Blog Details

How Tokenized Governance Can Make DeFi More Resilient


Incorporating governance into decentralized protocols is controversial. Governance implies rules, hierarchies and control, which can be antithetical to the whole notion of decentralization. Paradoxically, history seems to have proven that organizations without rules cannot be sustainable.

At present, there are two separate ways that DeFi (decentralized finance) projects and platforms are tackling this problem: They are either building a DAO (decentralized autonomous organization), or just minimizing governance. For most platforms, governance minimization is inappropriate. Building one immutable smart contract that never changes through a governance mechanism makes it fragile, as the underlying contract can never be fixed if problems arise. No project or product is perfect from day one and you will never be able to adapt to the operating environment or economic context.

The key understanding is that for a product to have a long life, it needs to have a way of adapting. This is as true in evolution and natural selection as it is for systems technologies in a Web 3 environment. The question then becomes how to create a modification consensus without having a centralized point. For that, you need decentralized governance – a new way to scale coordination by humans in a trustless manner.

Hacking governance participation

When even the most successful protocols have less than 5% voter turnout, they struggle to reach a quorum for some basic decisions. Further, it refutes the claim of being decentralized with such a low level of participation, since one large but minority holder can direct all the decisions. Why would any skilled contributor want to take the lead in this context? The mechanisms enabling decentralized protocols to become sustainable are simply not ready yet. Raising participation is going to be one of the biggest challenges in making DeFi a long-lasting industry.

Paladin was built in order to accelerate this process. With its decentralized governance lending protocol, users can either loan the voting power of their governance tokens (or its derivatives) or borrow some additional temporary influence.

By introducing a liquid democracy module, Paladin enables more people to access influence, with reduced friction and more optionality. This dapp is the cornerstone of an ecosystem with the ambition of transforming speculators into governors. Crypto does not need more investors, it needs more contributors.

Summoning the governors

Paladin’s products allow users to deposit, borrow and manage governance tokens, creating markets for influence and voting rights across the Aave and Curve ecosystems.

The value created by these influence markets will be redirected to locked PAL and used to incentivize governance activity. Exponentially rewarding aligned stakeholders while giving the protocol more insights on the current alignment of its stakeholders will allow the DAO to tailor its monetary policy in accordance with their wishes. Creating certainty – of liquidity, stability and participation – will greatly add to the sustainability of the wider DeFi ecosystem, of individual projects and of Paladin itself.

Increasing these levels of governance participation will be a multiyear endeavor. By creating more value around governance participation, Paladin is building a contributor-centric protocol. This will create long-term value in the crypto market by helping to build projects that can scale, react to change and energize participation among their users.

Get Started Now for instant Cashback