Since the early days, crypto has had four core promises:
1) Enabling trust at scale. Transactions are executed by code, rather than a single gatekeeper like a bank or other financial middleman.
2) Permissionless innovation. Crypto’s open source nature enables anybody to build on top of existing code.
3) A decentralized governance model. Power rests in the hands of the owners of the crypto assets, rather than owned and managed by a single centralized institution.
4) Better than free. The Internet is free, and crypto networks enable the creation of additional value for users and contributors.
The first promise (enabling trust at scale) was the original value proposition of Bitcoin. And as the crypto market expanded, we have seen permissionless innovation really take off. We’ve written about the power of “money lego blocks” in defi.
However, we’ve yet to see the last two promises play out at scale – until now…
Since the launch of the COMP token in mid June, we have been watching how “decentralized governance model” and “better than free” value propositions are starting to come alive.
Lending protocol Compound approved a proposal to distribute COMP tokens to regular borrowers and lenders on the platform, basically rewarding the participants of the platform with a stake in the protocol (like a gigantic loyalty program). Because so many users want COMP for its voting powers and potential high financial value, users loaded more and more assets into the COMP protocol, increasing the total value locked by over 6x and making it the second largest DeFi protocol by amount of money locked.
Yearn (YFI) took these two promises a step further. Andre Cronje, the creator of the protocol, handed over governance to the community right after launch (and kept no ownership at all in the protocol!) while users can only earn YPFI tokens by using the yEarn yield aggregating tokens. YFI’s market cap went to dozens of millions of dollars in only a few weeks. Yes, this was clearly a result of a bunch of speculation. But it also reflects the fact that the idea of a fully decentralized protocol has resonated within the crypto community.
This combination (delegating governance to users AND making it easy for them to earn a stake in a platform) is a very promising step toward creating a more equitable Internet. We are excited to see how more defi protocols will adopt this path and how these models will potentially transition to non-crypto platforms over time.
With that said, three big questions need to be figured out:
- Governance is hard. Most users / stakeholders don’t have the time and resources to actively contribute to a protocol’s governance. In the absence of a centralized function, how can governance be scaled? “Liquid democracy” approaches (where any token holder can delegate votes to anyone else) is a step in the right direction, but we might need “protocol politicians” (a term I first heard from $KERMAN) that can synthesize the different goals of the community and help develop consensus among participants and a clear roadmap for the whole protocol. These protocol politicians will not only need to be great communicators, but also technical enough to handle the kinds of product / protocol decisions that need to be taken.
- Financial incentives that reward users’ participation are great for the platform, as seen in the numbers for COMP. However, they might also lead to unintended consequences, especially given that financial assets are involved (e.g. disproportionate amount of levering up which could then lead to bubbles).
- Short-term versus long-term incentives. In the same way that the first employees of a start-up not only get a much higher number of stock options but also a much lower entry price than later-stage employees for taking on early risk, the same logic should be applied to crypto platforms. But we obviously don’t have much historic data yet on what amounts should be handed out in the early versus later years.
It has been an exciting summer for crypto with much more to come 🙂