SOULLY FireSide educational series Episode 7 — Crypto Governance and SpiritSwap
Apologies for not doing this earlier. With light at the end of the tunnel, the push has been real. However, moving forward the leadership team at SpiritSwap DAO will be making more of a concerted effort to transcribe or at least condense and summarize points of discussion.
The full video to this weeks Fireside can be found on the SpiritSwap YouTube channel: https://www.youtube.com/watch?v=XmlxuG3aTT8&t=2366s
As there were issues with slides showing this week so for the sake of continuity and to the benefit of our non native speakers, you can find a full transcription with slides included below.
Transcription:
For this educational series we will be touching on the topic of Governance. This one gets pretty deep and philosophical, so kick back, light up a joint and deep dive into some mystical subject matter.
First and foremost I want to acknowledge the requests form the community for a follow up presentation from Heesh regarding stable swap mechanics and the very advanced algebra / newton’s method under the hood. While this would make a great follow up, I had some concerns about the validity of us presenting this to you all and after discussing with the team, they agreed. After confirming with with Heesh about this he also agreed it wouldn’t be tenable nor useful for the community.
The formula for executing a simple input output function across stable math is so advanced, that Newton’s method needs to be applied because the polynomial on it is so fat that even the computations required are too immense for the blockchain to handle.
There is no way anyone who doesn’t have a background in advanced algebra would understand this nor get any value from it. Here is an example of a very very simplified and condensed equation for input vs output.
As such, while we want to do our best to adhere to community requests, we also want to make sure we’re actually offering value here, to the community and their ongoing participation with SpiritSwap. While interesting, we feel this topic would add no tangible value for the community to walk away with, most of the time you would be sitting there slack jawed (as I was) wondering what the actual F*** Heesh is talking about. To put it simply, So, my apologies to those who asked, but safe to say it’s a “don’t go there situation”.
Right, with my groveling out of the way, let’s push on with this week’s presentation.
This presentation will cover the various forms of governance that exist in the crypto space.
Governance can be boiled down into 3 main categories each offering pros and cons
These are :
Centralized governance
DAOS
On chain (lack of governance)
Centralized governance
Centralized governance can be defined as : A governance model where the authority, responsibility, and decision making power are vested solely within a central body.
This is preferred by passive investors but requires blind faith around the premise that the centralized body will always act on the communities behalf with good intentions, but with all things in life centralization comes at a cost. Lets look into the pros and cons here.
Pros:
Decision making made for you : A Lot of people actually dont want to make decisions on a protocols behalf. Some investors prefer to think less and pray that those in control of the protocol know what they are doing and make good decisions on the protocol or organizations behalf. This would be akin to the trad fi equivalent of a hedge fund.
Ability to step in and offer mediation or action against bad actors : By having absolute control, a centralized governance medium have the ability to step in and mediate at any point in time. This reduces risks towards investors giving people a sense of security. It can also offer a sense of insurance. Opposed to a decentralized format. A perfect example being, when SOLIDLY launched there were issues with router hops . I heard of people losing up to $100,000 due to route paths not executing correctly and getting rekt by low liquidity. For starters this wouldn’t happen on a centralized exchange as all trades happen off chain, being no liquidity pools to hop through, however in the event a user were to loose funds at fault of the protocol or organization, given said entity would be regulated, there would be grounds for this user to receive a refund or be compensated the lost funds. This isnt the case with a decentralized entity as there is no central body to be held responsible.
Can offer added layers of security : Again as mentioned above, with centralized activity taking place off chain, this offers less chance of typical on chain security vectors being an issue, however this is a double edged sword as can mean lack of transparency.
Accountability : Also as mentioned above, due to regulatory standards a centralized governance body will usually have to adhere to regulation which means there is a body accountable for issues such as user funds lost at fault of the host. This said, this could be argued as moot point as there are still many centralized governance systems that exist in DeFi where this would not apply.
Ok, lets look at some cons.
Cons:
Lack of control from the community : The counter argument to decision making being made on your behalf (a method preferred by passive investors) is that you have no control over the decisions that are made. Dont like a decision ? Tough luck, this isnt a democracy but could be seen as rather a dictatorship.
Adherence to regulatory standards: Due to regulatory standards, all official centralized organizations must adhere to these standards, even crypto ones. An example of this being a potential threat to freedom, is Circle, the company responsible for USDC. Fun fact USDC actually has a function in its contract that can mean any users funds can be frozen at any time as soon as the government produces Circle with a subpoena. Just like those who had their bank accounts frozen for supporting the trucker anti mandate demonstrations in Canada, the same can apply to a centralized body. This is a potential threat to freedom and free choice.
