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

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…

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