Decentralized Finance, DeFi for short, has shown incredible growth over the last year, taking center-stage in the crypto boom. DeFi has grown from just being a ‘hot word’ into a complex array of systems on the blockchain, allowing users to execute transactions without the use of ‘traditional’ financial institutions.
This ethos of such a decentralized, trustless, censorship-free, and fully automated financial system has been the driving factor behind the exponential growth and innovation in what’s become the most promising sector of cryptocurrency. However, despite that very ethos, it takes more than a decentralized infrastructure to have true decentralization. In fact, most DeFi projects end up somewhat centralized, with the majority of power ending up in the hands of a few large operators.
The Issue of Governance
The main reason most projects end up highly centralized is due to their governance framework. For the less crypto-savvy, Governance is essentially just a set of rules and processes that the system applies to. Each system has some form of governance in place to protect users in the same way that there are rules and laws in a country to protect individuals.
However, decentralized governance does come with its risks. The ability and ‘weight’ of each person’s vote is generally based on the number of tokens the voter has, with some projects allowing users who meet voting criteria to pass their vote over to another party – essentially giving more weight to that party’s vote.
The problem with this is that most projects end up with the governance being controlled by a select few, essentially centralizing the system. Taking the Popular Uniswap as an example, the large majority of voting power is held by the top 20 – 30 wallets, which consist of the UNI team and ‘whales’ like Gauntlet and Dharma. While it’s still decentralized, it does put a lot of power in the hands of large token holders. Another similar example of this would be the hostile takeover of Steem.
The Optimism Collective
However, Decentralized Governance is necessary for the future of DeFi. And one project is taking interesting steps to solve the issues that come with DeGov with a new take on DAOs – enter Optimism.
In what Vitalik Buterin, creator of Ethereum, has called “Possibly the biggest attempt at non-token-holder-centric DAO governance so far” Optimism has introduced a “large-scale experiment in decentralized governance” through its new governance model. Optimism will be jointly governed by the newly-founded Optimism Foundation and the ‘Optimism Collective’.
The Optimism Collective will be separated into 2 co-equal chambers: the Token House and the Citizen’s House, with each chamber focusing on different aspects of governance in order to balance the growth and evolution of the project.
While the Token House will essentially grant governance right through token ownership (OP), the Citizens’ House will be exclusively made up of ‘Citizens’ who will be granted non-transferrable NFTs. While the first group of Citizens will mostly be early Optimism contributors, this is expected to grow over time along with the project.
Along with this, both houses will be using Quadratic Voting, a system designed to reduce the impact of large token holders – a problem plaguing most DeFi projects. Instead of allowing one vote per token, Quadratic Voting instead increases the cost of each vote, reducing the impact that a single voter could potentially have.
While there is still a centralized aspect affecting the Optimism Collective DAO in the form of the Optimism Foundation, this influence is intended to help shape the DAO during its growth and essentially bootstrap the ecosystem – though Optimism says the Foundation will eventually be dissolved.
The Future Looks Optimistic
With somewhere in the vicinity of $500 million in TVL (Total Locked Value) according to DeFi Llama, Optimism is the second-largest L2 ETH rollup around. While the move is still an initial experiment to see how the system evolves over time, the successful implementation of this new model could potentially pave the way to greater scaling and efficiency for the Ethereum blockchain.
The transition to rollups like Optimism is still beginning, however, with most of the activity remaining on the Ethereum Mainnet and some alternative L1s. And until larger liquidity providers decide to move capital and protocols over to rollups, it’ll be hard to say which solution would benefit the platform most. Though, at the very least, with Optimism implementing a new form of Governance and dropping a token ahead of the Merge, other similar Layer 2 protocols, like Aribtrum, might follow suit. Either way, the next few months are likely to be interesting for Ethereum.