The Ethereum co-founder expressed his opinion on token-based decentralized governance and suggested that voting mechanisms are flawed and could keep the DeFi sector from realizing its potential.
According to a blog post by Vitalik Buterin, the cryptocurrency community needs to “go beyond voting with tokens in its current form.” Most DeFi projects now manage their protocol updates, reward distribution, and other aspects by distributing votes among protocol governance token holders based on their holdings.
However, many projects were criticized due to the fact that the voting was dominated by “whales” who own a large number of tokens, which allows them to vote in support of their personal interests. Buterin highlighted two issues related to token-based governance. He highlighted the risk of mis-distribution of incentives among community members and its vulnerability to “vote-buying” and “direct attacks” affecting the results of management votes. He wrote:
“The most important thing to do today is to move away from the idea that token voting is the only possible form of decentralized governance.”
Buterin noted the prevalence of “structural reorganizations” in which “vote buying” can be achieved, as well as the fact that control systems can be manipulated by borrowing tokens for cryptocurrency backing and using tokenized assets for voting. In this context, “the borrower has the authority to manage the protocol without economic interest, and the lender has an economic interest without the authority to manage,” he added.
Buterin advocated the study of Proof-of-Humanity control systems, in which each protocol user is given one vote. Buterin also proposed the concept of Proof-of-Participation as a possible solution where voting is restricted to protocol users who have helped develop the project or community. Thus, voting rights can be allocated exclusively to addresses that have completed specific tasks.
The Ethereum co-founder also suggested that quadratic voting, in which the power of a single token holder’s vote is proportional to the square root of the economic resources he allocates for decision making, could offer unique solutions for decentralized governance. Buterin proposes a “personal participation” approach in which individual voters are held accountable for their decisions:
“Voting with tokens does not work because although voters are collectively responsible for their decisions (if everyone votes for a terrible decision, the value of all tokens will drop to zero), each voter is not individually responsible.”
Earlier, Vitalik Buterin said that he has high hopes for using the Ethereum network for social purposes, going far beyond the quick financial gain from DeFi.
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