“Decentralized” projects are anything but
A lot of people have been asking about the real decentralization of DeFi lately.
Most notably, regulators and central bankers are seeing decentralized finance (DeFi) projects rake in billions while claiming to have no executive, no board, and no central authority. Instead, they are run by Decentralized Autonomous Organizations (DAOs), which resolve disputes and set policy through token-based voting.
Some, including the Financial Action Task Force (FATF) and the Bank for International Settlements (BIS), have concluded that DeFi projects and the DAOs that run them are not as decentralized as they appear, citing a variety of ways to find someone to pin the charges on.
See also: Bank for International Settlements calls DeFi decentralization an illusion
But many DAOs have a bigger problem: they’re far too centralized to really earn the nickname. Not only that, but DAOs form the building blocks of the blockchain-based Web3 that many in the crypto community believe will be the next generation of the Web – a decentralized, privacy-focused version free from Big Tech controls. .
Read more: Web3: Is there a “there” over there? And if so, where is it?
This was shown in a Twitter conversation between Elon Musk and Jack Dorsey last December. When Musk asked Twitter where Web3 was, Dorsey, then CEO of Twitter, replied, “It’s somewhere between a and z” – a reference to the blockchain and crypto arm of venture capital giant Andreessen Horowitz , a16z.
See also: Musk, Dorsey Hint VC Money puts Web3 vision at risk
The point made was that venture capitalists would end up controlling the “decentralized” web because they would hold so much voting power. With that wealth comes the ability to pay people to pay attention when votes are called.
Take the dispute that came to light this week between a pair of paid game development projects controlled by DAO, Merit Circle and Yield Guild Games (YGG).
The problem, as Coindesk explained, is that a pair of prominent members of the Merit Circle DAO – a group that includes anyone with an MC governance token – proposed a vote on canceling a contract with YGG. , who invested $175,000 in Merit Circle.
Also Read: PYMNTS DeFi Series: DeFi and DAO Unboxing
Members of the Merit Circle expected YGG to attract more investors and provide social media marketing which did not materialize. Saying that YGG brought too little “added value”, they wanted to organize a vote to cancel the contract.
Among the cancellation advocates is Sad Cat Capital, which markets itself as “an activist investment firm specializing in innovative and disruptive blockchain technologies.”
Saying, “we’re proud of the activism we do for projects we love,” Sad Cat Capital said in a forum discussion that it was “disappointed” with YGG.
But the contract was signed by Merit Circle, the company that developed the game, and it’s unclear, CoinDesk said, whether voters have the power or the ability to rescind the contract, even though it is. legal to do so. The company and its directors are, needless to say, the major token holders.
This is a problem that most DAO projects face, even with the best of intentions. In many cases, developers or early investors like venture capitalists have large holdings of governance tokens, and therefore outsized control, as most DAO proposals are decided by a majority of a quorum. generally weak. Then there’s the reality that these votes are widely discussed on dedicated chat channels such as Discord, where relatively few casual token holders — especially small investors or gamers — spend much time.
See it here: PYMNTS DeFi Series: Unboxing the Achilles heel of DeFi and DAODeFi on screen: Voting could take $100M worth of crypto from an investor
All of this ignores the fact that majority voting is actually a good way to run a business.
down the road
Another aspect is that many projects are started with the intention of becoming DAOs but are not yet there.
LinksDAO, created this year, is quite open about this. Formed to buy a “world-class” golf course and operate it as a member-run DAO, the project raised over $10 million in 48 hours – thanks to highly respected founders – by selling NFTs that allow the holder to purchase a membership, CNBC reported in January.
Most of that money, however, went towards DAO training costs and initiating the search for a club to buy. Another round of funding will be needed to buy it.
Meanwhile, NFT buyers will get governance rights after the formation of the DAO.