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 mediation a $14.5 million deal with venture firm Dragonfly to Maker’s DAO Run pushing its decentralized stablecoin DAI back onto Terra’s UST before Terra collapsed.

But not all of these experiments were successful.

A DAO cancelled on voting by your own community to use part of the project’s treasury to heal victims of a hack. And DeFi guru Kain Warwick, the founder of Synthetix, has much harsher words for the state of affairs.

During an in-depth discussion With decryptWarwick’s Dan Roberts at Chainlink SmartCon last week said he believes DeFi governance “is actually worse today” than it was a year ago.

“Governance just gets thrown out the window during a bull market, doesn’t it?” Warwick said. “Nobody cares, it’s like, ‘Let’s just try to act as quickly as possible, just do the stupidest thing.’ All those things that are really important but require a lot of thought and experimentation just blows your mind.”

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

“Governance Theater”

Warwick’s impact on space cannot be underestimated. In the same conversation, he also pointed to the next key problem crypto governance needs to solve: “governance theatre”.

“User-owned” doesn’t just mean “has a token”

“Community-driven” doesn’t just mean “has a discord”

‘Active in governance’ doesn’t just mean ‘voting on proposals’

Bullish on the Real Web3; no web3 theater.

— Spencer Noon 🕛 (@spencernoon) October 25, 2021

Warwick specifically addressed the problem of multi-signature wallets (“multi-sig” for short) and voting platforms such as Snapshot.

Fast: A multi-sign wallet is a crypto wallet owned by multiple people. It can be three, five or even ten. In order to move the funds within this multi-sig wallet, you need a majority consensus among the many owners. This type of wallet is used by many major DAO treasuries. They don’t want a person to have the ability to run away with funds from a treasury – not very decentralized. Therefore: Multi-Sig to limit risk.

As for snapshot, it is an off-chain governance tool for voting the crypto community. The project initially opted for an off-chain framework to optimize participation levels by reducing gas costs for voters.

“It helps a lot to increase governance participation by eliminating the cost to users,” said Fabien, Snapshot’s pseudonymous founder decrypt by telegram. Conversely, Fabien argued, “On-chain voting makes it easier to conduct trustless execution, but makes it harder to engage non-whales and has advanced logic in terms of voting rights.”

This compromise is problematic for Warwick.

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

Warwick argued that the “shiny facade” of many DAO tools was just a rushed bull market solution to governance. He says the industry needs to take the time to connect a community’s voices directly to this multi-sig in order to have real control over a project’s treasury.

“This is governance theatre,” he said. “The whole point 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, can express their preferences very clearly within the project should happen.”

The bear market will be good for building better governance

There is good news: Kain believes that many of the failures of DeFi governance stem from the fact that during a bear market people are not focused on fixing things – they just want to make more money. He’s optimistic governance tools will improve due to the bear market.

“I really hope that we will get much more robust solutions out of this bear market so that we can get rid of this multi-sig problem,” he said, “and get into the next bull market with much more sane governance.”

Maybe he won’t have to wait long. Fabien said that Snapshot Xwhich aims to combine the best of trusted execution and low user costs will be launched later this year.

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