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From the beginning, cryptocurrencies and their power has been their separation from the central control that has brought inequality to financial systems for thousands of years. By 2023, centralization had brought down some of the industry’s brightest and brightest stars, from Changpeng Zhao’s exit from Binance, Sam Bankman-Fried and the FTX saga, Terra’s Luna, and BlockFi. An error in the hands of a few changed the Web3 landscape forever. Degovernance is the key to the next cycle of decentralization and the only way to secure the future of cryptocurrency and decentralized finance.
At the heart of non-governance is an unwavering belief in decentralization. The protocol’s governance minimizes human intervention in its operations. The unmanaged protocol uses smart contracts to ensure that web3 accomplishes its mission of eliminating human errors that can negatively impact even the most popular projects and their communities. True decentralization is achieved when a system operates without the typical layers of top-down decision-making that characterize traditional financial systems and, increasingly, some DeFi systems.
Governance minimization is essential as a safeguard against long-term centralization of control and creates better security for investors, users, and contributors. One way to achieve this is to add a decentralized governance layer driving the project through a dedicated DAO.
Some projects have already begun moves toward better governance, but just because a project has DAO in its name doesn’t mean it’s actually decentralized or protected from fraudulent actors.
In a recent example of dangerously inefficient governance, Indexed Finance, a DeFi protocol managed by a now-deactivated DAO that was exploited several years ago, was attacked by malicious governance proposals. So why does it matter if a non-existent, inactive DAO is taken over by a malicious actor?
The protocol has thousands of members connected to contracts, many of whom have set up token acceptance so that the protocol can move tokens from their wallets. This means that an attacker could upgrade that contract and take millions of tokens directly from wallets from users who had permission set up years ago. This is a major problem that arises when protocol governance is left solely to token holders. In contrast, protocols such as Reflexer and Open Dollar are not gradable. This means that DAOs cannot upgrade their code in a malicious way because the protocol is unmanaged.
Ungovernance reduces the role of these stakeholders and argues that the system should be allowed to operate autonomously once the underlying code and algorithms are operational. Like winding an old clock, once the original time has been set no further human intervention is required.
An important question is how to measure the degree of governance needed to eliminate corruption in a project. Traditionally, centralized power structures have had unfair influence over all decisions and processes.
This could be a founder, board of directors, or similar hierarchy. In a society, this may be a monarchy or an unfair political structure. In a company, it looks like a board of directors. In a DAO, this can be a team of core developers or whales that have accumulated influential governance tokens. In contrast, an ideal system is characterized by an equitable distribution of power and influence, with no single point of control or failure. In the Defi and DAO space, governance stakeholders hold the power and make pivotal decisions, from protocol upgrades to fee structures.
If the web3 space is to thrive once again, more care must be taken in building projects from the ground up before corruption, market speculation, or poor decision-making get involved and put millions of dollars of investor money at risk.
There is little hope for the future of the industry if founders fail to proactively engage in the appropriate level of thinking to eliminate inefficient and potentially dangerous governance in their projects.
What problems arise if we fail to introduce decentralization across the industry?
Many essential elements of the web3 space rely on stability to maintain value and attract users, and can be severely affected by sudden shocks. Stablecoins that seek to maintain price stability and peg to a reference value, such as USD Coin (USDC), DAI, and other dollar-backed stablecoins, are susceptible to external shocks and manipulation and are systematically at risk. Likewise, instability and instability are significant obstacles to new users and businesses trying to enter the space, cutting off millions of potential adopters. If a cryptocurrency is never good enough in terms of security, it will never be adopted.
Following the DAO boom of 2021, DAO tools and structures have made great strides in ensuring best practices for operating decentralized communities.
Various projects, such as Collab.Land, have built a strong foundation for token-gated communities, ensuring that token holders in DAOs have access to community chat and documentation, eliminating the need for a single person to manage a large community. Projects like Govrn allow contributors to track and record their contributions to the DAO, but the process of documenting and rewarding active members of the DAO community is decentralized and automated.
The opportunity cost of inaction is too high to allow ineffective governance to continue to dominate the ecosystem. Focusing on non-governance is the only way to achieve long-term growth and prosperity for cryptocurrencies and DeFi.