Last Thursday, the billionaire founder of the Tron DApp platform borrowed $13 million worth of COMP, the governance token that gives owners a vote on how to run DeFi lending platform Compound.
Justin Sun then used those tokens to force a vote on a proposal to add the True USD (TUSD) stablecoin to the list of assets that can be put up as collateral for a Compound loan, with borrowers able to take out loans worth 80% of their collateral.
The next day, crypto developer GFX Labs connected the loan to the proposal, leading to allegations that Sun was launching a “governance attack” on Compound — essentially using his wealth to overwhelm the token-based voting procedures that are used to manage decentralized finance and crypto projects.
An unplanned TUSD proposal has been proposed @compoundfinance to set TUSD’s collateral factor to 80% (currently 0%) https://t.co/Xf2oOEKJya
— GFX Labs (@labsGFX) February 4, 2022
While the incident turned out to be less menacing than outraged crypto community members thought — Sun had discussed the move with lead developer Compound Labs for months, and the founder of the company and blockchain protocol defended the move — it showed very clearly one of the biggest threats to DeFi: vote buying.
While this story is spicy and interesting, borrowing COMP to launch a proposal isn’t a governance attack against the Compound protocol, for a few reasons: https://t.co/Fqxc9dDUEj
— 🦍 Leshner (@rleshner) February 5, 2022
Sun has been involved in similar controversies before, notably over a TUSD-related vote in the MakerDAO, a lending platform and stablecoin issuer, CoinDesk reported. In that case, a similar loan of MKR governance tokens was spotted before the vote, but were not used.
Another was the Steem Network battle, where Sun bought the vast majority of governance tokens of the blogging and social media project from two of its founders, Decrypt reported.
While it wasn’t fully decentralized, it was a proof-of-stake platform that was controlled by a group of witnesses chosen by token holders, who pooled tokens with them. The 20 largest pools govern the project, and pooled tokens can be reclaimed anytime. When Sun’s purchase was announced, the witnesses froze a large chunk of his tokens.
Enraged, Sun called it a hacker theft and convinced several major exchanges to vote with customers tokens to reverse the move. The fight escalated, with several exchanges reversing their votes. Eventually, Sun won control of Steem, but a large number of users migrated to a blockchain fork that replicated Steem but without Sun’s tokens.
Decentralized Vote Buying
A DeFi project is controlled by a DAO, or decentralized autonomous organization, which uses self-executing smart contracts to run every part of the business. This means everything, from changing interest rates to installing a software patch to fix a bug allowing hackers to drain millions of dollars, can take days or weeks to be approved.
See also: PYMNTS DeFi Series: Unpacking DeFi and DAO
Once a DAO is installed, no centralized control is needed, or even possible — at least in theory. However, the way the process works is generally that a certain percentage of token holders must vote to put a proposed change up for a vote, and then a larger percentage must approve it. This is generally run on the one-token, one-vote method. There are some vote-buying safeguards — quorums or giving extra voting weight to people who have held the tokens longer — but generally the percentages count only those who voted.
The problem with this method is that while it sounds democratic, it is actually plutocratic, Santi Siri, the founder of the nonprofit Democracy Earth (which issues governance tokens), told CoinDesk several years ago.
“It’s based on whoever has the largest amount of tokens or the largest economic weight,” he said. Token holders “don’t have any weight at all in the decision-making. The voting is pretty much irrelevant if a single whale can decide the outcome of an election.”
And because of the pseudonymous nature of blockchains, it is rarely possible to identify the whale in question — Sun was only identified in the Compound vote because he borrowed the COMP using a ten-figure wallet known to belong to him. If a wealthy person wants to do this quietly, all they have to do is break their votes up into small token denominations.
Bribing Proudly
This is often less than subtle, however.
Take for example Bribe Protocol, which is as subtle in its intentions as a sledgehammer. Its tag line? “Where DAO token holders get paid to govern.”
It explains the process this way: “Depositors stake governance tokens in the BRIBE pool. Bidders pay to borrow the entire pool to vote on governance proposals. The highest bid is distributed through the pool as income.”
Former Messari research analyst Ryan Watkins put it this way: “We wanted democratized finance, instead we got 3 layers of bribe protocols ultimately controlling plutocratic protocol governance systems.”
We wanted democratized finance, instead we got 3 layers of bribe protocols ultimately controlling plutocratic protocol governance systems.
Color me skeptical this is the end state of DeFi.
— Ryan Watkins (@RyanWatkins_) January 11, 2022
“Color me skeptical this is the end state of DeFi,” Watkins added. “It’s hard to argue the incorruptibility of these systems.”
Sure we may still get things like transparency, interoperability, and permissionless access, but it’s hard to argue the incorruptibility of these systems the way they’re governed today.
— Ryan Watkins (@RyanWatkins_) January 11, 2022
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