"De" in DeFi Questioned: Teams Accused of Hoarding Tokens and Voting Power

Hello Defiers! Today’s issue is all about the latest in decentralized governance

• Curve and 1inch face community backlash over governance and token control

[UPDATED on Aug. 25 at 11:40am EST to correct CRV’s fully diluted market cap]

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DeFi’s Tyranny of the Commons

A common theme in DeFi this year has been to increasingly decentralize governance, with teams giving up an increasing share of control over their project to their communities. The boom in governance tokens, which are used as incentives for traders to add liquidity to these protocols, has accelerated the trend.

But as this nascent ecosystem of decentralized governance systems evolves, with protocols holdings hundreds of millions of dollars worth of digital assets, the idealistic quest for open and democratic systems is being tested. Will DeFi teams design systems and incentives that allow for truly decentralized token distribution, or will their projects’ tokens and voting power tend to concentrate in their own wallets? Curve Finance and 1inch are two examples of this question.

Curve Faces Backlash for Governance Control

By Cooper Turley

The most recent DeFi drama shows all the lofty ideals of decentralized governance quickly come back to earth when there’s real money at stake.

Curve Finance, the stablecoin-focused DEX at the heart of yield farming, last week proposed that CRV holders who lock up their tokens in a voting escrow can multiply their rewards by up to 2.5x, starting Aug. 28.

Token holders of yEarn Finance, which holds roughly $2.5M worth of CRV from its early liquidity provider rewards, decided to take advantage of the new incentive, locking the entirety of their CRV treasury for 4 years (the max duration).

But Curve’s core team locked up their own tokens too, overpowering yEarn’s and every other token holder in the voting escrow. They’re effectively holding ~71% of the DAO’s governance power at the time of writing.

Andre Cronje @AndreCronjeTechSo... @CurveFinance founder just took over 71% of the voting power; And since founder rewards are significantly higher than LPs and other voters, pretty much locked everyone else out. So guess voting is pointless now. Have fun everyone.

2:11 PM ∙ Aug 23, 2020870Likes215Retweets

This sets a dangerous precedent in which quorum (currently set at 30%) can currently only be reached if the Curve team participates in voting. Some in the community are up at arms over the concentrated voting power in what was supposed to be a decentralized governance system.

💡 As a quick refresher, quorum is the amount of votes necessary for a proposal to pass. With this quorum, at least 30% of all CRV locked in the DAO must vote on a proposal. In its current breakdown, quorum can only be reached if Curve chooses to vote with their tokens, despite the team stating they do not want to vote and sway what ‘decentralized governance’ looks like.

Fat-Finger Mistake

Curve’s founder Michael Egrov publicly stated that he ‘overreacted’ while other Curve supporters are claiming that it was a ‘fat-finger mistake’.

Now, Curve is looking to reel back the action by encouraging more people to lock CRV in the DAO. Only ~7% of the circulating supply is locked for governance, which means that if more token holders locked their tokens governance could become more decentralized.

The team is also trying to leverage Discord polls as a ‘soft-vote’ to determine community sentiment for how the Curve team *could* vote with their tokens.

Interestingly, Curve’s 622k CRV were originally only locked for 1 month. As of yesterday, the timelock was adjusted to the full 4 year vesting.

Farm and Dump

As any farmer knows, the trend since launch has been to earn CRV and immediately sell at a profit. With this continuing to take hold, it will take a special kind of community member to take the risk of locking CRV for 4 years while the token sits at a fully diluted market cap of over $10B.

