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Governance controversies in Web3

In this article we discuss some major issues seen in Web3 governance.
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© RMIT 2022

Governance of Web3 projects is necessary and important because entrepreneurship is neither clear-cut or linear.

In only the past few years we have seen many major Web3 governance issues play out.

  • A bug in the code of DeFi protocol, Compound, led to an erroneous disbursement of an airdrop. Funds that were meant to be used as incentive rewards for future users were given to current users. Compound’s rigid governance mechanisms acted as a barrier to change this, and the protocol had to rely on the good will of users to return the funds.
  • A layer 1 blockchain, Juno, faced a difficult problem when one wallet farmed the project’s airdrop using multiple wallets. This meant they ended up with 3.1 million of the native token $JUNO, as opposed to the airdrop limit of 50,000. The community then voted on whether the wallet should have their balance reduced to 50,000 and the remaining tokens confiscated. This highlights the social and community challenges projects face and why governance is so important. This governance controversy is ongoing.
  • A community member for DeFi protocol Yearn Finance, proposed that the protocol increase the token supply by 22%. Where one third would go to the developers of the protocol and the rest into the community treasury. This was an extremely contentious governance proposal at the time and saw many long-term users leave as a result.
  • When an unresponsive whale’s wallet on DeFi protocol Solend was looking close to liquidation, the project developers asked the community to grant them emergency powers to liquidate the whale at an OTC desk. This was due to fears that the multimillion dollar liquidation would create such immense sell pressure on the platform that it would cause it to jam the network. When this proposal was passed it caused so much backlash that the developers submitted a new proposal to reverse it.
Governance icon Governance seems insignificant and almost unnecessary in times of stasis and certainty. It is palpable in times of crisis or rapid change.

Doing business in Web3 inevitably involves adapting to changing circumstances — whether that’s a change in their competitive landscape, an attack or a planned upgrade.

© RMIT 2022
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