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Curve’s Troubled Governance Is a Warning for Other DAOs in DeFi

Several yield farming schemes this summer have made many users rich. But when it comes time to vote on protocol improvements with their newly-earned governance tokens, many farmers have been silent. 

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Curve’s Troubled Governance Is a Warning for Other DAOs in DeFi | Crypto Briefing
















Yield farming a protocol’s governance tokens may mean mega profits, but does it convert into decentralized control over the protocol.


Key Takeaways

  • Curve’s liquidity providers don’t actively participate in the governance process, which leaves decision-making in the hands of a few powerful stakeholders.
  • While the latest reward boosting initiative improved the situation, it doesn’t solve the fundamental governance problem.
  • Non-financial incentives are important for building long-lasting decentralized communities.

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Several yield farming schemes this summer have made many users rich. But when it comes time to vote on protocol improvements with their newly-earned governance tokens, many farmers have been silent. 

The idea of liquidity mining assumes that reward tokens are used to steward the evolution of DeFi protocols. But the sector’s obsession with profit poses challenges to this assumption.

The example of Curve DAO shows that users aren’t willing to stick with the project after receiving short-term gains. Consequently, only a handful of large players are left to govern the project, which creates an environment for hostile power grabs.

The issue is not Curve-specific; its roots are in the community itself. Human nature eagerly seeks the path of least resistance on its way to riches. Hence, DAOs should find ways to harness greed for the benefit of their protocols.

Misalignment of Incentives

While the DeFi platforms have been growing since 2018, their popularity exploded after Compound launched its governance token COMP on Jun. 16, 2020.

The introduction of COMP ignited the yield farming movement, where users provide liquidity to help the lending function for rewards. Curve followed the same path with its CRV token.

The overarching idea of decentralizing Curve’s governance is to give tokens to liquidity providers through inflation, as stated in the protocol’s guide:

“The circulating supply at the end of year one should be around 750m CRV. The rate of inflation is there to help put the DAO’s control in the hands of liquidity providers on the Curve Finance protocol.”

By giving out governance tokens, the team distributes control over the network. Users can lock their CRV in the system to influence Curve’s future by proposing ideas or voting for other proposals. 

However, holders of CRV bear an opportunity cost when they lock-up their tokens because tokens are tradable. If the price moves up or down, the tokens are stuck in the protocol and can only be sold or bought after spending hefty gas fees to remove them from lock-up. Besides, high inflation will negatively affect CRV’s price in the upcoming years. 

Consequently, using rewards for governance means passing up on lucrative gains.

Curve Inflation
CRV inflation. Source: Curve.fi

In reality, Curve’s governance model shows that users prefer instant profits over having a say in the project’s governance. After farming the CRV, rarely do liquidity providers lock up their tokens.

Curve Locked Tokens
f

Total vote locked CRV (black) vs. circulating supply (green). Source: Curve.fi

Curve Price

CRV price. Source: CoinGecko

The Curve Cartel

Low governance participation is not unique to Curve, but that doesn’t change the outcome—it makes power grabs easy. 

SIMETRI gains of 1031%

The first Curve DAO war occurred on Aug. 23, when the project’s CEO, Michael Egorov, captured over 70% of the DAO’s voting power. As Egorov commented, he “over-reacted to balance out the growing influence of yEarn, lead by Andre Cronje.

Curve Tokens Distribution
The difference in vote locked CRV distribution before (top) and after (bottom) Egorov’s intervention. Source: Curve.fi

Egorov’s intervention put the DAO in a predicament.

Voting on the platform requires a 30% quorum, so the founder has to participate in the voting process. Hence, he theoretically could influence decisions on the platform in his favor. While in reality, Egorov acted professionally, the situation showed how a single actor could easily hijack the DAO. 

The second war was connected to CRV inflation. The protocol distributes inflation across its liquidity pools according to how users vote each week. By having substantial voting power, a large player can direct the majority of inflation to a pool of their liking.

On Aug. 26, almost 50% of the CRV inflation was proposed to go to the sBTC pool. However, the distribution changed dramatically in favor of the Y pool shortly after.

Curve Gauge Weights
Difference between gauge weights on Aug. 26, 2020. Source: Julien Bouteloup

The rapid shift in the votes’ distribution not only confirms that Curve’s DAO is small and volatile but also shows that financial incentives are the key influential factor in the platform’s governance. 

yEarn and Y pool dominate the governance because they offer lucrative rewards. Notably, the rewards come from the yEarn platform instead of Curve. 

When liquidity providers lock their stablecoins on Curve’s Y pool, they receive ownership tokens, which they can take outside of Curve and lock on yEarn for over 90% ROI.

