The Tally Newsletter, Issue 32
May 19, 2021
Welcome back for issue 32 of the Tally Newsletter, a publication focused on all things decentralized governance. We’ll keep you updated on key proposals, procedural changes, newly launched voting systems, shifting power dynamics, and anything else you need to know to be an informed citizen.
This week we cover:
PoolTogether’s grants program proposal
Sharp losses and insolvency for BSC based lender Venus Protocol
Plus brief updates from around the ecosystem.
PoolTogether on Track to Pass Grants Proposal
TL;DR: The proposal empowers a grants committee to distribute 27,000 POOL tokens to contributors over a 6 month period.
PoolTogether, the protocol for no loss prize pools, has become the latest project to jump on the grants bandwagon. And for good reason - while the structure and processes are still taking shape, Uniswap and Compound have both had early success with their grant programs.
Similar to the other protocols, PoolTogether will charge lead members with managing the program and handling due diligence. A committee of reviewers will then confirm each grant before funding, and help manage the allocated POOL tokens via a multisig. While funding is granted in POOL tokens, the grants program would be authorized to spend up to $500,000 per quarter in grant funding plus $100,000 in operational expenses.
As we’ve seen in the past with the Uniswap grants committee, it can be difficult to judge the future value of tokens. The proposal specifically addresses this with an option for potential followup funding requests to governance depending on price changes. This may come into play relatively soon, as with the recent market downturn 27,000 POOL tokens are worth at least 20% less than the $500,000 quarterly spending target.
So far there seems to be broad community support for grants spending, with the proposal having already met the minimum quorum requirement. This was likely made easier by the relatively small token request, and the community trust built up over time by the various committee members.
In the short term, many projects like PoolTogether are recognizing there may be more risk from governance inaction versus potential overspending. But as more projects embrace grants programs to increase responsiveness, communities may struggle with limits of trust and social scalability. A mix of social and technical solutions will be needed to unlock further benefits from committee governance.
Venus Protocol Faces Disorderly Liquidations
TL;DR: Severe market manipulation in the project’s own XVS token allowed attackers to take out undercollateralized borrowing positions.
Venus Protocol has been a prominent fixture of Binance Smart Chain (Binance’s in house EVM blockchain) since last fall. It offers similar borrowing and lending services to Ethereum’s MakerDAO, Aave, and Compound, including lending of various crypto assets and minting the project’s native VAI stablecoin. While the fundamentals of defi lending and derivatives are well understood, Venus’s pursuit of the far end of the risk curve seems to have caused problems in this latest incident.
Specifically, Venus allows users to both borrow its own XVS (a short position) as well as use it as collateral to borrow other assets (a long position). This leverage is compounded by futures and margin offerings on Binance’s centralized exchange as well, leading to a highly leveraged trading environment for the XVS token.
Attackers managed to use this intrinsic volatility as a means of extracting value from the system. First, XVS was borrowed to trigger a short squeeze and parabolic price rises. Then attackers pledged their XVS tokens as collateral on Venus to borrow alternative assets including ETH and BTC. But due to the XVS token’s inflated valuation being fed into the oracle, the attackers were able to borrow more than the fair value of their collateral.
Despite the founder’s explanation that no funds were lost, Venus protocol faces tens of millions in bad debt, where the value of outstanding loans exceeds assets. Because losses are not automatically applied to suppliers’ positions, and the protocol has only a vague plan for plugging the hole (using OTC deals or further borrowing against XVS), it may be impossible for all users to withdraw their assets. This creates a risk of bank runs if users lose confidence in Venus’ repayment plan, as those withdrawing last face greater losses.
Above all else, the exploit exposes a looming governance problem in many BSC based protocols. Without community involvement in project maintenance and risk management, all responsibilities fall on core team members who may be either unqualified or misaligned. Projects focused on real community engagement should have a competitive advantage from safer, more effective governance.
In Brief:
Crypto markets experience sharp intraday drawdown, with billions of dollars liquidated:
MakerDAO’s liquidations 2.0 upgrade handles market drop without losses:
Alchemix considers 1,000 ALCX grant to sponsor centralized exchange listing:
Aave votes on implementing GUSD and CRV reserve factors, which funnel revenue to the protocol to compensate for the AAVE risk backstop:
Opportunities:
Flipside Crypto’s Bounty Brief newsletter collates funding for defi data analysis
Aave grants program begins accepting applications:
Thanks for joining us for issue 32 of the Tally Newsletter! Be sure to check out the Tally governance app, join us on Discord, and subscribe to our protocol calendar for the latest updates!
Anything we missed? New developments or protocols you’d like to see covered? Drop us a line at newsletter@withtally.com
Best,
Nate, Tally