The Guide to DeFi Governance

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October 26th, 2021

By: Ratan Kaliani, Annamira O’Toole & Shivam Patel

In the spirit of decentralization, DeFi (decentralized finance) protocols have been empowering their communities to guide the future of these protocols through on-chain governance. However, the ecosystem of DeFi governance and token delegation can often be hard to navigate. Here at Blockchain at Berkeley (B@B), we’ve learned a lot from running our delegation program for 4 protocols (Uniswap, Compound, Aave, Fei) over the past year . This guide intends to distill some of those learnings into a digestible format to help other delegates & future community members hit the ground running.

DeFi Governance Overview

Protocols use DeFi governance to empower community members to work together to make key decisions regarding protocol changes, launching new initiatives and transforming the long-term vision for the protocol. In the most common model, token-based governance, 1 token corresponds to 1 vote in the protocol, enabling every token holder of a protocol to participate in governance. By leveraging governance, DeFi protocol teams decentralize decision-making across the community.

The governance process, like the DeFi protocols themselves, are controlled by smart contracts. In most protocols, once a governance proposal and its protocol change is approved, the proposal moves into a timelock where it is held frozen for a period of time (such as two days) before being integrated. Timelocks allow for a buffer for the community to counteract potentially malicious or misinformed activity before they are incorporated into the protocol.

For example, Governor Bravo is a popular set of governance contracts developed by Compound Labs. Any proposal made in Governor Bravo contract is made of a set of actions: call contract function, upgrade contract by redeploying and setting proxy address of new version, etc. These changes then go to a vote, of which the result is either cancelled or sent to the timelock before execution.

How are proposals integrated into the protocol? (Courtesy of Open Zeppelin)

With Governor Bravo and similar governance contracts, certain smart contracts designated by the protocol are able to be upgraded without needing to change the proxy address. However, smart contracts not deployed under these frameworks are immutable, and as such many DeFi protocols use proxy contract patterns to interface between the client and the actual contract logic.Users and client applications use the address of the proxy contract and interact with its functions. The proxy contract then points to the protocol’s contract logic. This enables upgrading protocol parameters and redeploying contracts to the chain without necessitating that clients change the addresses they interact with; rather, clients simply change what version of the protocol logic that the proxy contract points to.

Token Delegation

Why does delegation matter?

Early investors & protocol builders often hold an outsized amount of governance tokens and delegation of these tokens serves as a vector to encourage diverse participation from the community. For example, a16z recently open-sourced their token delegation program, which looks to increase the quality of the governing body of protocols by delegating to community members who demonstrate early leadership in governance.

Voting power is delegated by use of utility functions in the governance token smart contracts. These functions enable token holders to delegate their on-chain governance rights to others who they as view as adept “protocol governors”.

How do you become a delegate?

When bootstrapping a DeFi Governance initiative, it helps to first show a depth of knowledge in a protocol by being active in the forums and the community at large. After gaining familiarity with the protocol and understanding the value-add your organization can bring to the table, contributing to the protocol and being an early community leader in a protocol is the best avenue to receiving your first delegation. Connecting with VC firms and protocol teams/founders are potential avenues as well, but the most effective method to make an impact is still simply being very active in moving the protocol forward & making your voice heard. In our experience, we’ve seen that by being active protocol governors in the community, investors & founders will start reaching out to you directly with delegation proposals. However, it is necessary and your responsibility as a delegate to do your due diligence on protocols and only participate as delegates in protocols that are legitimate. Being transparent, accountable and independent are key towards earning the community’s trust, and you must actively seek all to be an impactful community member.

The legal contracts associated with the delegations can vary, but they generally include a gas stipend to cover the costs of gas fees for on-chain voting, along with the delegated token amount and duration of the contract. It’s standard practice for a clause to be included that allows for the revocation of delegated tokens should your organization become inactive in the community. We’d highly recommend having a legal contract in place just to make sure that all parties are on the same page in terms of delegation details and expectations.

Example of a DeFi governance delegation letter (Courtesy of a16z)

Our Approach to DeFi Governance

Mission

We strongly value being active in the entire governance process, from forum discussions to temperature checks to proposal discussions to intermediate and final votes. We engage our community not only through forums, but also on Twitter, where we explain our voting decisions and meet to discuss protocol changes with community leaders within each protocol. By being active governors & community members, we hope to leave a lasting impact on DeFi governance and help shape the future of DeFi.

