Is Soulbound Token the future of decentralized governance?
Soulbound Token is a token that contains an individual’s actual information in the form of NFTs and is permanently stored in the user’s blockchain wallet. SBT acts as a kind of Web3 CV, records information and helps increase user reputation
Decentralized Finance vs Decentralized Governance
Since the concept of Decentralized Finance (DeFi) was born, we often equate it with “decentralized” finance, then its governance mechanism is also “decentralized”. But is that true?
Decentralized Gov of the protocol/organization. As an example from DeFi, DeFi protocols often have decentralized governance in the form of DAOs – giving users the right to vote on important issues of the protocol, not just following the intentions of the group of creators. out protocol.
Thanks to this DAO mechanism, DeFi in particular and the cryptocurrency market in general have been aiming for a “higher goal”, creating a new revolution with the ideal of replacing traditional financial institutions. system – where the “big hands” and the authorities hold the power to “kill life”.
Since the “DeFi Summer” 2020, many protocols with governance DAOs have been born, leading the main trends in the segment such as Uniswap DAO, AAVE DAO, Curve DAO or Synthetix DAOs.
Is decentralized governance really “decentralized”?
That’s ideal, but there’s no model without weaknesses. But DeGov’s weakness comes from his own phrase “decentralization”. An example of a label is the recent Terra 2.0 proposal. Although many small users do not want to fork the new chain, the decision is in the hands of the validator – who holds the majority of LUNA.
So, the question is: Is decentralized governance really as “decentralized” as we think?
To answer this question, Ethereum creator Vitalik Buterin has a long article that outlines the non-decentralized elements of how the DAO works.
“Decentralized governance is necessary, but doing it through coin voting carries many risks that have or have not been discovered. The core of the solution is to change or replace voting with coins.”
The role of governance tokens
Basically, in the DeGov mechanism, users can vote for important decisions of the protocol by “voting” or simply called “voting”. Of course, the more votes, the more “voice has weight”. In the end, the choice that gets the most votes wins.
And this voting is the most important use of the governance token of that protocol.
Let’s take a look at how to vote in the Uniswap DAO with the governance token UNI:
- A Uniswap user who wants to suggest something for the protocol must first hold UNI. When submitting a proposal to the Uniswap DAO, it must receive at least 25,000 UNI votes yes to qualify for the second review round. Otherwise, if there are not enough votes, the proposal will be disqualified. right from the parking round.
- By the 2nd round, the proposal will have to receive at least 50,000 UNI votes to advance to the 3rd round.
- …
- In the next review rounds, the number of UNIs required to vote is increasing.
With other DAOs like AAVE DAO or Curve DAO, the governance token is used similarly: the protocol requires staking and locking a certain number of CRVs or AAVEs to participate in the voting rounds.
Barriers of Decentralized Governance
At this point, readers must also begin to realize “something is wrong” with DeGov and governance tokens. That’s it: A person or a group of people who holds enough governance tokens will have the power to govern the entire protocol.
1. Barriers to entry for individual users
First, if you are an individual user, it is difficult to own a large number of UNIs to participate in voting. And not everyone is willing to lock a lot of AAVE or CRV to participate in governance – instead of using it for trading or lending, etc.
Of course, this problem is quite obvious and there have long been many solutions such as users staking their tokens into large token pools. This is similar to citizens electing “deputies” to vote on their behalf.
However, with the increasing attraction of tokens from small users, governance continues to be in the hands of these large pools.
2. The interests of the rulers
If the political institution has “Interest Groups” then DeGov also has interest groups that govern the same protocol. In order for the proposal in its favor to be approved, pool A can do many ways to attract tokens to its pool such as increasing the staking interest rate, offering more benefits to participants. This is no different from the “buy votes” that we often see.
And this practice is so popular in DeFi that a phrase dedicated to it was born – Liquidity War. The origin and most famous is Curve Wars, the battle to attract liquidity on Curve. To understand more about this event, listen to: DeFi Discussion ep.27: Curve Wars – the mysterious keyword behind the price increase of CRV.
Another downside of voting with governance tokens is this: No matter who you are, as long as you hold enough tokens to participate in voting.
The fact that staking pools and validators hold a large amount of tokens to govern the protocol is not as dangerous as the fact that among the decision makers, there are people who are “evil wolf” – do not want the protocol to develop but just want to attack. public and take away everyone’s property.
Coin68 has had an article discussing the current barriers of DAO, read more at: DAO is the future? What barriers need to be overcome to help DAO organizations explode?
Is Soulbound Token the solution?
Vitalik Buterin proposes several workarounds to make voting more decentralized, one of which is the Soulbound Token.
What is Soulbound Token?
Soulbound Token, also known as Soulbound NFT, is inspired by the “Soulbound” feature of World of Warcraft game items.