ROI on Curve Y Pool
ROI on Y pool ownership tokens on yEarn. Source: yEarn

By using yEarn as a proxy for earning profits, Curve’s liquidity providers form a cartel. They combine their governance power to adjust Curve in a way that maximizes yEarn’s returns, which is not necessarily beneficial for other Curve users.

Besides influence within the DAO, there’s some questionable activity coming from the outside. Namely, the team extends the product without asking for prior approval from the users.

Ideally, the Curve DAO should decide which extensions should be built and deploy capital for development. However, the recent move from Curve’s core team broke this relationship. 

On Aug. 25, the team added a new pool to the platform before polling token holders, going around their governance process. After getting backlash from the community, Michael Egorov proposed on-chain voting, which technically should have been done in the first place.

Curve CEO Commentary
Michael Egorov’s proposal. Source: Curve Governance Forum

At the moment of writing, the pool is still available on the platform’s UI, and users can interact with it. If the team can modify Curve at will, it undermines the DAO’s value proposition.

Can Financial Incentives Fix The Issues?

Starting from Aug. 28, 2020, Curve launched an incentive program to increase participation in the DAO. The platform offers up to 2.5x boost of the CRV rewards to those who lock enough tokens.

Keeping the boost stable, while capitalizing on the rewards, is laborious and risky. Imagine a user provides 10,000 DAI to the Y pool. She will need over 5,000 CRV under a 1-week vote lock to maximize the boost, which means risking more than $20,000 in CRV. 

Cred - earn easier

One way to reduce the amount of CRV needed is to extend the locking time. However, it’s not an optimal short-term strategy, as the boost is likely to change at every withdrawal of the rewards.

The system is designed to encourage long-term vote locking, as proved by one of the team’s recent responses to Andre Cronje. Long-term vote locking without withdrawing rewards should encourage users to stick with the project and contribute to its future success.

The boost incentive worked to drive the attention of users to the DAO. The day before the incentive kicked in, the number of vote locking addresses increased seven-fold. However, the interest quickly died off, most likely because of the boost’s complexity.

Curve Addresses
The number of addresses that locked CRV. Source: Curve.fi

Nevertheless, the inflow of new users diminished the influence of large players in the DAO, which is an encouragingly healthy dynamic.

Curve Distribution
Current vote locked CRV distribution. Source: Curve.fi

Importantly the distribution between short and long-term vote locks is in favor of the long-term ones. The majority of the addresses locked their tokens until 2024.

Curve Tokens Unlocking in a Year
Distribution of the number of addresses by unlocking year. Source: Curve.fi

The short-term effect of the boost is promising, but it may not be enough to fix low voter turnout in the long term. Despite the initial excitement, only 1,147 out of over 8,000 holders locked their CRV since the incentive started.

In a sense, farming CRV with the boost is like staking, and staking platforms suffer from low voter turnout despite providing financial incentives. Making money via short-term trading turns out to be preferable over holding tokens and going through the governance hustle.

Curve DAO is still vulnerable to oligarchy and technocracy. It needs to grow to a critical mass to balance out the team and cartels. Whether or not it will happen largely depends on the community and the introduction of other incentives.

If most of Curve’s users will merely aim for quick profits, boosting will turn into a game of musical chairs. 

The team needs to find creative ways to direct greed into meaningful governance activities to mitigate this. Money can bring users to the platform, but they will need something more to stick around, something that will make them feel they are a part of the group.

Curve’s Warning Sign for Others

Curve’s example is not unique. On-chain governance is a complex topic, and there’s no flawless architecture. Still, there are some lessons other projects can learn from. 

A DAOs ethos is essential. The community around a project needs to have a long-term vision and active participants to propagate this vision. In such a case, financial incentives will act as oil for a well-built machine. 

In other, poorly designed schemes, the project will become a cash cow to a handful of whales and tech-savvy people.

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Source: https://cryptobriefing.com/curves-troubled-governance-is-warning-other-daos-defi/

Blockchain

Aave hits record $288 high as demand for flash loans and staking increases

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Aave (AAVE) price has been on an absolute tear for weeks and today the DeFi-token rallied to a new all-time high at $288.90. 

The decentralized finance protocol is one of the most popular in the market and the recent rally in the DeFi sector is one of the driving forces behind AAVE’s rally.

AAVE/USDT 4-hour chart. Source: TradingView

At the start of 2021, AAVE price was trading at $83 and the recent rally appears to have bolstered the protocol’s surging total value locked, increasing buy volume on spot and derivatives exchanges and the continued development of Aave’s lending platform and flash loan issuance.

TVL soars to a new high

Data from DeFi Pulse shows that Aave’s TVL rose from $2.03 billion on Jan. 1 and as (BTC) and Ether (ETH) price went parabolic Aave’s TVL also surged.

