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The Tally Newsletter, Issue 41
July 28, 2021
Welcome back for issue 41 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 give an overview of some of the most important governance talks from last week’s EthCC conference in Paris!
Aave Pursues Multichain Governance
TL;DR: Aave will use bridge messaging to govern multichain deployments of the Aave protocol, without introducing additional trust assumptions.
Recently, Aave has begun to offer services directly on other chains beyond Ethereum mainnet. Their first cross chain deployment on Polygon has been well received, with daily active users already exceeding their user base on Ethereum mainnet. As additional sidechains and L2 platforms come to market (such as Arbitrum), Aave plans to continue to expand and offer services in as many environments as possible.
While this has been highly successful from a business perspective, it introduces some significant governance challenges. Namely, how can a protocol based on Ethereum control a constellation of sub-protocols on other platforms? Aave is far from unique in facing this challenge, with Sushiswap and others also considering governance mechanisms as they move towards a multi chain future.
At last week’s conference, Aave CTO Ernesto Boado shared some insight into Aave’s future plans for cross chain governance (full talk here).
Currently, Aave uses a multisig to manage admin privileges on cross chain deployments. While this allows for agility while standing up a new deployment, it also creates additional trust assumptions for protocol users (who rely on multisig signers to act honestly).
In the future, Aave plans to use cross chain bridge messaging to direct protocol changes for the Polygon market (as well as other yet to be released cross chain markets). Aave’s governance on L1 would submit a message to the relevant bridge contract, which relays the message to Aave’s contracts on the L2 or sidechain. While this mechanism still depends on bridge operators, the trust assumptions are already baked into any activity on cross chain deployments through bridged assets and therefore there are no additional centralization or governance risks.
Bridge messaging will likely become the standard control mechanism for protocols with multichain deployments, displacing trusted multisigs.
Jimmy Ragosa of Kleros Argues for Separation of Powers in DAOs
TL;DR: Introducing separate executive, legislative, and judiciary functions can help DAOs scale decision making without compromising on decentralization.
To date, most DAOs have been designed similarly to a direct democracy. Each protocol change is put up to a vote, open to participation of all token holders. While this is preferred due to a focus on decentralization, in some ways this direct voting framework can be counterproductive. In addition to loss of agility and focus, direct democratic systems are also susceptible to persuasion and groupthink, which can reduce the true level of decentralization.
Jimmy’s talk pulled learnings from national, corporate, and non profit governance to suggest a more resilient and performant framework for decentralized governance, based on separation of powers between executive, legislative, and judicial branches. See the full talk here.
Per his view, existing direct democratic systems are similar to a parliament without an executive government or constitution; there is no overarching direction and few guardrails against malicious action. Introducing executive powers, subject to approval from voters (the legislative branch of governance), allows for much faster decisions and more strategic focus.
Most existing protocols adopt a static judicial system, with the operating standards and limits of power coded directly into core governance contracts. But as more power is delegated from voters to executives, which operate on the boundary of smart contract mechanisms, the question of what is or is not permitted becomes less clear. Introducing a specific judicial function to interpret executive actions can allow for greater executive freedom while maintaining fidelity to the original mandates approved by voters.
While protocol judiciaries are still a new concept, Kleros court is an early example of how this could work; users staking the native token PNK can be drafted to serve on a jury, and make judgements based on presented evidence along with the original DAO agreements, contracts, and passed proposals. Incorporating human judgement allows for enforcing more complex agreements that can’t be easily automated at the smart contract level.
Element Finance Shares Details on Governance Framework
TL;DR: Element allows for a high degree of governance flexibility, with an executive council based on liquid delegation and ability to support multiple voting tokens.
Element Finance offers a platform for fixed rate borrowing and lending. But beyond that, they have also developed a new governance framework which team member Paul Vienhage debuted at EthCC.
The framework is based on the following governance needs:
Flexibility: protocols are evolving rapidly and governance needs can change over time
Convenience: token holders can’t keep up with voting on every protocol change
Agility: some lower risk actions can be safely handled without high approval thresholds or delays
Throughput: governance scalability should be measured by the pace of decision making, rather than voter participation rates
Element Finance has developed a highly flexible governance framework that seeks to address these requirements without compromising on decentralization.
The first new component is a governance council, made up of a small group of delegates with the highest voting support. This allows for permissionless entry and exit, based only on vote holders’ decision of delegate rather than political elections. Without fixed terms, council members are subject to continual accountability to voters. The council will have some limited on chain powers, including being able to submit proposals regardless of proposal threshold. But their primary purpose will be handling off chain protocol management and operations.
In contrast to other protocols which hard code a specific token to measure voting power, Element also introduces the concept of “voting vaults”, modular strategies for calculating voting power based on tokens or other factors. Some of the potential benefits include allowing voting from L2s, greater capital efficiency by allowing voting for tokens within defi applications, and non-token weighted metrics such as identity. This could even extend to greater governance power for users or related protocols by incorporating external tokens into voting power (such as Element users’ LP tokens or Yearn’s YFI token). While the initial setup will probably be based on simple token weighted voting from the core governance token, new voting vaults can be added over time after launch.
A final improvement is embracing the concept of “optimistic governance”, allowing lower risk decisions to go through with less friction. Element council members could be granted limited spending allocations, which can be used to drive protocol development and operations without causing unnecessary governance overhead. And different types of governance proposals can require varying approval thresholds and timelock delays depending on their risk level.
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Anything we missed? New developments or protocols you’d like to see covered? Drop us a line at firstname.lastname@example.org