Lack of privacy: Privacy is a personal choice, some people have no issue handing their details over to a centralized body, others prefer to exercise their right to freedom. Regardless, furthering to the regulatory factor mentioned above, centralized institutions who are regulated must adhere to KYC/ AML etc. This restricts one from being able to exercise their right to privacy.
Lack of transparency: Without everything being out and open like a decentralized form of governance (such as on chain governance) a centralized governing authority can choose which information to make public and which to keep private. This reduces transparency and can pose a threat to those involved in the protocol.
Now that we have covered the nuances and charastics of a centralized governance model lets take a look at some of the decentralized alternatives, the first being DAO’s.
The acronym DAO (Decentralized Autonomous Organization)can be applied to and seen as a form of Decentralized governance. In its current iteration SpititSwap is A DAO. A DAO specifically is an organization that runs on a blockchain protocol fully and autonomously in accordance with rules encoded via smart contracts. By circumventing the need for human intervention or centralized coordination for example (a development team), DAOs are often referred to as “trustless” systems.
There are many different types of DAO’s who take different approaches towards achieving true civil governance. Truth be told, we err on the side of a no mans land here, whereby there is no “secret sauce” to the perfect structure of a Decentralized Autonomous Organization, in reality the concept of civil governance is not novel, however the facilitation of a blockchain to actually implement civil governance as a testing ground for various DAO models, is.
In this presentation, our aim is to educate our community around various DAO types , structures & their purposes, in hope of imparting knowledge to you all around how DAO’s operate and what they strive to achieve.
At the end of the day, every single inSPIRIT holder holds the keys to decision making; however, as I have mentioned before, in order for this to work effectively, there are 5 main requirements. For the sake of this presentation I have combined and condensed these into 3 requirements, which we will cover in this presentation.
3 main requirements
1. Community and engagement / participation of said community :
2. Effective structure / voting mechanics
3. A DAO needs a governance token or share system
Lets cover these three main requirements for a DAO to be effective in its cause of decentralized civil governance and specifically pay attention to how SpiritSwap DAO are currently tackling these requirements.
1. Community and engagement / participation of said community :
Engagement is obvious, without an engaged community there is no interest to participate in governance. Without interest to participate in governance, there is nothing to govern, quite the paradoxical loop. As victor ugochukwu quotes, “A DAO without engagement is an exercise in futility”
There are various ways to engage a community, some DAOs do this via incentives, others base their engagement upon the structure of their model, for example a collective drive to achieve a common goal or task such as the constitution DAO.
At SpiritSwap, our approach to tackling participation and engagement falls into two categories.
Education and potential to increase financial incentives via stakeholder driven action.
Let’s dive into these.
Education is simple. The aim is to produce meaningful educational content not only to impart value to the community but also to ensure the community is well informed in decision making logic to make informed decisions on behalf of the DAO. The main pitfall of civil governance is lack of education, objectivity and understanding. To ensure this is executed in an effective manner the SpiritSwap DAO is offered a myriad of educational and thought provoking resources. These include
- Youtube educational content surrounding support for the features SpiritSwap offers.
- Weekly educational fireside chats rich in thought provoking content and providing the community an opportunity to have their say in a group discussion, offer opinions and question anything they want to about the intricacies of DAO procedures.
- A platform to float, discuss and debate topical subject matter pertinent to the governance of SpiritSwap. These platforms are supported by both the commonwealth and snapshot programs.
Commonwealth : Is a platform that supports the SpiritSwap DAO. They are an amazing partner and have always been quick to respond to development requests from the SpritiSWap DAO leadership team.
Commonwealth is an incubator for most community lead governance proposals.
where proposals can be discussed and debated before they are shipped to a vote. This platform also allows SpiritSwap holders a place to float concepts even if they don’t have enough inSPIRIT to push an official DAO vote on SnapShot. By following the “how to use our Forum” guide on Commonwealth, users can lobby for support of inSPIRIT holders on ideas they have, but may not necessarily have the voting power to push. New or Old users who want to familiarize themselves on this process can do so via the following link
https://commonwealth.im/spiritswap/discussion/3304-how-to-use-our-forum
SnapShot: Is the official voting platform of SpiritSwap DAO. After a topic or proposal has had time to be discussed and debated in the commonwealth platform, users who feel they have enough support from the inSPIRIT community can officially push a proposal for passing by the DAO via the SnapShot platform. The aforementioned link goes into explicit detail on the best practices for pushing a successful proposal.
