wherever they're at in the spectrum and helping build solutions for them.
Certainly, and there is such a very broad spectrum. Indeed, when it comes to projects that are on the way to decentralization, you mentioned that maybe full decentralization doesn't work for all projects. On the Orca side - which is the only solid insight I have into it - decentralization was the name of the game from the very beginning, that was definitely the the ambition. But it's such an iterative process. It's all about... the destination is decentralization, but the journey you take those just going to be, you'll encounter a lot of things that maybe you weren't expecting on the way, and it's so iterative. So you will learn so much about it just by trying to, well, if you're simulating it, or you're trying to imagine it, you'll suddenly encounter all of these issues that maybe you hadn't expected before. But of course, they can all be, they can all be surmounted, though they can always be vaulted over provided you have enough insight. But it is such a such a big question, because ultimately the the question of what full decentralization really looks like has yet to really be solved as it were, or have a perfect use case in general. Maybe you guys would disagree, maybe there is an example of perfect decentralization. But it is sort of the "castle on the hill" that we've not quite seen yet - still a bit cloudy upstairs. When it comes to like decentralization, and the amount of information that you share with protocol users, do you think because we have seen some protocols encounter problems, when it comes to governance, where they are they maybe share too much? Or they have they have given too much power to token holders, to the point where long term sustainability has not been is not achievable? It's harder to achieve? Does anyone here think that actually, the amount of information you share the amount of transparency is actually peaked so far, and protocols will be maybe a bit more restrictive with the kind of information or the amount of power that they give to their protocols? Or do you think we're still very much at the early in the beginning with how much power and how much information is shared? Avi, what do you think?
Yeah, it's a great question. I mean, the easy answer is, I think, teams will become way more pragmatic, and how they start to roll out the power to the community. You know, obviously, we've really not only been doing this for a few years, in terms of understanding how to decentralize communities and build them, the tackling amazing tech that Patrick and Emon are building, like, that's in its infant stages of being integrated, even though this tech is so powerful. So yeah, the teams will start to slowly understand through mistakes of others how to improve, there'll be some teams that kind of fumble. And we're at Flipside, we are working with MetricsDAO, to incubate their governance processes. And you know, it's one, that's one thing we run into all the time is to see, hey, you know, the simple decision, like we have these tokens in our treasury, and we want to delegate them to a team, well shoot, we don't have a process in place, do we have to run through full governance that way? Like, yes, I guess we should probably have a full proposal up in full transparency for the ecosystem. But like, do they really need to be involved in that conversation? And it's like, even those fundamental things where you set up a full constitution and a governance process, and then you come to these little decisions, you're like, oh, man, like that's where we are in this process. So I think you definitely want to have, you know, willingness to try and break things. And so I hope teams don't decide to go backwards and start to take away the power that they've given to the community. But I hope that teams moving forward will be more pragmatic and learn from mistakes and be able to kind of decentralized in a way that makes them feel like they can trust the decisions being made.
Right. What's that old line, "A smart man learns from his mistakes, a wise man learns from the mistakes of other people?" Let's hope that enough mistakes have been made thus far. We don't need to make even more mistakes before we finally figure it out. Emon what do you think? Do you think maybe we've seen a peak when it comes to the amount power that has been distributed? Or do you think this is something which will just evolve into more of a mature process?
Yeah, I don't know that. There's I don't think there's necessarily a dichotomy there between, you know, too much information to the community too little are we overloading it. To me, it's all about how you package the information in the sense that it's great that all the information is is accessible, but I don't think you should assume that every community member is going through and reading the constitution is reading the intricacies of every proposal. Nor should we accept expect, you know, a lot of people talk about how do we get more people in our community voting, I don't think every community member has to care about voting, right? Like, I think it's great if they do, but your average user is gonna be going about their day, they're using your protocol to meet a very specific need. But they're not necessarily trying to participate in the governance of the protocol. And so I think a big key in this governance, conversation and decentralization is really meeting the user where they're at. And maybe that from an informational context, maybe that means tiers of information, you know, for certain users, they're digging into the code of the proposal to understand what's going to execute, but maybe for others, it means you're putting together a really easily digestible summary of what's going on. If they want to proceed they can you make it clear to them why it's important for them to participate. And you go about it from there.
Sounds very simple again, but it is a tricky problem. Like I've heard so many people say we're going to end up with quasi or pseudo political entities inside the crypto ecosystem where you have a chief whip, who is going around rallying the the token holders to vote for one proposal or another. Patrick, what's your take on it? Do you think the oil ultimately through light house, you're trying to create a system which will solve a lot of these problems?
I don't know if full decentralization should necessarily be a goal for a DAO. I think that naturally, power will get concentrated in the hands of a few. It's more of a mechanism of who are the few rather than trying to fight against that, that centralization, that tendency to centralize. And I say that just because there are people that have more information than others. And it's going to be up to them to communicate that information to others, if they want to facilitate decentralization, but that could be to their detriment just as much as it could be to their benefit. The way that we'd like to think about it is that more governance power should be given to people that have not necessarily more stake in a protocol, but more proximity or they contribute to the protocol. If you're just a user of a protocol, and you don't want to participate in governance, well, that's on you. I mean, no one should force you to do it. And if you really feel affected by the decisions that are being made, I mean, the door is open for you to vote to to participate
I distinctly agree with half of that and distinctly disagree with the other. I think that we should be pursuing decentralization as a maximal level of it. Maybe not every protocol needs it. But I do think that it's important that many are striving to automate some of their processes through decentralization, it is dangerous if you say, okay, like, I'm good with token weighted voting being dominated by five or six whales - definite inevitability in some cases. But part of it that I love that you're talking about is being able to track contributions and tie back to governance power. One of the things that we've been working with a couple of teams on is designing an overarching ecosystem around your governance token that acts as like a board of directors. But that governance power can be derived by the contributions that you're giving day to day. So that means that you're tying actual activity, you're giving governance power to the people that are most invested in have spent the time building the protocol itself, and maybe that those that power decays over time, but ways to kind of like reinforce that the people we care about, like you don't want someone that can just go buy a million tokens on the market to have direct, you know, decision making power over your protocol, you want to find ways to tie it back to the people on the boots on the ground, that can actually be you know, have that incentive to be participating in the right way.
