Btw, I’m not alone in sharing the opinion that coin voting alone as a governance mechanism is flawed.
Vitalik has written a comprehensive post for this that echoes many of my own opinions that I have come to independently and through experience.
Source: https://vitalik.ca/general/2021/08/16/voting3.html
While I highly recommend reading the whole post, here’s some of it for convenience.
He illustrates the problems with coin-voting:
Problems with coin voting even in the absence of attackers
The problems with coin voting even without explicit attackers are increasingly well-understood (eg. see this recent piece by DappRadar and Monday Capital), and mostly fall into a few buckets:
- Small groups of wealthy participants (“whales”) are better at successfully executing decisions than large groups of small-holders. This is because of the tragedy of the commons among small-holders: each small-holder has only an insignificant influence on the outcome, and so they have little incentive to not be lazy and actually vote. Even if there are rewards for voting, there is little incentive to research and think carefully about what they are voting for.
- Coin voting governance empowers coin holders and coin holder interests at the expense of other parts of the community: protocol communities are made up of diverse constituencies that have many different values, visions and goals. Coin voting, however, only gives power to one constituency (coin holders, and especially wealthy ones), and leads to over-valuing the goal of making the coin price go up even if that involves harmful rent extraction.
- Conflict of interest issues: giving voting power to one constituency (coin holders), and especially over-empowering wealthy actors in that constituency, risks over-exposure to the conflicts-of-interest within that particular elite (eg. investment funds or holders that also hold tokens of other DeFi platforms that interact with the platform in question)
For the first point, as even illustrated even in this poll, often an individual holder especially if it’s a small investment does not have much incentive to research and think carefully about what they’re voting for.
The problem of coin holder centrism, on the other hand, is significantly more challenging: coin holder centrism is inherently baked into a system where coin holder votes are the only input. The mis-perception that coin holder centrism is an intended goal, and not a bug, is already causing confusion and harm; one (broadly excellent) article discussing blockchain public goods complains:
Can crypto protocols be considered public goods if ownership is concentrated in the hands of a few whales? Colloquially, these market primitives are sometimes described as “public infrastructure,” but if blockchains serve a “public” today, it is primarily one of decentralized finance. Fundamentally, these tokenholders share only one common object of concern: price.
The complaint is false; blockchains serve a public much richer and broader than DeFi token holders. But our coin-voting-driven governance systems are completely failing to capture that, and it seems difficult to make a governance system that captures that richness without a more fundamental change to the paradigm.
Empowering coin holders to be the only determinants of the future of the project often result in short term decisions to drive coin price up even to the detriment of longer term goals and also ignore the other parts of the community which may be significant contributors to the project in other ways, (time, development, connections, influence etc). It also stops the community from growing if individuals feel that they cannot dislodge existing coin holders or have their say.
Vitalik also talks about the weakness of coin voting in that it’s very susceptible to vote buying which has happened to many other protocols especially those in delegated proof of stake models where many just ‘sell’ their votes to whoever gives them the most returns regardless of the decision they make.
Time locks that require coins to be held for a certain time before being entitled to vote are also a stop gap solution and can be bypassed.
Some DAO protocols are using timelock techniques to limit these attacks, requiring users to lock their coins and make them immovable for some period of time in order to vote. These techniques can limit buy-then-vote-then-sell attacks in the short term, but ultimately timelock mechanisms can be bypassed by users holding and voting with their coins through a contract that issues a wrapped version of the token (or, more trivially, a centralized exchange). As far as security mechanisms go, timelocks are more like a paywall on a newspaper website than they are like a lock and key.
He proposes several potential solutions but also cautions that they come with different trade offs.
However what I want people to read is Vitalik’s conclusion that is what I’ve been saying for a long time (even before reading this article) in that coin voting alone is often just governance theatre and generally concentrates power in a few powerful coin holders. This is why it perplexes me when people say I am trying to rig/control the vote as I can safely say I am among the larger holders of Firo wielding influence that would be able to be part of this ‘elite’ which is what I have been trying to fight against.
Coin voting would empower me while enabling me to claim it’s ‘decentralized governance’ yet it isn’t my preferred choice. I’ve seen this happen in many projects and the damage it has caused.
But these are all only a few possible examples. There is much more that can be done in researching and developing non-coin-driven governance algorithms. The most important thing that can be done today is moving away from the idea that coin voting is the only legitimate form of governance decentralization . Coin voting is attractive because it feels credibly neutral: anyone can go and get some units of the governance token on Uniswap. In practice, however, coin voting may well only appear secure today precisely because of the imperfections in its neutrality (namely, large portions of the supply staying in the hands of a tightly-coordinated clique of insiders).
What I’m hoping we can do is some element of futarchy or reputation system or combination but these are highly complex systems that need serious development work. Quadratic voting such as Gitcoin is also a promising concept but also requires users to WANT to donate which is what I originally envisioned with the community fund concept but perhaps it’s a little too early to do this while the community is small and in many cases not yet mature.