The aforementioned pertains directly to the policy driven governance aspect of SpiritSwap DAO, by this I mean the ability to have a say around the course and direction of the protocol directly, development, risk mitigation, how a portion of treasury assets are spent or invested and even how the DOW is structured and operates for example shortening of proposal duration, reduction of quorum or proposal thresholds e.t.c
The power is literally in your hands, you just have to take the initiative to grab the bull by the horns so to speak. This is going to sound “shilly” and no financial advise intended, but at the current price of SPIRIT, for $1300 locked in perpetuity you hold the power to make whatever proposal you like.
As more and more proposals are pushed and the community further adopt and get involved with policy driven governance, there is the intention to ensure that subject matter, discussions and debates pertaining to these proposals are heavenly covered in FireSide chats. Think of these future Fireside chats as SpiritSwap DAO’s version of a decentralized parliament or congress.
Potential to increase financial incentives via stakeholder driven action: Is the SpiritSwap DAO’s second approach to tackling engagement.
Money always motivates. The SpiritSwap DAO’s on chain gauge governance system ensures inSPIRIT holders are rewarded for participation in our on-chain governance. Without waffling too much, I would instruct new users who aren’t familiar with our gauge governance to refer to our Gitbook documents, a link to which can be found in our official resources channel in discord.
In short, by holding inSPIRIT and further to this, being active in governing how emissions are distributed each week before the epoch ends, inSPIRIT holders are rewarded by way of bribes from other protocols to vote on their gauge to drive more emissions to their farms. inSPIRIT holders are also rewarded passively by taking a stake in the inSPIRIT ecosystem via our weekly rewards generated by fees from people who use the DAO’s AMM.
A third engagement benefit to being an inSPIRIT holder and thus governance participant revolves around the fact that these users receive a boost to their farms, promoting further stakeholding in the ecosystem.
V2 upgrades will add to this model and offer inSPIRIT holders two additional models geared towards financial inventiveness via stakeholder driven action.
The Real Yield anti dilution model, ensuring governance participants are never diluted by farmers (making adoption of the governance model even more enticing)
The other model is still under lock and key (we have to keep some things V2 a surprise) however the latter is the most exciting and rewarding in my opinion.
After a large segue into the first of 3 requirements to ensure a successful DAO, let’s look into the second factor “Effective structure / voting mechanics”
. An effective DAO structure and voting mechanic is also required. This is obvious, without the necessary infrastructure in place, governance can not thrive or even worse, breaks easily.
The aforementioned actually covered our current voting mechanics already, however to quickly reiterate what SpiritSwap DAO does to ensure this factor is well covered.
SpiritSwap DAO takes a two prong approach to effective governance.
Policy governance vote mechanics are managed by a combination of the commonwealth forum(for in depth discussion and lobbying of support) and the SnapShot platform for proposal of policy change and voting on said proposals.
This approach ensures there are avenues to have ample discussion about the intricacies and mechanics of proposed policy change before they actually happen. This helps alleviate wasted or irrelevant proposals. A recent proposal RIGHTLY called for a reallocation of fees. However this user did not follow the proposal path as such the proposal did not pass. Had the person making the proposal followed the path, they would have quickly learnt in the forum stage of the process that this was :
1. Not possible as contract migration would be required (which is happening with V2 anyway)
2. V2 mechanics offer a much more supercharged version of this persons proposal anyway.
However, after V2 a third arm to vote mechanics is slated, full on chain governance. This novel mechanic to the ecosystem will in short allow developers to make a PR (pull request) to the SpiritSwap DAO’s github, effectively enabling developers with stake holds in the DAO, along with capable and “in the know” community members to directly make changes to the SpiritSwap ecosystem from a code perspective. This might be for minor changes such as iterations to the fee or emission structure or larger updates such as actually adding to the SpiritSwap DAO’s product suite. The DAO will then have the chance to review the code in question, and if it passes security checks and gets enough DAO approval, upon the vote passing, will automatically be added to the code base. Such a metric also allows people to make a vote to execute a certain function in our smart contracts. Like vote to increase/decrease emissions, vote to change allocation between the multiple Gauge proxies that SpiritSwap V2 will have and, vote to whitelist tokens for gauges, circumventing the manual and cumbersome process of a snapshot then manual addition by developers. This approach not only takes the labor out of pushing governance policy but also speeds the process up.
