Hello Defiers and happy Friday. Here’s what’s going on in decentralized finance:
Compound Finance is introducing a governance token
Bullish signs in DeFi amid crypto market slump
PoolTogether tokenizes tickets
Loopring launches scalable DEX
and more 🙂
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Token Democracy Bringing Platform-Specific Coins Back
Compound Finance wants to decentralized governance by introducing a token to its system. The plan shows platform-specific coins are losing their stigma and becoming more sophisticated.
Compound Finance, the second-largest lending platform in DeFi after MakerDAO, is planning to distribute tokens among Compound shareholders in proportion to their stakes —initially, the coins won’t be available to the public. The goal will be for the coins, called COMP, to help management cede control of the protocol to the broader community.
In this new financial system, something as radical as a company’s management team democratizing decision making, has come to be one of the basic features expected of these companies. Any direct control or influence over code and governance is reviled. And that’s because it defeats the whole purpose of DeFi and Web3, which is to be trustless. That means users don’t have to trust banks and processors in the middle of transactions, and they don’t have to trust the teams building these dapps either.
Right now, Compound is further from the most decentralized extreme of the spectrum relative to other projects like Uniswap and MakerDAO, as its team can unilaterally change how the project works, and its code is not open source. A governance token would be a big step towards the more decentralized end of the spectrum.
There are variations of these so-called governance tokens, but the general concept is that they each represent one vote (1 token = 1 vote, not 1 person = 1 vote). That’s because in systems where people are represented by crypto addresses, identity is easily manipulated — as easy as creating a new crypto address. MakerDAO, 0x and Aragon are already using their platforms’ own tokens for governance. Kyber Network and Synthetix are also moving in this direction. [Read The Defiant’s post about it: Synthetix and Kyber Are Latest to Join DAO Wave].
Besides carrying voting rights, governance tokens often carry other benefits and are used for things besides voting. In the case of MakerDAO, MKR tokens get burned when they’re used to pay fees required to close out a loan on the system. This could be seen as an indirect dividend, as each time MKR is burned, the price is pushed up.
Not an Investment
This is a lot more sophisticated and nuanced than most of the so-called “utility tokens” of the ICO days. Projects introducing a token whose only function is to simply buy goods and services offered on the dapp are becoming less frequent, as it became apparent there was no real use for those coins, other than to sell them for ether and bitcoin. The market has caught on and the bar for projects that want to add a token is a lot higher.
Compound’s token will be used solely for its governance function and is not meant to be an investment, the company’s CEO Robert Leshner wrote in a post.
“It isn’t a fundraising device or investment opportunity. Until the decentralization process is complete, COMP will not be available to the public.”
Here’s how it works:
COMP, an ERC20 token, allows the owner to vote or to delegate voting rights to the address of their choice, meaning it’s not necessary to own COMP tokens to participate in governance.
Anybody who owns or has at least 1 percent of COMP delegated to their address can propose a governance action.
Proposals, which are meant to be executable code, are subject to a a three-day voting period. If the majority of votes and a 4 percent quorum approve a proposal, it can be implemented after 2 days.
Leshner declined to provide more details than what was disclosed in the post.
The two-day buffer before a proposal is implemented may be a lesson from the potential attack discovered on MakerDAO’s governance system, which would allow anyone with enough MKR tokens to create a proposal and vote to steal funds, without giving other token holders to react. This vulnerability pushed the Maker team to change the buffer time before votes are executed from 0 to 24 hours.
Tokens used to be mainly a tool for teams to raise money before delivering their product, causing a complete misalignment of incentives. It’s a positive development that in this new wave of Ethereum-based applications, tokens have the specific function of aligning the project with the community, by becoming a tool to vote.
DeFi Shows Improving Sentiment Amid Crypto Slump
Ether bulls are getting whiplashed. Last week, ETH crossed $280 and $300 was in the horizon. This week, Ethereum’s cryptocurrency has slumped 20 percent from those highs to a little over $220, causing liquidations on decentralized finance to spike and value locked to drop. But there are signs that traders are regaining confidence.
PoolTogether is Tokenizing Lottery Tickets
Users can now buy tokens to participate in the PoolTogether lottery. The protocol’s new plDAI and plUSD tokens represent ownership of tickets eligible to win prizes, and can be stored in users’ wallets and transferred to others.
Loopring Launches First zkRollup Exchange
Loopring, a protocol for scalable Ethereum exchanges, islaunching the Loopring Exchange on Ethereum mainnet. It’s the first publicly accessible exchange using the zkRollup technology.
Seagal was promised $250,000 in cash and $750,000 worth of tokens for touting an initial coin offering from a company called Bitcoiin2Gen. He agreed to settle the SEC’s allegations without admitting or denying wrongdoing, and will pay a $157,000 fine and the same amount in disgorgement.
Haseeb Qureshi of Dragonfly Capital says, flash loans are a big security threat, but they’re here to stay, “and we need to think carefully about the impact they will have for DeFi security going forward.”
Rocket announces it issued a loan backed by tokenized art.
Announcing Loan #3: 1,000 DAI to @reneil1337 against @josiebellini NFT Art 🖼 – 1st ever Crypto Art-backed loan 🎨 – 2 pieces of Josie + 1 @poapxyz from @EFDevcon as reputation – 6 months term, 15% interest (30 APR) More loans to come through soon NIx
February 26th 2020
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The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access at $10/month or $100/year, while free signups get only part of the content.
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About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.