Anthony Sassano | sassal.eth 👨‍🌾 🏴 @sassal0x@mbaril010 @AndreCronjeTech @CurveFinance @DegenSpartan @DeFi_Dad @Rewkang Implying I hold any CRV - farm and dump sir lol3:05 PM ∙ Aug 23, 2020

The larger narrative here is that DeFi governance is still in its infancy. With power dynamics at play before real governance is even live, many are starting to question the foundations on which multi-billion dollar protocols are built and controlled.

scott lewis🌾 @scott_lew_isby being power-grabby before the system was ready, the yfi community created a process that seems unfair to outsiders, which will open up vulnerabilities for new competitors. and since yfi is very much aligned with curve, this is a problem.

learn yearn ($YFI) @learn2yearn@scott_lew_is oh my... CRV is the lifeblood of YFI. governance is more important than short term gains! this is only the start of what's to come. if it's not clear, kirby suggests a haircut.4:18 PM ∙ Aug 23, 202012Likes2Retweets

1inch Token Distributions Gets Smoked

By Cooper Turley

1inch, the largest DEX aggregator with $1.8B in cumulative volume, is facing backlash from the community regarding its 1INCH token distribution.

Liquidity providers to 1inch’s new automated market maker DEX Mooniswap will earn one-year locked tokens for adding liquidity to any of these pairs before the token launch. The token’s launch date hasn’t been set yet.

Detailed in the announcement post, 1INCH will distribute 2% of tokens to early Mooniswap liquidity providers and 21% to ecosystem growth. This is just 0.5% more than the core team (22.5%) and 3% more than investors (19.5%).

For perspective, here’s how other prominent DeFi projects are treating LP reward allocations:

• yEarn (YFI) - 100%
• Balancer (BAL) - 65%
• Curve (CRV) - 62%
• mStable (MTA) - 45%
• Compound (COMP) - 42.3%

Defensive Posts

Touting itself as “the system (which) will mark the most efficient and benevolent structure to ever hit the market” the 1inch team is scrambling to emphasize 1INCH is much more than just a worthless governance token, hence the conservative distribution. Still, they haven’t clarified exactly what the token’s utility will be other than saying “it is gonna be huge.”

Anton Bukov | k06a.eth @k06a@CryptoWinthorpe @1inchExchange We are not ready yet to disclosure it fully but it is gonna be huge. I'd say one of a few real tokenomics on the market.9:57 PM ∙ Aug 22, 202036Likes2Retweets

Their defensive posts are backfiring with some in the community, who say 1inch has sided with investors over modeling the distribution towards its users.

Ξdward @_Ed1990_@1inchExchange Stop complaining. You've made your bed, lie in it. If the rewards are enough liquidity will come and you don't need to be concerned/ defensive. Not sure what you're trying to achieve by arguing with & mocking potential users / LPs.9:50 PM ∙ Aug 22, 2020149Likes3Retweets

Now, many are coming out of the woodwork to voice their opinion about the project and its communication - best encompassed by DeFi Prime stating that “1inch needs to grow up and get over running social media like they are just a hackathon winners”

Future Fund @FUTURE_FUND_Whoever is managing the @1inchExchange twitter account, this passive aggressive stance will destroy the good community that it once created. If you made a mistake, own up & be humble. Community is everything, they will make you or break you. Please learn from the $YFI community. https://t.co/YGeKzTgjQn

1inch.exchange @1inchExchangeAre you satisfied with 1inch token distribution scheme? A. Yes, 21 % + 2 % is what i deserve as a LP B. No, users/LPs are life-breath of this shit and deserve more than team C. I’ll let the experts decide D. LPs can issue their own version of token for themselves11:47 PM ∙ Aug 22, 2020106Likes9Retweets

If one thing is clear, community members are scrutinizing teams much more heavily around key dynamics like token allocations. While the 1inch team has certainly displayed their worth, they’ll need to maneuver carefully to retain the good standing community ethos which got the project to where it is today.

Coopahtroopa 🔥_🔥 @CooopahtroopaThe standard to which the community is holding token projects to is incredibly bullish. Bag-holding is no longer ‘numba go up’ It’s now ‘do what’s best for your users’ Few understand. 😤3:49 PM ∙ Aug 23, 202076Likes10Retweets

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About the founder: I’m Camila Russo, author of The Infinite Machine, the first book on the history of Ethereum. I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.