# Governance Initialization (DeFi)

### 0 Introduction

#### Prerequisite / Assumptions:
- a DeFi Protocol requires formalized on-chain governance
- desire for sufficient decentralization
- desire for no single point or group for 'issuance'

Decentralized finance (DeFi) projects typically undergo a transition from centralized control towards decentralized governance, with decision-making power shifting from a select few to a broader community. This process is crucial to ensure that DeFi projects align with the principles of openness, permissionlessness, and credible-neutrality [0]. At the same time, a protocol must strike a delicate balance between competing priorities: the need to maintain a high degree of decentralization while also ensuring its functionality, security, and attractiveness to participants.

### 1 Challenges for Initialization
Experimental smart contract software prior to formalized governance should undergo rigorous testing, including testing in a production environment to simulate real-world scenarios. While risks are involved, responsible testing can be achieved by imposing hard limits on the total account creations / tokens used (to limit maximum potential downside in an exploit event). A cautious and responsible approach to "field testing" can improve the software's reliability and resilience, crucial for its eventual success.

#### 1.1 Centralized Initialization
Initially, a blockchain program may be created and developed by a relatively centralized group of individuals. Even with decentralization in mind from the outset, this small group can be selecting the meta and parameters of the governance token. The "meta" could include things like intial distributions, voting structures, and incentive programs. When these decisions are made without enough community input, the token is essentially a product of centralized initialization. This centralized control of the initialization process contrasts with the decentralized ethos that underpins DeFi. It may also raise concerns about the founding team's motives, the project's legitimacy, and its long-term sustainability.

#### 1.2 Sybil-Resistance
Another challenge for governance initialization is ensuring adequate sybil-resistance. Sybil attacks occur when a single entity creates multiple identities or accounts to manipulate the voting process in a decentralized governance system. This could result in an unintended concentration of tokens, undermining the democratic principles of decentralized governance. To address this challenge, many DeFi projects use reputation-based systems, unannounced snapshots (some account checks at an arbitrary historic date), or staking requirements. However, without airtight identity verification, it's hard to be confident.

#### 1.3 Achieving Consensus
One of the challenges in achieving consensus, even within a small team, is that conflicting preferences may arise with no clear path to compromise. Failure to reach consensus can lead to delays and compromise the project's overall success, making it crucial to find ways to work collaboratively and establish clear decision-making frameworks.

### 2 Solution: Protocol Governance Launch
Given that the properties of DeFi require formalized on-chain governance [2], implementing a protocol for governance launch can address the concerns of centralized initialization. This would enable the entire community to propose and vote on the token's meta parameters. While exact designs can vary, a super-majority voting could determine the token/governance rules for the current program, while alternative tokens and programs could be created for every other proposals. This approach ensures that the community actively participates in shaping the token's development and governance structure, promoting decentralization.


#### 2.1 Example Implementation Details (using [excalidraw graphic](https://excalidraw.com/#room=932c1bfcf57ce64f4c26,YxanBJQ7ibS8ZyeqnhQOmQ) above):
- if there are 1000 accounts in a protocol, each account gets 1 vote
- after X slots, if there is a proposal with a super-majority vote, then it can be initialized as the governance for the current program
- otherwise, the voting process starts again, removing the accounts who abstained
- in the above, since a super-majority was not reached by the accounts, the process would restart with the 300+23+1 accounts who voted
- to ensure a 'filibuster' doesn't last indefinitely, the super majority threshold could adjust by the minimum decrement after each restart
- once the current program has been designated, minority vote proposals are available to be intialized as well

#### 2.2 Alternatives Considerations (for informal community polling):
- how long, e.g X slots (3 days, 1 week, 2 weeks)?
- 1-account-1-vote? asset / stake-weighted voting?
- super-majority definition? 50%, 60%, 100%?
- sybil guarded: staked-quadatric voting bonus with time cutoff for applying further discounts (this assumes the protocol already has some built-in insurance/other staking mechanism)
- e.g. all users get 1 vote, but staked users get concave `f(stake, stake_duration)` votes

#### 2.3 Pros of Protocol Governance Launch
- Fosters a sense of ownership and participation among users
- Promotes transparency and reduces the risk of a single point of failure
- Aligns with the core principles of decentralization
- Supports a fork-friendliness, skin-in-the-game strategy [2]
- Offers potential legal advantages by reducing the possibility of centralized control and manipulation
- Provides Sybil resistance through the super-majority rule and potential stake-weighted voting power bonuses
#### 2.4 Cons of Protocol Governance Launch
- Complex and time-consuming process of proposing, voting on, and implementing multiple tokens and programs
- Fragmentation of the project into numerous alternative tokens and programs could dilute the overall value and utility of the primary token
- Decentralized decision-making process may result in suboptimal choices if participants lack the technical expertise or foresight to assess the long-term implications of their decisions.

### 3 Open Questions

1. What is an adequate level of decentralization to avoid a single-point-of-failure, and how should decentralization be balanced with regulatory compliance across different jurisdictions?
2. How can the goals of decentralization and compliance be balanced in a roadmap for the development of decentralized technologies and systems?

### 4 Conclusion
The arc from centralization to decentralization in DeFi projects is critical to ensure that they align with the principles of openness and permissionlessness. While centralized initialization may be a more straightforward approach, it risks undermining the project's credibility and sustainability. A protocol for governance launch can help address these concerns by enabling the community to propose and vote on the token's meta parameters. While this solution has its challenges, it fosters a more decentralized governance structure, which can be advantageous for both early contributors and the entire ecosystem.

### 5 Appendix

#### definitions
- super-majority voting: higher threshold then simple majority (>50%) for passage. requires high consensus and is filibuster prone.

#### sources
[0] - https://nakamoto.com/credible-neutrality

[1] - Sridharan, Cindy. “Testing in Production, the Safe Way.” Copyconstruct, Medium, 6 May 2018, https://copyconstruct.medium.com/testing-in-production-the-safe-way-18ca102d0ef1.

[2] - Buterin, V. (2021, August 16) "Moving beyond coin voting governance" https://vitalik.ca/general/2021/08/16/voting3.html

[3] - "DeFi North Star" https://twitter.com/ChrisBlec/status/1644021824588488713

[4] - https://twitter.com/EugeneProko/status/1592608847444992001

[5] - https://twitter.com/lex_node/status/1644708286195703810

[6] - https://www.coincenter.org/treasurys-new-defi-risk-assessment-relies-on-ill-fitting-frameworks-and-makes-potentially-unconstitutional-recommendations/