Total value locked on AAVE. Source: DeFi Pulse

Currently, Aave’s TVL sits at a new all-time high of $3.75 billion, making the platform the second-largest DeFi platform by TVL behind Maker (MKR).

The steady addition of new tokens to the lending and borrowing protocol increases the likelihood that its TVL will continue to rise and help AAVE retain its standing as one of the top DeFi projects in the cryptocurrency space.

Staking drives demand for AAVE token

AAVE’s trading volume also surged at the beginning of 2021, increasing from $200 million on Jan. 3 to a high of $928 million on Jan. 16.

AAVE price vs. Reported trading volume. Source: TheTIE

As AAVE price reached a new high, it’s 24-hour trading volume notched a record $1.06 billion. This volume surge is partially driven by investors acquiring more tokens for staking, with 26.8% of the total supply of AAVE currently staked on the platform earning an APY of 6.1%

Flash loans attract investors

Another reason for AAVE’s recent surge is the growth of its flash loans.

Flash loans allow cryptocurrency holders to collatoralize their portfolio to fund other purchases or new crypto purchases. The loans also help investors utilize the value in their tokens without the need to sell see them and create a taxable event.

Since launching flash loans less than 12 months ago, more than $1.7 billion have been issued and it’s expected that this figure will increse as the crypto bull market progresses.

Total flash loan issuance to date on AAVE. Source: Messari

As can be seen in the chart above, the most dominant token requested for flash loans is the DAI stablecoin, followed by USDC and ETH. Data from Messari shows that Aave issued $25 million in loans in the first half of 2020, $500 million in Q3, and nearly $1 billion in Q4, including $450 million in December.

The expansion of the flash loan concept will likely attract more users to Aave, especially since they can be used for arbitrage opportunities between DEXs, collateral swaps, self-liquidations and a variety of other applications within the DeFi sector.

Source: https://cointelegraph.com/news/aave-hits-record-288-high-as-demand-for-flash-loans-and-staking-increases

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Blockchain-based-video-game

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Ethereum and the broader cryptocurrency market have seen mixed price action over the past few days and weeks. Ethereum Price is Surging Despite the selling pressure it has experienced at $1,200, ETH beat all odds and surged beyond $1,400, recording a new all-time high at $1,423.38.  At press time, the…

Source: https://btcmanager.com/Blockchain-based%20video%20game%20community%20and%20development%20platform,%20Enjin%20(ENJ)%20witnesses%20the%20launch%20of%20the%20highly-anticipated%20dark%20sci-fi%20action-adventure%20game,%20Age%20of%20Rust./

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Blockchain

Cryptocurrency makes World Economic Forum’s Davos Agenda

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The World Economic Forum’s upcoming Davos Agenda will feature two separate sessions on cryptocurrency, offering another compelling sign that digital assets have permeated mainstream consciousness. 

The sessions, titled Resetting Digital Currencies, will be held on Monday and Thursday. The first session will feature five public speakers, including Bank of England Governor Andrew Bailey and Hikmet Ersek, president and CEO of Western Union.

Thursday’s group features four speakers, including Tharman Shanmugaratnam, a senior minister for the government of Singapore, and Zhu Min, chairman of the Beijing-based National Institute of Financial Research.

“COVID-19 has accelerated the long-term shift from cash,” reads the prospectus for both sessions. “Meanwhile, central bank digital currencies are emerging, potentially transforming how people use money worldwide.”

It continues:

“What policies, practices and partnerships are needed to leverage the opportunities posed by the rise of digital currencies?”

Davos Agenda is a five-day summit featuring some of the world’s leading figures in finance and government. The cryptocurrency series falls under the summit’s “Fairer Economies” theme. Other themes include “Tech for Good,” “How to Save the Planet” and “Healthy Futures.”

The World Economic Forum is devoting more resources to understanding blockchain technology and cryptocurrency. The Geneva-based organization has even created a cryptocurrency working group, which only last month published its inaugural review focusing on the various use cases for digital assets “beyond price and speculation.”

The Forum’s research has cited blockchain technology as a key driver of “sustainable digital finance.” Blockchain and smart contract capability, the Forum’s researchers argue, can unlock “hidden values of legacy digital systems.”

Central bank digital currencies, or CBDCs, are one area of research the Forum has delved into over the past 18 months. In Jan 2020, the Forum announced it had developed a framework to help banks “evaluate, design and potentially deploy CBDC.” The framework was developed in conjunction with over 40 central banks, financial institutions and academic researchers.

Source: https://cointelegraph.com/news/cryptocurrency-makes-world-economic-forum-s-davos-agenda

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