Editor's Note: This article discusses the possibility of using DAO to enhance the decentralization of DeFi products, and analyzes the two cases of Maker DAO and Uniswap. Interestingly, under the author's definition, Uniswap itself is a DAO, and you will be better able to understand the special features of Uniswap.
Deficient finance (DeFi) is mainly criticized for its actual degree of decentralization . Some critics insist that we can't advertise Maker, 0x, Compound, etc. as "decentralized" agreements, after all, they are all built by centralized companies. These companies can control the smart contracts of such agreements at any time, or let them smash and terminate. They also suggested that these agreements be called non-custodial financial services more relevant.
Although this is a valid argument, there are some strong arguments that justify the need for such control. The most reasonable angle is the dimension of time: the DeFi protocol cannot reach the degree of complete decentralization on the first day of creation, but it can gradually reduce its centralization over time. The protocol should have mechanisms, such as an emergency self-destruct switch , to stop the agreement if necessary, thereby protecting the user's assets.
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Another strong argument is that such agreements are open source and auditable. If the developer decides to terminate/stop the project, the project code can be used by other companies/individuals.
Of course, no matter which party agrees, there is room for improvement in the degree of decentralization of the DeFi project. DAO ( Decentralized Autonomous Organization ) may be the best tool to further enhance the decentralization of DeFi products. DAO allows DeFi users to decide on important things, such as adding new features or deploying a new version of the DeFi protocol. In addition, users can vote for who is going to activate the emergency switch at a critical time, or even create a "sub-DAO" to handle such dark moments.
In this article, I will explore why the DeFi protocol ultimately needs to make a choice – whether to give control to DAO for true decentralization, or to explicitly provide unfunded finance on the public chain in the form of a centralized enterprise. service. No matter which one you choose, you can create an effective model of sustainable development, each with its own sacrifices and goals.
While DAO is the cornerstone of the decentralization of DeFi projects, it does not mean that projects such as Maker and Uniswap are completely decentralized. These projects are only on the road to decentralization, and there is a long road to the end.
Why DAO is so important to the decentralization of DeFi
First, our definition of DAO is as follows:
- DAO membership is open and not limited to a specific group.
- Members/shareholders of DAO can propose/vote to decide what changes to make, and there is no situation in which a central agency can hinder or change its decisions.
- DAO members receive direct or indirect economic incentives based on their level of participation to ensure consistency of incentives.
These characteristics are critical to effective decentralization. In this sense, Bitcoin is the most successful DAO. In the Bitcoin network, anyone can participate in a node or hold bitcoin, can propose, support or oppose BIP (Bitcoin Improvement Proposal), and finally rely on participation and ensure that the system runs according to the rules ( At the very least, indirect) rewards.
As such, it is these features that make DAO a powerful governance mechanism that enables true decentralization of DeFi products.
Another benefit of using DAO in the DeFi protocol is that DAO can help developers of such protocols reduce some regulatory risks when used properly . In fact, this piece of content is more complicated and belongs to the legal category . It requires an additional article. There are many developers who believe that since the control of smart contracts is not in their hands, how others use these smart contracts naturally has nothing to do with them. However, regulators such as the US Securities and Exchange Commission (SEC) do not think so .
MakerDAO and its shortcomings
MakerDAO was one of the first DeFi projects to recognize the importance of using DAO to manage the project's operational needs. One of the most noteworthy parameters is the stable rate , which is the interest rate charged by the CDP (Pledged Debt). Since March to April this year, MKR token holders have voted to increase the stability fee, which has caused DAI to return to the anchor price of $1 with a 3-4% negative premium.
-Maker Stabilization Fee Change Chart (Source: mkr.tools ); DAI/USD Price Chart (Source: Messari) – MKR holders also need to vote on another important decision as soon as possible, which is ERC 20 Token A pledge combination of multiple pledge DAI (MCD) can be selected. In addition to ETH, the Maker community also selects among the candidate pledges REP, BAT, DGD, 0x, GNT, and OMG.
Although Maker's DAO structure gives MKR holders multiple governance rights, Maker is not perfect for DAO use. In theory, almost all Maker-related decisions can be voted as a governance proposal, but there are still many decisions that are not generated by voting, such as the recruitment of executive team members and the use of project funds. Another limitation of MakerDAO is that the current distribution of MKR tokens is too centralized, and some entities hold more MKR tokens to match the voting results.