In WoW, items with the soulbound feature are no longer tradable, tied to the owner. In other words, users holding soulbound tokens will not be able to trade or transfer that token to others. From there, this token acts as an identifier, asserts ownership, is proof that the holder obtained this token through a recognized activity, not buying “hands-on” from someone else.
As a side note, Vitalik Buterin once said that one of the reasons that pushed him to the decentralized ideal of cryptocurrencies was that as a child, he was very passionate about World of Warcraft. However, one day, the game decided to remove a feature that he liked very much, so the founder of Ethereum became “bitter”. In his profile page, he wrote:
“I was born in Russia in 1994 and moved to Canada in 2000, where I went to school. I used to be very happy playing World of Warcraft from 2007 to 2010, but one day Blizzard decided to remove the damage calculation for my favorite warlock character’s Siphon Life spell. I cried until I fell asleep that day and realized the horror that centralized services bring. I decided to quit the game right after that.”
Solutions for decentralized governance
From there, Vitalik proposed to use soulbound tokens instead of the current governance tokens.
The Ethereum founder suggested that instead of a DAO model that favors large holders of governance tokens, we should use soulbound tokens for voting. This can prevent staking pools from collecting tokens from other users – because soulbound tokens are not tradable.
And finally, Vitalik supports the current governance model of Optimism – the Layer2 project that stands out with the recent massive OP airdrop.
An example: Optimism
As explained in the article Important things to know about Optimism Collective, this project uses a “bicameral” governance model consisting of two separate departments, “Token House” and “Citizens House”.
- Token House: OP token holders can participate in governance voting on issues like protocol upgrades, incentives for another project on Optimism… Token House is similar to how the current Uniswap DAO operates implementation – prioritize the number of votes in the form of governance tokens.
- Citizens House: participates in governance on issues such as capital allocation for the protocol, retroactive, etc., including holders of a soulbound token called Citizenship. This proof of governance is non-transferable, in order to prevent the problem of whales collecting tokens
However, as we said at the beginning of the article, no solution is perfect. Although Soulbound token brings more benefits in governance than the current governance token model, this token also has disadvantages. Imagine if the wallet holding the soulbound token was hacked, this “identity card” would also have to change hands.
Besides, since there are not many practical applications of the soulbound token yet, some potential downsides may not be discovered yet.
Disclaimer: The information in this article is not investment advice from Coincu. Cryptocurrency investment activities are not recognized and protected by the laws of some countries. Cryptocurrencies always carry many financial risks.
Author
Analysis
Is Soulbound Token the future of decentralized governance?
Soulbound Token is a token that contains an individual’s actual information in the form of NFTs and is permanently stored in the user’s blockchain wallet. SBT acts as a kind of Web3 CV, records information and helps increase user reputation
Decentralized Finance vs Decentralized Governance
Since the concept of Decentralized Finance (DeFi) was born, we often equate it with “decentralized” finance, then its governance mechanism is also “decentralized”. But is that true?
Decentralized Gov of the protocol/organization. As an example from DeFi, DeFi protocols often have decentralized governance in the form of DAOs – giving users the right to vote on important issues of the protocol, not just following the intentions of the group of creators. out protocol.
Thanks to this DAO mechanism, DeFi in particular and the cryptocurrency market in general have been aiming for a “higher goal”, creating a new revolution with the ideal of replacing traditional financial institutions. system – where the “big hands” and the authorities hold the power to “kill life”.
Since the “DeFi Summer” 2020, many protocols with governance DAOs have been born, leading the main trends in the segment such as Uniswap DAO, AAVE DAO, Curve DAO or Synthetix DAOs.
Is decentralized governance really “decentralized”?
That’s ideal, but there’s no model without weaknesses. But DeGov’s weakness comes from his own phrase “decentralization”. An example of a label is the recent Terra 2.0 proposal. Although many small users do not want to fork the new chain, the decision is in the hands of the validator – who holds the majority of LUNA.
So, the question is: Is decentralized governance really as “decentralized” as we think?
To answer this question, Ethereum creator Vitalik Buterin has a long article that outlines the non-decentralized elements of how the DAO works.
“Decentralized governance is necessary, but doing it through coin voting carries many risks that have or have not been discovered. The core of the solution is to change or replace voting with coins.”
The role of governance tokens
Basically, in the DeGov mechanism, users can vote for important decisions of the protocol by “voting” or simply called “voting”. Of course, the more votes, the more “voice has weight”. In the end, the choice that gets the most votes wins.
And this voting is the most important use of the governance token of that protocol.
Let’s take a look at how to vote in the Uniswap DAO with the governance token UNI:
- A Uniswap user who wants to suggest something for the protocol must first hold UNI. When submitting a proposal to the Uniswap DAO, it must receive at least 25,000 UNI votes yes to qualify for the second review round. Otherwise, if there are not enough votes, the proposal will be disqualified. right from the parking round.
