Understanding Blockchain Governance: Analyzing Decentralized Voting to Amend DeFi Smart Contracts (2305.17655v3)

Abstract: Smart contracts are contractual agreements between participants of a blockchain, who cannot implicitly trust one another. They are software programs that run on top of a blockchain, and we may need to change them from time to time (e.g., to fix bugs or address new use cases). Governance protocols define the means for amending or changing these smart contracts without any centralized authority. They distribute the decision-making power to every user of the smart contract: Users vote on accepting or rejecting every change. In this work, we review and characterize decentralized governance in practice, using Compound and Uniswap -- two widely used governance protocols -- as a case study. We reveal a high concentration of voting power in both Compound and Uniswap: 10 voters hold together 57.86% and 44.72% of the voting power, respectively. Although proposals to change or amend the protocol receive, on average, a substantial number of votes (i.e., 89.39%) in favor within the Compound protocol, they require fewer than three voters to obtain 50% or more votes. We show that voting on Compound proposals can be unfairly expensive for small token holders, and we discover voting coalitions that can further marginalize these users.

• The paper reveals a concentration of voting power, with 10 voters controlling 57.86% in Compound and 44.72% in Uniswap.
• The paper demonstrates that high voting costs and coalition formations marginalize smaller token holders during proposal decisions.
• The paper suggests that innovative reforms like quadratic voting could enhance fairness and efficiency in decentralized governance.

Understanding Blockchain Governance: Analyzing Decentralized Voting to Amend DeFi Smart Contracts

Overview

The paper "Understanding Blockchain Governance: Analyzing Decentralized Voting to Amend DeFi Smart Contracts" by Messias et al. provides an in-depth examination of governance protocols within blockchain systems, specifically focusing on decentralized finance (DeFi) smart contracts. The research scrutinizes decentralized governance in practice, using Compound and Uniswap as case studies, two prevalent governance protocols in the DeFi landscape. By exploring the dynamics of voting power concentration, the authors reveal significant insights into the operation and challenges related to decentralized governance.

Key Findings

1. Concentration of Voting Power: The paper reveals a noticeable concentration of voting power within Compound and Uniswap. For instance, 10 voters possess 57.86% and 44.72% of the voting power in Compound and Uniswap, respectively. Such concentration implies that only a small cohort is needed to effectuate significant governance decisions, posing questions about the true decentralization of these protocols.
2. Voting Patterns and Fairness: The analysis highlights the high costs associated with voting on Compound's proposals, which can be disproportionately burdensome for small token holders. Coupled with the formation of voting coalitions, these costs could marginalize smaller participants.
3. Proposals and Participation: The examination of proposal acceptance shows that most receive substantial support, yet only a few voters are required to achieve quorum. This finding underscores possible imbalances and inefficiencies within these governance systems.
4. Impact of On-chain Voting: While on-chain voting ensures transparency and tamper-resistance, the associated transaction fees pose a barrier to participation. The disparity in voting costs per unit for smaller holders raises concerns about fairness in decision-making processes.

Implications

The implications of this research are significant both practically and theoretically. From a practical standpoint, understanding the concentration of voting power helps stakeholders assess the resilience and robustness of DeFi governance structures. The findings suggest a need to reevaluate the distribution of governance tokens and consider mechanisms to better democratize voting power. Theoretically, this research enriches the discussion on decentralization, trust, and governance efficiency within blockchain ecosystems.

Speculation and Future Directions

As blockchain technology continues to evolve, the challenges identified in this paper highlight the need for innovation in governance protocols. Implementing quadratic voting or reputation-based systems could be promising avenues to explore. These approaches may offer more nuanced and equitable governance structures, potentially fostering wider participation and fairer decision-making.

Future investigations might focus on developing and formalizing frameworks that mitigate the adverse impacts of voting power concentration. Additionally, comparative studies of different governance mechanisms could further illuminate best practices and innovative solutions that balance decentralization with effective governance.

Conclusion

This paper presents a detailed analysis of governance mechanisms within prominent DeFi platforms, shedding light on the complexities and challenges of maintaining decentralized control. It calls for a reassessment of current governance practices to better align with the principles of decentralization. By addressing the issues of voting power concentration and participant marginalization, the paper sets the stage for more equitable and efficient blockchain governance systems, paving the way for future research and developments in this rapidly evolving field.