Why Synthetix’s Kain Warwick Thinks DeFi Governance Has Gotten Worse



Decrypting DeFi is Decrypt’s DeFi email newsletter. (art: Grant Kempster)

DeFi is teeming with interesting governance experiments, from Lido Finance’s DAO brokering a $14.5 million deal with venture firm Dragonfly to Maker’s DAO racing to push its decentralized stablecoin DAI back on top of Terra’s UST before Terra collapsed. 

But not all of these experiments have been successful. 

One DAO reneged on its own community’s vote to use some of the project’s treasury to make victims of a hack whole. And DeFi guru Kain Warwick, the founder of Synthetix, has much harsher words for the state of play. 

During an in-depth discussion with Decrypt’s Dan Roberts at Chainlink SmartCon last week, Warwick said he believes DeFi governance “is actually worse today” than one year ago.

“Governance just gets thrown out the window during a bull market, right?” Warwick said. “No one cares, it’s like, ‘Let’s just try and move as quickly as possible, do the dumbest possible thing only.’ All of that stuff that is really critical, but takes a lot of thoughtfulness, and experimentation just gets blown away.”

The biting criticism holds particular weight given Synthetix’s role in basically creating what we now call decentralized finance. Synthetix, a platform that lets users hold and trade tokens that track the price of real-world assets “synthetic” versions), was an early pioneer of yield farming as a token distribution model. The project was also one of the first to spin out into three different DAOs to support Synthetix: ProtocolDAO, GrantsDAO, and SynthetixDAO. 

“Governance theater”

Warwick’s influence over the space can’t be understated. In that same conversation, he also pointed out the next key problem crypto governance needs to solve: “governance theater.”

Warwick took specific aim at the problem of multi-signature (“multi-sig” for short) wallets and voting platforms like Snapshot. 

Quickly: A multi-sig wallet is a crypto wallet owned by multiple people. It could be three, five, or even ten. In order to move any of the money within that multi-sig wallet, you need majority consensus among its many owners. This type of wallet is what many large DAO treasuries use. You don’t want one person to have the ability to run off with a treasury’s funds—not very decentralized. Hence: multi-sig to limit the risk. 

As for Snapshot, it’s an off-chain governance tool for crypto community voting. The project initially chose an off-chain framework in order to optimize participation levels by reducing gas costs for voters. 

“It helps a lot to increase participation in governance by removing cost for users,” Snapshot’s pseudonymous founder Fabien told Decrypt via Telegram. Conversely, argued Fabien, “On-chain voting make it easier to do trustless execution, but makes it harder to include non-whales and have advanced logic in terms of voting power.”

That tradeoff is problematic for Warwick.

“You go to Snapshot and you vote with your tokens, and it sends a signal. But where does the signal go? The signal goes ideally, to the multi-sig, right?” he said onstage at SmartCon. “But the multi-sig is not responsible at all to that signal. The multi-sig could say, ‘No, we’re not going to do this.’”

Warwick argued that the “shiny veneer” of a lot of DAO tooling was just a rushed, bull market solution to governance. He says the industry needs to take the time to connect a community’s votes directly to that multi-sig to have real control over a project’s treasury.

“That is governance theater,” he said. “At the crux of the matter is how do we ensure that token holders, the people who own the project, the people who control the project, the people who should be making the decisions, are able to very clearly express their preferences as to what should happen within the project.”

Bear market will be good for building better governance

There’s good news: Kain thinks a lot of the failures of DeFi governance are due to the fact that during a bear market, people aren’t focused on fixing things—they just want to make more money. He’s optimistic governance tools will improve due to the bear market.

“My strong hope is out of this bear market, we will get much more robust solutions so that we can get rid of this multi-sig problem,” he said, “and come out into the next bull market with a much more reasonable governance framework.”

He may not have to wait long. Fabien said that Snapshot X, which aims to combine the best of trustless execution and low user costs, will launch later this year.

Decrypting DeFi is our DeFi newsletter, led by this essay. Subscribers to our emails get to read the essay before it goes on the site. Subscribe here. 

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