Certainly, it's the carrot and stick approach. Ultimately, for incentivizing token holders, I was wondering if maybe some protocol is gonna go down the Australian routes and just make it illegal not to vote in governance decisions, maybe where if you don't vote, you forfeit your tokens or something like that they automatically burn. As it's such an experimental area, like there's still so much room for how you do incentivize token holders. But as we are talking about transparency in general, one of the big issues that I think of when you have people who really want to be totally transparent with everything is it actually can make the voting system dysfunctional. So this is where so much information is being relayed, and it is so technically complex, that a lot of token token holders will either be exhausted by continuous governance decisions, or it will be so over their head because they're not, you know, they're not gigabrain, Solana developers that they won't actually understand what these decisions are. And I see this as a big obstacle in the way of, you know, greater and greater transparency. Patrick, do you think there's, is there an easy way around this?
It's a really tough question. I don't think that there is an easy way around it at all. I do think that when it comes to the amount of information that's disseminated, it's always going to be controlled by someone. And I don't know if there's a way of getting around that. Except maybe if that information is somehow persistently on chain. But then, you know, a lot of it is just off chain. It's like you realize there's a vulnerability, you share it amongst your core team. That's a decision of whether or not you want to communicate that it's also public. Right? If there's a vulnerability in your protocol, it's by default public. It's just who got to that first. Right, we saw it first.
Yeah, informational asymmetry is also something that you can't just can't get rid of that you want. Emon, what do you think? Do you think there is a quick fix maybe, a patch?
I don't think there's there's not a quick fix. I do think in general, right now, DAO members are inundated by proposals. And they're inundated by proposals, by virtue of the fact that currently, basically anything that a truly decentralized DAO wants to do has to be a proposal meaning if I want to take $10 out and buy business cards for a few of my DAO members, we have to create a proposal for that for the Treasury to allocate $10 to me to go out and do that thing. And so we're working on that problem in two different ways. One is with sub DAO, to basically allow for smaller pockets of folks working who are working on a specific problem to basically get a budget from the DAO to one time vote. And then once they have that budget, they can decide how they want to spend it. The more interesting one, and I think this is the one that we need to spend more time to get right, though, is having specific parameters or quotients, of when something triggers a proposal or not. So to give an example, let's say using Lighthouse's reputation system, I'm, you know, committed DAO contributor, I've done a lot of good work for the platform. And if I'm spending $10 on business cards, maybe it's written into the contract, hey, expenditures below $10. And if the person has a certain amount of reputation, we trust that and we're not going to require a proposal, that person can do that up to a certain amount of time. So that's one example. And then you brought up the point around that the actual contract itself, you know, one of the beauties of decentralized governance is that you can also control changes in the contract, meaning if I'm, you know, DeFi protocol, and I want to increase my fee from point 5% to 1%. That's often a DAO vote. And once the DAO vote passes, it's automatically enacted into the protocol. And you could see the same sort of quota parameter element working there where you decide, hey, certain things, certain code changes, we're okay with just being patched live. But others require an actual proposal and it to go through the governance process. So I think it's all about finding the right balance.
Certainly, I think for each protocol, it's a different balance, depending on what it is. Does anyone here think that there is there is one code of conduct that could be adopted across the board that would make things easier? Or as I believe, should it be much more localized to the protocol itself?
Yeah, I mean, I guess I love the subDAO idea, helps to kind of take a specialized group of folks in thinking about a problem. One thing that, you know, we have a dedicated team of eight folks working for Flipside governance. And we're delegates in a number of large ecosystems. And I found that the delegation work has been really effective. And you know, we're talking about this problem of information asymmetry, and then participation, we have too many votes, and there's not enough information, I don't have the time to go investigate, well, then you should be delegating your votes to a dedicated team who works on that. So, you know, it looks like governance, we're developing personalized services where you know, every vote that we push out, we're, we're publicly and transparently pushing out a rationale for why we're doing it, providing pros and cons for the decision making. So that you may be a participant, but you may not have the time to spend doing it. And so I think I'd love to see more protocols kind of taking that approach where you can allow, you know, tokens to get in the hands at least decision making power in the hands of folks who are spending their time really understanding the intricacies of the protocol.
Now, we do only have one minute left, folks. So really quickly, I would just like to ask each of you a question. So the [main] question, of course, is "How much transparency is enough in DeFi governance". I would just like to ask you, "How much transparency is too much?". Zero to 100%.
It's well, maybe this is a cop out answer, but it's relative to the protocol itself and their aims and the point that they are in their development process.
Yeah, I don't think it's one size fits all. i In general, I'm a fan of transparency. And as I said earlier, it's a matter of finding the right bite size bits to meet your community where they're at, but like both of you said it's a trial and error process specific to that community.
With four seconds left I agree with them.
Well there you have it folks hope you enjoyed this panel! A very fascinating conversation and I'm sure this discussion will be continued ad infinitum at future Breakpoints. Thank you so much!