This is enormous as it allows any governance participant the opportunity to make direct updates to the code base, so long as safety and security checks are passed. Also more decentralized than multi-sig that puts 7 people in charge of actually signing off on these policy changes. It ensures whatever people vote for actually happens !
On chain, everyone is in charge and executes the code together through votes.
Again, I have to be objective here. As this model is novel and untested, it doesn't come without threats. this can be a double edged sword, so proceeding with this model will in itself require a DAO vote, but that’s a topic for a later discussion. The point to be taken here is that the SpiritSwap DAO are always seeking and exploring new ways to add new and exotic herbs and spices to OUR DAO’s “secret sauce” as we navigate through the intricacies of operating a successful and cohesive DAO.
3. A DAO needs a governance token or share system
The third and final condensed ingredient to a DAO’s secret sauce is to ensure that there is a solid governance or share system.
Again, we have touched on this above however it is a point of pertinence nonetheless. For a DAO to achieve success it needs to have a functioning ecosystem with a governance token revolving around it.
In the sake of the SpiritSwap DAO, the governance model bases itself around the inSPIRIT token, which is tethered to the SpiritSwap ecosystem. By employing the VE model, SPIRIT tokens are taken off the market and locked away for a specified amount of time, thus thinning out supply. Having a symbiotic relationship between participation in governance and a supply thin, is beneficial for obvious reasons. However, a supply thin isn’t the terminal objective, but rather a proof of interest in the system of governance. Users pledging their SPIRIT tokens to the governance ecosystem in return for inSPIRIT tokens is a way for participants to put some “Skin in the game” and marry to protocol in a sense. This is a form of preventative mechanism to restrain bad actors, anyone participating in the governance model has a “financial stake” in the ecosystem, thus ensuring they will do their best to make good, informed and positive choices in governance orientated decisions. Ultimately what’s good for the ecosystem and the governance model that dictates the outcome and prosperity of this ecosystem, is good for the participant who has a financial stake in the ecosystem.
There have been many arguments against DAO governance
These can be boiled down to 5 main factors.
- Poor Infrastructures
- Legal Battles
- Navigating Smart Contracts — Risks and Un-immutability
- Effective Coordination or Complete Decentralization
- People (Community) Over Profit or Just a bunch of rich folks combining to increase their earnings
Lets take a closer look at these arguments.
The first being Poor Infrastructures :
The argument has been made that Since DAOs are purely digital and decentralized, they often lack a well-developed and efficient infrastructure their traditional counterparts enjoy. Many DAOs have to design the right tooling and infrastructures by themselves before launch, and a bulk of these tools are quite ‘quirky’.
DAOs suffer from lacking the right infrastructures for reporting, treasury management, governance, payroll, communication, identity management, etc. Without the right infrastructure to handle these duties, many DAOs may lose members and eventually fail to gain traction.
However, the increased rate of innovations and collaborations in the Web3 space is gradually helping to solve some of these problems.
At SpiritSwap DAO we aim to make use of emerging tools mentioned above, such as commonwealth and snapshot to navigate these intricacies
Legal Battles
DAOs share similarities with many organizations of today like corporations, non-profits, partnerships (both general and limited liability), and cooperatives. But these organizations are all regulated and governed by the rules of the different terrains they are rooted in.
DAOs, on the other hand, are purely decentralized without a particular location, and the rules governing them are not specific to that of any existing legal framework. In many regions of the world today, DAOs battle with regulatory issues such as taxation of DAO tokens, treasuries, and investments, how to get insurance on investments, implementing AML and CFT policies, and who takes responsibility for a DAO’s actions. Without a clear system to solve these legal challenges, it’ll be hard for DAOs to gain ground in the physical world.
While this area is still grey, at SpiritSwap the DAO works with a hefty legal team to ensure we are operating within the grounds of regulatory standards. However as we will discuss further, the implementation of on chain governance will even further decentralize SpiritSwap, but more on that soon.
Navigating Smart Contracts — Risks and Un-immutability
Blockchains may almost be impossible to hack but the smart contracts that run on them do not completely share the same level of security.
Many smart contract networks have faced a series of attacks with some protocols drained of millions of dollars sometimes. For example, the first DAO known as “The DAO” is a typical example of the impact of such vulnerabilities. A more recent event is the $120 million hack of BadgerDAO.
Division within a DAO can lead to fragmentation and result in splits which we have seen with popular crypto networks:
The Ethereum/Ethereum Classic split was caused by disagreements in responding to The DAO attack. The response of the Ethereum community puts the immutability of blockchains in question. The Bitcoin/Bitcoin Cash hardfork was caused by a disagreement in block sizes.
