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Protocol Management DAO

Case study of protocol management DAO
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© RMIT 2023

Introduction

DAOs are often used to govern web3 protocols. These protocol DAOs are typically coordinated through a governance token, where token holders vote on proposals. As described by Coopah Troopha (go to ‘Further reading’ to find out more), they are a way for a protocol to “transition power from a core team into the hands of the community.”

A protocol DAO is often tasked with ensuring the long-term success of the protocol. A decentralised finance (defi) protocol DAO, for instance, might make decisions including fee structure, interest rates, upgrades and ecosystem incentives.

In this case study we explore an example of a protocol DAO with on-chain governance: Yearn Finance.

Yearn is a decentralised finance (defi) protocol with billions of dollars of value locked within it. Yearn enables investors to access different strategies and financial products, such as tools to maximise yield. The Yearn ecosystem is ultimately governed by Yearn (YFI) token holders.

Every DAO is different. In this case study we therefore emphasise two unique elements of Yearn governance. First, the way that it distributed tokens for the DAO (through a ‘fair launch’), building their protocol DAO community. Second, their development of ‘constrained delegation’, where governance powers within the DAO are delegated to teams.

What is Yearn?

Yearn enables its users to pursue investment strategies and earn returns through products. Yearn has been described as a “community-driven robo-adviser for yield” (Krisztian Sandor, Coindesk), a “yield optimiser” (Finematics), and a suite of automated investment strategies enabled by “money robots” (Cryptopedia).

Alongside other products, the core of the Yearn ecosystem are Vaults – a kind of “smart savings account that maximises the value accrual of deposited assets”.

Users can access low-cost actively manged funds by depositing digital asset, and a series of automated smart contracts will pursue an underlying strategy. These strategies, as well fee structures and other decisions, are controlled through community governance – that is, by the Yearn protocol DAO.

Governance and a fair launch

Yearn, like most web3 projects, began with centralised governance. The governance of Yearn has since become a leading example of a DAO that has undergone progressive decentralisation and remained a functioning and effective organisation.

Yearn’s governance initially sat with founder Andre Cronje. This was unsustainable (and risky) as the protocol value grew.

Governance responsibility was therefore decentralised to a multisignature contract (a 6-of-9 multisig) of prominent members of the Yearn community.

To decentralise even further, governance powers were later handed to tokenholders – that is, to the DAO. Initially 30,000 Yearn governance tokens (YFI) were minted and distributed entirely to users of Yearn (there are now 36,666 YFI tokens).

This approach to launching a token is known as a ‘fair launch’, and Yearn’s has been described as “now-mythical”. As Tracheopteryx describes (see ‘Further reading’ to find out more):

the project’s creator, developer Andre Cronje, gave away all of the tokens. All of them. He didn’t keep any or give any to his buds or investors. All 30,000 YFI tokens were distributed to users of his platform over one week. At the time that was millions of dollars. And today, it’s over a billion. A billion-dollar gift.
Many consider this fair launch approach strategy to be central to the governance of Yearn. It fostered a community of contributors and governors who were already using the protocol.
Today the governance of Yearn occurs through proposals and votes through those YFI tokens. This governance process often begins in Yearn Governance Forums. There are various rules (such as quorum and minimum YFI holdings) enable proposals to proceed to a vote. These votes are coordinated through Snapshot to keep gas fees low.
This process of progressive decentralisation — from a centralised founder to a DAO — is only one interesting aspect of Yearn. We explore the second below: the creation of teams within the DAO.

Constrained delegation and a multi-DAO structure

In April 2021, Yearn began its transition to a multi-DAO structure. This change enabled the delegation of decision-making responsibilities to teams. The purpose of this multi-DAO approach is to allow “protocol development to not be stiffened by bureaucracy while maintaining a sufficient level of decentralization.”
These teams are described as “empowered autonomous contributor teams” that have “emerged organically from the community” (Tracheopteryx and Lex_node). This “constrained delegation” approach empowers these teams to be creative, and relies less on YFI tokenholders being involved in each decision. As Tracheopteryx and Lex_node explain (see ‘Further reading’ to find out more):
Rather than being asked to make specific, operational decisions, YFI holders will conduct how power flows within yearn, wielding granular and clear control over every aspect of what yearn does.

As described in the original proposal, Yearn teams are still ultimately under the governance of YFI tokenholders and “are privileged to be able to get funding on a more spontaneous, informal basis and have their contributions presumed to be ‘yearn-official’, but are still subject to being monitored by YFI holders and disenfranchised if they abuse their roles.

Conclusion

Ultimately the governance and structure of DAOs evolves. Governance emerges and shifts as the community and environment shift. As we have seen in this case study, Yearn has evolved from a single admin key, through a fair launch, to a polycentric structure of DAO teams.

© RMIT 2023
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Introduction to DAOs: Decentralised Autonomous Organisations

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