Decentralized exchange and DAO
The Decentralized Exchange (DEX) was the first DeFi product to be created to provide non-custodial and decentralized token trading services. However, the decentralization of such products is the most difficult, at the expense of important features and performance. Before explaining the reason, let's think about all the core operations of the decentralized transaction:
- Decide which currency to put on
- Create an order book for transaction execution and order matching
- Profit by charging transaction fees
Of the above three operations, the second one is the most difficult to achieve decentralization. Although an order book can be generated by accepting a limit order through a chain transaction, the cost is high and the performance bottleneck is difficult to break. Even in this case, you need to read the data on the chain through a centralized server and website, and display the order book to the user. If you want to improve performance, it is necessary to use the centralized chain order book and the transaction matching engine, which enhances the degree of centralization. DAO has long been seen as a solution to this centralization problem, as reflected in IDEX, 0x and even Uniswap.
Uniswap: Invisible DAO
It may be strange for me to classify Uniswap as DAO. After all, the team of this project has not promoted this. Then let's take a look at how Uniswap works and see if it fits the definition of DAO.
In terms of the three operations that need to be performed on the decentralized exchange, Uniswap cleverly solves the second and most difficult operation by means of an automated market maker, while the first and third operations are similar to DAO. s solution. The hardest part of decentralized exchanges is market-making and order matching. Uniswap solves this big problem by using an automated market maker algorithm and automatically adjusting the transaction price through smart contracts.
– How Uniswap works as a DAO –
Uniswap handed over the decision-making power of the currency to the participants. Participants can choose an ERC-20 currency to form a trading pair with ETH, DAI or other currency and create a liquidity pool. Participants can have a share of the pool by providing liquidity to the pool and have the right to split the pool's revenue. Participants also have the right to make a currency, as long as the liquidity is withdrawn and the share is destroyed. Through this process, participants can determine the top and bottom currency of Uniswap at their sole discretion . In addition, all fees charged by Uniswap (0.3% per transaction) are handed over to the pool's liquidity provider. In this way, participants can benefit directly from the operation of the system.
From the perspective of the entire architecture, Uniswap fits well with the definition of DAO . 1) Uniswap is an open organization where everyone can obtain a certain amount of share by providing liquidity; 2) Participants can effectively determine the upper/lower currency by injecting/withdrawing liquidity, and the Uniswap team cannot hinder participation. The decision of the person; 3) Participants can directly profit by holding the share.
Nonetheless, Uniswap can formally introduce DAO to manage the entire system, and then make decisions to change the fee structure, improve the automated market maker model, and increase the functionality of the Uniswap decentralized exchange, and then benefit from it.
Why other DeFi projects cannot be considered DAO
Many interesting DeFi projects and agreements only implement some of the attributes of DAO, such as voting or earning revenue by participating in agreements. However, only DeFi projects that implement the above three operations can be classified as DAO. For example, the loan agreement Compound is open to everyone, and people who participate in the agreement can earn interest. In addition, users can vote on which currency lending services the platform is open to, and which currencies can be used to pledge lending, just like the previous WBTC voting . However, these votes are not binding and the project team can ignore the voting results. This is in stark contrast to MakerDAO's voting mechanism, where MakerDAO uses smart contracts to vote and the project team cannot overturn its voting results.
Similarly, decentralized exchange IDEX is adopting a step-by-step approach to decentralization of the platform, which allows platform users to run part of the exchange's infrastructure by pledge the tokens of the project. Users can draw from the transaction fee by running the infrastructure node of the exchange, which is currently 25%. However, IDEX does not conform to the definition of DAO because the user has no right to speak about the exchange's currency.
What benefits can DAO bring to DeFi?
In addition to improving the distribution of control over DeFi products on Ethereum, DAO also helps advance the implementation of Bitcoin-related DeFi projects . Many solutions for introducing Bitcoin into the DeFi project are implemented through sidechains, such as Blockstream's Liquid, or creating a peg zone that anchors bitcoin on a blockchain like Ethereum. , such as WBTC and Cosmos. The main problem with this type of solution is how to choose a verifier to maintain the hooking process. For example, taking the Liquid sidechain as an example, Blockstream selected 35 trusted entities to form the Liquid Alliance, which oversees the link to the Bitcoin blockchain. The problem with this approach is that the verifier is selected in a centralized manner. If you switch to DAO to let participants decide who the verifier is, you can significantly alleviate this problem. You can also motivate them to be loyal to the DAO participants by rewarding the transaction fees charged by the linked zones.
Original link: https://www.tokendaily.co/blog/becoming-decentralized-enough Author: Mohamed Fouda translation & proofreading: Min Min & A sword
This article is authored by the author to translate and republish EthFans.