- By the 2nd round, the proposal will have to receive at least 50,000 UNI votes to advance to the 3rd round.
- …
- In the next review rounds, the number of UNIs required to vote is increasing.
With other DAOs like AAVE DAO or Curve DAO, the governance token is used similarly: the protocol requires staking and locking a certain number of CRVs or AAVEs to participate in the voting rounds.
Barriers of Decentralized Governance
At this point, readers must also begin to realize “something is wrong” with DeGov and governance tokens. That’s it: A person or a group of people who holds enough governance tokens will have the power to govern the entire protocol.
1. Barriers to entry for individual users
First, if you are an individual user, it is difficult to own a large number of UNIs to participate in voting. And not everyone is willing to lock a lot of AAVE or CRV to participate in governance – instead of using it for trading or lending, etc.
Of course, this problem is quite obvious and there have long been many solutions such as users staking their tokens into large token pools. This is similar to citizens electing “deputies” to vote on their behalf.
However, with the increasing attraction of tokens from small users, governance continues to be in the hands of these large pools.
2. The interests of the rulers
If the political institution has “Interest Groups” then DeGov also has interest groups that govern the same protocol. In order for the proposal in its favor to be approved, pool A can do many ways to attract tokens to its pool such as increasing the staking interest rate, offering more benefits to participants. This is no different from the “buy votes” that we often see.
And this practice is so popular in DeFi that a phrase dedicated to it was born – Liquidity War. The origin and most famous is Curve Wars, the battle to attract liquidity on Curve. To understand more about this event, listen to: DeFi Discussion ep.27: Curve Wars – the mysterious keyword behind the price increase of CRV.
Another downside of voting with governance tokens is this: No matter who you are, as long as you hold enough tokens to participate in voting.
The fact that staking pools and validators hold a large amount of tokens to govern the protocol is not as dangerous as the fact that among the decision makers, there are people who are “evil wolf” – do not want the protocol to develop but just want to attack. public and take away everyone’s property.
Coin68 has had an article discussing the current barriers of DAO, read more at: DAO is the future? What barriers need to be overcome to help DAO organizations explode?
Is Soulbound Token the solution?
Vitalik Buterin proposes several workarounds to make voting more decentralized, one of which is the Soulbound Token.
What is Soulbound Token?
Soulbound Token, also known as Soulbound NFT, is inspired by the “Soulbound” feature of World of Warcraft game items.
In WoW, items with the soulbound feature are no longer tradable, tied to the owner. In other words, users holding soulbound tokens will not be able to trade or transfer that token to others. From there, this token acts as an identifier, asserts ownership, is proof that the holder obtained this token through a recognized activity, not buying “hands-on” from someone else.
As a side note, Vitalik Buterin once said that one of the reasons that pushed him to the decentralized ideal of cryptocurrencies was that as a child, he was very passionate about World of Warcraft. However, one day, the game decided to remove a feature that he liked very much, so the founder of Ethereum became “bitter”. In his profile page, he wrote:
“I was born in Russia in 1994 and moved to Canada in 2000, where I went to school. I used to be very happy playing World of Warcraft from 2007 to 2010, but one day Blizzard decided to remove the damage calculation for my favorite warlock character’s Siphon Life spell. I cried until I fell asleep that day and realized the horror that centralized services bring. I decided to quit the game right after that.”
Solutions for decentralized governance
From there, Vitalik proposed to use soulbound tokens instead of the current governance tokens.
The Ethereum founder suggested that instead of a DAO model that favors large holders of governance tokens, we should use soulbound tokens for voting. This can prevent staking pools from collecting tokens from other users – because soulbound tokens are not tradable.
And finally, Vitalik supports the current governance model of Optimism – the Layer2 project that stands out with the recent massive OP airdrop.
An example: Optimism
As explained in the article Important things to know about Optimism Collective, this project uses a “bicameral” governance model consisting of two separate departments, “Token House” and “Citizens House”.
- Token House: OP token holders can participate in governance voting on issues like protocol upgrades, incentives for another project on Optimism… Token House is similar to how the current Uniswap DAO operates implementation – prioritize the number of votes in the form of governance tokens.
- Citizens House: participates in governance on issues such as capital allocation for the protocol, retroactive, etc., including holders of a soulbound token called Citizenship. This proof of governance is non-transferable, in order to prevent the problem of whales collecting tokens
However, as we said at the beginning of the article, no solution is perfect. Although Soulbound token brings more benefits in governance than the current governance token model, this token also has disadvantages. Imagine if the wallet holding the soulbound token was hacked, this “identity card” would also have to change hands.
Besides, since there are not many practical applications of the soulbound token yet, some potential downsides may not be discovered yet.
Disclaimer: The information in this article is not investment advice from Coincu. Cryptocurrency investment activities are not recognized and protected by the laws of some countries. Cryptocurrencies always carry many financial risks.
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