Decentralized finance (Defi) is a fast-growing space of blockchain technology that is gaining popularity. It has gained a lot of traction around the world and is a potential alternative to the current financial system. It's a more transparent and open version of today's financial services. Traditional finance is a well-established system that is tried and tested with a variety of options/products in one place but they are subject to complicated rules and limitations as they are controlled and centralized by a particular regulatory body. Defi, on the other hand, is not reliant on any central organizations or middlemen. Instead, Ethereum's smart contracts, which are built on open and decentralized protocols, are used (DApps).
Decentralization is a top priority for several major decentralized finance (Defi) platforms. The developers of Defi platforms have used governance tokens to move decision-making power from a small group of founding members to worldwide, distributed communities of stakeholders in charge of their protocols.
When it comes to the governance of the Defi protocol, it is a system in which there is no central authority. In the Defi space, currently, they have several models. Defi does not allow third-party control, the question of who will make crucial protocol decisions emerges.
Governance Models
Decentralized finance's governance model tries to transfer control of the protocol from a third party to users who actively participate in it. Although a small group of developers and investors develops a Defi protocol, they have no control over how the protocol is used after it is implemented. The Governance model is important as it makes it more decentralized, transparent, and reliable.
Founder Control
The founders control the majority of Defi initiatives and set the direction for all the activities carried out by the users in the protocols. As choices are made completely by one individual, there is clear and faster decision making which helps the organizations to grow quickly.
Council Control
Here, the core developers serve as the council. The selected members of the community are appointed to help drive the governance and the future of these protocols. The authority is concentrated in a group of individuals who formulate plans and put out road plans. Bitcoin and Ethereum are two well-known examples of this model of governance.
Liquid democracy
Liquidity democracy is not widely practiced in the Defi world. It's also known as delegated or proxy voting, and it's similar to corporate voting in that it allows dignitaries and stakeholders to vote. Every network that follows this governance has a set of basic criteria for acquiring the right to vote.
Governance Token
In Defi platforms, governance tokens are the most often deployed governance model. Typically, each token represents one vote, and the vote in protocols varies depending on the project. The governance tokens are frequently used as a voting mechanism, allowing holders to support or oppose a particular proposal. While the community can forecast the minimum response required for any option to be adopted, the voting system's outcome determines whether or not a proposal should be implemented on the platform.
Decentralized Autonomous Organization (DAO)
Decentralized Autonomous Organizations are run by programming code written on a collection of smart contracts and operate transparently and autonomously. Developing a company with operating rules that are digitally encoded in a Blockchain such as Ethereum. DEX, Validators, Users, Developers, and Stakeholders are the components of a DAO.
DAO is governed by the rules set in smart contracts. The firm may operate partially or wholly based on the codes specified in its digital charter. The stakeholders own the tokens from the company (stakes) and use these tokens for voting. DAO enables investors to ‘shape' the business by creating interaction between the people via the use of smart contracts and also helps the users to operate independently.
Conclusion
Recently, eSatya, one of the Blockchain based companies in Nepal has conducted a meetup on the topic Defi Governance. The meetup was supported and sponsored by the Government of Nepal, Ministry of Education, Science and Technology, the Ethereum Foundation (Ecosystem Support Program). Likewise, CSIT Association of Nepal, Prime IT Club, Digital Notice were the supportive partners for the meetup. The first speaker for the session was Ms.Elena Korjavina, an aspiring UX Designer and crypto enthusiast having over 15 years of experience in financial services and Finance Technology(FinTech) where she overviewed the DeFi governance along with the pros and cons of centralized and DeFi Finance.
And the other speaker for the session was Mr. DeFi Vlad, Co-founder of Bishares finance, an innovative DeFi based index fund protocol that provides consulting for Ledger Link Labs in DeFi, Smart Contract and Non-fungible Tokens (NFT) integration engineering. He talked on various DeFi Governance Models, decentralized autonomous organizations, and their operation in the DeFi space. He also discussed the DeFi projects, as well as the issues that have arisen with the DeFi platform and the future of DeFi governance.
The concept of Defi has been around for a while now. As Defi grows, so does the need for and demand for governance tokens. Since users with more liquidity can access more governance tokens, the entire governance paradigm may progressively shift from decentralized to centralized, with power concentrated in the hands of a few. The existing Defi governance paradigm needs some significant improvements and options to fully address all these issues.
Although decentralized governance is still in its early stages, key processes have been defined and applied across the industry to ensure that protocols are managed inclusively and sustainably. Nonetheless, the evolution of governance models may have the greatest impact on the future of Defi.
