Cross-Chain Governance and the Future of DeFi
Graham Tonkin is an active member of the StakerDAO community and a co-founder of Stateless.Money, an independent validation service for Proof of Stake (PoS) protocols, including Polkadot, Kusama and Elrond.
We’re in the midst of a historic moment for decentralized finance (DeFi). As DeFi propagates outside of Ethereum onto other promising Layer 1 (L1) networks, governance models now exist to coordinate and evolve applications throughout the ecosystem.
I believe the future of DeFi must be multichain. While Ethereuem’s first mover advantage is strong; the greater variety of people, protocols, and strategies working to advance decentralized finance, the better. In the last 18 months, a variety of L1s have emerged that will play a substantial long-term role in the future of decentralized finance. Polkadot, ChainLink, The Graph, and a handful of other protocols now have vibrant, active ecosystems worth following.
Many DeFi applications that are exclusively on Ethereum today will likely have a presence across a select number of L1s, including Polkadot. We are seeing bridges between chains begin to propagate, but we’ve been lacking a governance model that operates across and between L1 blockchains. As DeFi applications begin to evolve into multi-chain applications, governance must follow to ensure adequate stakeholder input is possible.
As I will describe below, the cross-chain governance model introduced by StakerDAO, a community of crypto and DeFi enthusiasts, eliminates this barrier. Proposals recently approved by the StakerDAO community successfully leveraged this cross-chain governance model to begin building multichain DeFi projects.
To understand the potential impact and significance of this development, it’s important to first look at how we got here.
A Short History of DeFi Governance
In early January 2009, the bitcoin network made its first appearance to the public.
Originally, there was no process for formal governance or reaching consensus among stakeholders regarding changes or updates to the blockchain. In other words, blockchain governance was initially an off-chain process that grew out of a dedicated community of early adopters and primarily consolidated with core developers. While the lack of governance within the Bitcoin protocol is arguably a valuable feature that adds long-term predictability to the network, other protocols have recognised the importance of on-chain governance to effectively evolve a protocol or application.
In September 2018, Tezos launched its mainnet with on-chain governance, the first for an L1. While the protocol upgrades were baked into the protocol, the funds contributed by crowdsale participants weren’t, but instead held under management by a Swiss foundation. More recently, we’ve started to see more applications where the evolution of the protocol, as well as the treasury to fund the evolution, is managed on-chain by governance participants.
In the world of crypto, the more transparency, the better. Deciding what to build, how much to spend, and who to pay in a transparent way creates a greater level of trust within a community of stakeholders. With the freedom to vote as one decides, the fate of the protocol lies with the community of participants, not a foundation council who deliberates off-line.
Today’s DeFi applications on Ethereum take transparent governance to heart, managing decision making in an open forum. The forthcoming issue, however, is when these projects desire to grow outside of a single L1. How will a community only present on Ethereum finance, build, and govern an endeavor on an entirely new L1?
The First Cross-Chain Governance Model
On March 30, StakerDAO, a DeFi community with interests spread across a handful of L1s, approved the world’s first simultaneous cross-chain proposal brought to vote on two blockchains: Ethereum and Tezos. The significance of this moment goes far beyond the specific details of the proposal itself (which are public and on-chain here); it signals the start of DeFi’s multichain future. A recent proposal to build PINT, an on-chain index token for the Polkadot Ecosystem, queried voters on both Ethereum and Tezos.
The illustration below provides a concise introduction to StakerDAO governance and how it works:
The StakerDAO Governance Model
StakerDAO is a DeFi community for those who strongly believe in a multi-chain future. The tribalist maximalism present in many community L1s is shortsided. Other chains aren’t the competition, centralized finance is.
StakerDAO governance brought together community members from two chains – Ethereum and Tezos – to create a new DeFi project on a third chain: Polkadot.
Why would communities on Tezos and Ethereum vote to build a project on Polkadot? The Staker community believes the Polkadot ecosystem is promising, and the fees generated by the PINT index will flow directly into Staker’s community treasury to be utilized as governance sees fit.
The successful approval of the PINT proposal demonstrates how cross-chain governance models align interests and foster innovation across L1 chains and their communities. It’s a powerful demonstration of how cross-chain governance will be a catalyst for DeFi’s future.
Governance for the Multichain Future
Staker community members – like those of many L1 chains – recognize the rich potential and opportunities that exist across a great number of ecosystems.
As we look towards the future of DeFi, widespread adoption is predicated on the ability to reduce transaction costs while increasing bandwidth. While Ethereuem continues its path towards ETH2, other “Layer 2” (L2) solutions are working to expedite this process by off-loading transactions from the primary chain.
The beauty of this model means that any chain can be an L2 for another, which allows for increasing interoperability and optimized transactions. Applications that are now only present on Ethereum will likely be present on multiple chains, making their features more accessible to a larger set of users.
Those excited about a multichain future need a simple solution to collaborate, propose, and launch impactful projects wherever DeFi exists. New governance models will guide the development of these projects across the whole DeFi ecosystem.
The result will be a diverse ecosystem that is more active, resilient, and connected than it has been in the past. By aligning interests and fostering cooperation, multichain governance will play a major role in creating the future of permissionless finance that will enable anyone greater freedom to store, transact, and invest their wealth.