Tokenised Voting Rights

Discussion

Tom Barbereau et al. :

"Unlike shares, voting rights tokens are not legal contracts, and they do not entitle holders to a share of a registered company’s profits . A community of voting rights token-holders – a DAO – is not typically positioned as a juridical person. The distinctions are clear.

In the context of DeFi’s governance, decentralised specifically denotes independence from regulators, registered companies, and investor registration processes. Hence the Democratic Senator Elizabeth Warren referred to DeFi as “the Wild West of our financial system”. The Financial Action Task Force (FATF), the Chair of the United States Securities and Exchange Commission (SEC), and Professor Kenneth Rogoff from Harvard University issued similar remarks. According to Warren, DeFi replaces an old form of centralised control – the traditional financial system – with a new form of centralised control that is shadowy and unregistered. She therefore associates DeFi not with a uniform, democratic distribution of power and resources but rather with “new concentration risks” [p. 3]. The Republican House Majority Whip, Tom Emmer, advanced an opposing view. According to him, de-centralised finance “shifts economic power from centralised institutions back into the hands of the people”. The tension is obvious: DeFi is oligarchic according to Warren, and it is democratic according to Emmer.

Early socio-technical studies about DeFi’s governance support Warren’s assertion [10,11,14,25]. The new concentration risks and oligarchic governance structures are broadly labelled “Fake-DeFi” [26] and “the illusion of decentralisation” [27]. Barbereau et al. [10] studied the tokenised voting rights issued by five Ethereum-based DeFi projects: Uniswap, Maker, SushiSwap, Yearn Finance, and UMA. The authors discovered that, for all five cases, the distributions of tokenised voting rights are highly concentrated. Their study did not, however, examine the actual exercise of voting rights.

...

DeFi’s token-holder governance is a novel topic that cannot be subsumed under the well-known categories of corporate governance or State governance. It also cannot be subsumed under the blockchain researchers’ esoteric category of off-chain governance – specifically, the governance of an entire distributed ledger by parties such as the Bitcoin Core Developers and the Ethereum Foundation.

Motivated by the topic’s novelty as well as the tension between “democracy” and concentrated power, we conducted an exploratory, longitudinal, multiple-case study."

(https://www.sciencedirect.com/science/article/pii/S0160791X23000568?via%3Dihub)

Timocratic Governance

Reilly Smethurst et al. :

"We ... claim that DeFi’s governance is timocratic. This reflects the fact that DeFi’s elites are not simply wealthy; they are sometimes “shadowy” and unidentified as well.

Timocracy is a type of stakeholder governance that dates back to the Solonian Constitution from the sixth century BC. It involves both producers (developers) and property owners (token-holders) that pursue a mixture of particular interests and common interests. Timocracy’s main risk is effectively the same as the risk identified by Warwick: if a timocracy degenerates, then it becomes an oligarchy (or a plutocracy).

As discussed in Plato’s Republic [545a–550c], a timocracy is a conflicted mix of community-oriented virtues and private wealth accumulation. Timocracy’s emblematic rulers hide their wealth in “treasuries and strongrooms”, which implies that timocratic power is crypto- (‘concealed or secret’). “Victory and honour”, in a timocratic regime, are obtained via calculated risks and courageous conquests, not via harmonious rationality or dialectical reason. Timocratic rulers accumulate wealth in subtle ways that are odds with the commons, and they “run away from the law like children running away from their father”. Socrates’ contemporary Sparta is an example of a timocratic regime, and it enjoys an eponymous relationship with Synthetix’s Spartan Council. Incidentally, Lycurgus of Sparta first implemented a separated powers model, which Synthetix and Yearn Finance later adopted.

A timocracy degenerates into an oligarchy when its constitution is rewritten to explicitly reserve power for the wealthy, and when contracts are created to purposefully exacerbate the division between a wealthy class and a poor class. Although our nine DeFi cases are tacitly governed by wealthy, above-average token-holders (whales), average and below-average token-holders (minnows) are allowed to participate in the governance procedures. The minnows’ participation is not as effective as the whales’ participation; but it is not strictly precluded. Furthermore, developments like Synthetix’s quadratic voting are intended to stop the inequality gap from widening.

To reiterate, DeFi’s governance is timocratic. DeFi’s timocratic rulers – the unregistered, above-average token-holders – accumulate more power over time by purchasing even more tokens. The concentration of power is gradual, subtle, and putatively neutral, because crypto-asset marketplaces are open to all. DeFi’s timocratic governance could degenerate and become oligarchic if above-average token-holders vote for so-called improvement proposals that significantly diminish the power of average and below-average token-holders, or if they vote for changes that make it more difficult for newcomers to acquire and exercise voting rights [42; 550d–551b]. Such actions would further strengthen the “old guard”."

(https://www.sciencedirect.com/science/article/pii/S0160791X23000568?via%3Dihub)

More information

* Decentralised Finance’s timocratic governance: The distribution and exercise of tokenised voting rights. By Tom Barbereau, Reilly Smethurst et al. Technology in Society, Volume 73, May 2023, 102251

URL = https://www.sciencedirect.com/science/article/pii/S0160791X23000568?via%3Dihub

1.

"Decentralised Finance (DeFi) projects are governed by token-holders and coders.

We studied nine voting rights tokens from Bloomberg’s inaugural Galaxy DeFi Index.

We analysed the nine tokens’ on-chain transaction data plus qualitative sources.

DeFi’s voting rights are highly concentrated and exercised by very few holders."