Situations like these break the censorship resistance feature which attracted many to the web3 space. On the flip side, this can help in scaling many projects beyond the limits Web3’s “good feature” of immutability has placed on them. The current success of the Ethereum network is a testimony to this effect.
Effective Coordination or Complete Decentralization
The governance structures in most DAOs are the typical democratic system of one man, one vote. While this structure has many advantages, it’s not the best way to actively manage corporations especially when decisions that need to be taken require expertise.
Traditional organizations function with certain hierarchies because getting every employee or member to vote on decisions is highly ineffective and can prove disastrous. Imagine if everyone in an organization needs to vote on the SEO strategy that needs to be employed or the code base a developer needs to use. A large token holder without adequate experience can negatively influence decisions.
Lets tackle this in two parts:
1. An uneducated cooperative leading to poor decisions made. As already covered the SpiritSwap DAO strives to educate their community as much as possible via many different education vehicles, while this isnt a silver bullet, there is at least an effort in place to ensure the community responsible for policy making and on-chain driven decisions are well informed on the effects of their decision making.
2. Large token holders. Lets address the elephant in the room. There are large inSPIRIT holders such as winSPIRIT protocols who can sway decisions, the biggest being liquid driver, of which Dr Liquid has been very vocal around his intentions to acquire and retain a majority share of inSPIRIT voting power. This isnt a concern for two reasons.
A. With shadow farms coming into effect, LQDR will be moving to a gauge model which will see voting power extended to their holders. Liquid driver, like spirit swap hold regular “deck talks” their version of fireside to ensure their community are educated and well informed on the effects of policy making.
B. Some compare liquid driver to a parasite, feeding on its host SpiritSwap. This said we must understand that they also drive a lot of liquidity and thus volume towards SpiritSwap which is good for the ecosystem (a parasite feeding its host if you will). A further point to acknowledge, If you are going to consider LQDR a parasite, the first rule of subsisting is to never kill the host or on other terms, dont bite the hand that feeds you. Majority of the time LQDR community should in theory make good decisions across SpiritSwap related governance as anything that hurts SpiritSwap DAO will have a flow on effect to them also, mutually assured destruction.
In on-chain governance rules are hardcoded into the blockchain protocol. This means, any decision that is being taken, is automatically being translated into code, e.g. decisions concerning, increase/decrease of emissions, vote to change allocation between various gauge proxies , vote to whitelist tokens for gauges E.t.c
One blockchain project which plans to implement on-chain governance is Tezos. To overcome the difficulty of unmotivated developers, developers can broadcast their improvement proposal on-chain. Once the proposal gets approved via an on-chain vote it is implemented in the testnet. After a specified amount of time, a final vote occurs and it is implemented in the main net.
Just like off-chain governance on-chain governance comes with various problems. In a clearly defined on-chain governance metasystem the system may be legitimately gamed by some stakeholders where previously undefined norms held misbehaving actors in check. The proposed benefits of an on-chain governance system is that it is predictable and stable, so it becomes difficult to argue for a meta change once the protocol has been gamed. More fundamentally, Vlad Zamfir argues that governance problems should not be thought of as design problems but rather applied social problems. What he means is that governance is an unpredictable and emergent phenomenon. Therefore it cannot be fully engineered in advance and has to keep the flexibility of unplanned occurrences.
To impart with some concluding thoughts on my own, I feel its all about balance.
There are definite benefits to all of the aforementioned styles of governance, but as with all things philosophical, there is not right or wrong. The means to achieve the ends must take the goal of the ends into account, then you will find your path.
Personally I see a combination of balance between both DAO style governance and on chain governance as counter balancing each others limitations.
Utilizing tools to solve characteristic issues synonymous with DAOS to answer issues with education for more logical, learned and information led decision making, but applying the decision process to on chain governance, which offers a higher level of transparency and decentralization than the manual and cumbersome DAO process.
There are most certainly issues with on chain governance where by the tools aren't currently in place to address said issues, however as I have maintained throughout this presentation, there is no perfect recipe for the secret sauce, the fun part is taste testing as we perfect it. I have faith that as a community, we can navigate throughout these nuances, overcome challenges and make SpiritSwap the best damn community lead protocol out there !
With those closing comments, I thank you for your time today. Make sure to join us next week for Fireside episode 8 where FTM Alerts CryptoClay will be joining us to discuss to discuss in more depth, the Macro conditions and parameters that impact the crypto market space.
Thank you and good evening.