Committee Structure

Although we aim to incorporate as much information as possible into our governance decisions, we’ve found that a carefully structured core Governance team helps ensure that we stay on top of protocol developments and are informed voters & contributors in governance. The core team ensures the decisions that our organization makes in DeFi governance are democratic and well-reasoned.

Initially, we began with a committee where each member would be active in the community of each of the protocols that we were delegates in and would come together as a group to discuss the proposals to reach consensus. While this model works well as delegates in 1–2 protocols, we quickly recognized that it wouldn’t scale as we became delegates in new protocols. Currently, we designate core members to serve as leads for specific protocols & DAOs within a protocol (ex. B@B’s involvement in the Aave Risk DAO). Our core governance team meets on a consistent basis for our governance committee to debate the merits of governance proposals. In meetings, our protocol leads relay the specific details and nuances of protocols to the committee, allowing us to make more informed votes as a team.

Case Study: Temporarily Disable COMP Rewards (Compound Proposal 63)

To dive in deeper into what our governance process looks like, we’ll explain our evaluation process for our recent vote AGAINST COMP Proposal 63, which looked to temporarily disable COMP rewards in response to the Comptroller exploit from an overlooked error in COMP Proposal 62.

  1. The first aim of our team is to get the context, goals, downsides & implementation of the proposal at hand, spearheaded by our protocol leads. Proposal 63 needed to be fast-moving to respond to the $100M+ at risk from the exploit, and as such was a rudimentary solution: give the community the ability to suspend all COMP claims to prevent more money from being at risk. However, this proposal came with a significant downside - all integrations with the protocol (ex. a protocol using Compound as a part of an investment strategy) involving the claimComp function would be bricked. Proposal 64 was released two days later and fixed the same problem with a more nuanced solution: only those users who did not interact with exploited markets would be able to withdraw their COMP. After further research, we recognized that this solution was not only more elegant, but better maintained trust in the Compound protocol in the wider DeFi community. As a result, the initial research led the Compound protocol leads to recommend voting AGAINST the proposal.
  2. After completing the research phase of evaluation, the Compound protocol leads presented their preliminary findings & initial research to the committee for a full vote by the core team. Due to the potential implications of the vote and importance of finding a solution to the exploit, our team dedicated significant time towards individually researching the merits of the proposal. After doing so, the committee convened to vote and a majority decided to vote AGAINST Proposal 63.
  3. Because Proposals 63/64/65 were interrelated, we included our justification for all 3 proposals in one tweet that we released to the community. By including our reasoning in our tweets, we hope to educate & help guide those in the community towards making well-informed governance voting decisions.

Future Steps

By being active delegates & contributors in DeFi Governance, we hope we can help educate the wider crypto community and take ownership in moving protocols forward. We aim to release our specific views and objectives for B@B’s DeFi Governance impact in a future post. To give a teaser - as DeFi continues to go mainstream, rethinking incentive mechanisms for community engagement & access to governance are integral prerequisites to mass adoption. As always, we’re excited to continue contributing to the community in a transparent & public manner!

General Resources

The governance tooling ecosystem has evolved rapidly in tandem with the growth of DeFi and we’ve found that having a hub for these resources is key towards improving awareness & efficiency in DeFi Governance. Here’s a compilation of resources we’ve found most helpful as delegates & monitoring the governance ecosystem:

Dashboards

  • Tally: Voting dashboard, governance tooling & wiki for information on governance systems
  • Sybil: Track voting power & votes on proposals by delegates by protocol
  • Boardroom: DAO Management platform for members of hundreds of communities to participate in governance
  • Protokol: Track voting power for voting delegates in USD

Protocol Resources

Uniswap

Compound

Aave

Fei

Further Reading

About Us

Blockchain at Berkeley (B@B) is Berkeley’s hub for blockchain innovation and one of the leading student-run blockchain organizations. Since 2016, Blockchain at Berkeley has been focused on educating the wider community about blockchain, facilitating innovative research and discussions, and crafting industry-leading PoC’s with top blockchain and Fortune 500 companies. We’ve been involved in DeFi Governance since early 2021, and are excited to continue to break barriers on the path forward!

Thank you to the B@B Governance Crew (Annamira, Callam, Shivam, Steven, Rishabh, & more) for making B@B’s DeFi Governance initiative a reality and B@B Fam for editing & influencing this piece (Nishan, Darya).

If you’re interested in working with Blockchain at Berkeley, feel free to reach out to us via Twitter DM or via governance@blockchain.berkeley.edu - we’re always looking to collaborate on innovative DeFi Governance projects!

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