Not Everything is Decentralized – The Daily Gwei #39

https://thedailygwei.substack.com/p/not-everything-is-decentralized-the


There was a copycat YFI token spun up over the last 24 hours called YFII that has caused some divide in the DeFi community. This divide has led some people to call this copycat token a scam which then led to what happened just a few hours ago – Balancer blacklisted the YFII/DAI pool from its front-end interface.

Now, of course, people are in Balancer’s Discord server saying that Balancer isn’t “decentralized” or is going against what DeFi is meant to be – I think it’s more nuanced that. There’s a key difference between the decentralized smart contracts that live on Ethereum and the centralized front-end that users interact with to access those smart contracts. For example, anyone is able to directly interact with the Balancer contracts via various means (using Etherscan, MyEtherWallet/MyCrypto or a third party app) but obviously the way most users will interact with them are by using Balancer’s official front-end. I actually wrote a guide on how to interact with the Set Protocol smart contracts using Etherscan and MyEtherWallet if you wanted to see what this looks like in practice.

This begs the question – are the protocol creators/maintainers (who also maintain the front-end) expected to remain “neutral” in these cases? Or are they meant to be the arbiters of what is considered a “scam” and what isn’t? I think it’s unfair to expect the maintainer of a front-end to be held to some gold standard of having to be totally “decentralized” and let scams/frauds run free on their platform – that is not what it means to be “DeFi”. If people want to buy a token via a DEX like Balancer, they still can by using the smart contracts but people shouldn’t expect the centralized front-ends to remain neutral.

Though, taking the other side of this, we can also look at it from a user perspective. Imagine that a user was providing liquidity to the YFII/DAI pool on Balancer and they went to check on it today only to discover that the pool is gone from the front-end. Now, of course, this user is going to panic and immediately think that they’ve been scammed or their money is lost. The only choice they now have is to either try to figure out how to interact with the contracts manually or go through support channels. The weird thing here is that those support channels are usually the team themselves so if the team removed the pool from the frontend because they thought it was a scam or fraudulent, would they even help this person to retrieve their funds? Would it be up to the community to help in this case? I don’t think this is the case with the Balancer team/community but it could happen in other communities!

Uniswap has also been struggling with this issue for a while where users were unhappy with the insufficient warnings displayed on Uniswap’s front-end about scam tokens. This is because on Uniswap you can enter the contract address of a token and it’ll pull the ticker (such as ‘ETH’) and display that for the user. Scammers tend to play on this by creating new token contracts of popular new tokens and use the same name so that when a user enters in the fake contract address, they believe that it’s the real one (though Uniswap has much better warnings now). Though, this only happens if Uniswap hasn’t verified and added the token to the dropdown menu themselves.

What I would like to see more of is projects hosting their front-end on services like IPFS or developers forking the front-ends (if open source) and creating a vibrant ecosystem that taps into these contracts. We already do see this happening to some extent with services like InstaDApp, Zerion and ZapperFi allowing users to interact with different protocols outside of the “official” front-ends. This is obviously great for decentralization and gives users multiple platforms to choose from.

Have a great day everyone,
Anthony Sassano


All information presented above is for educational purposes only and should not be taken as investment advice.


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Exploring Governance in Ethereum – The Daily Gwei #37

https://thedailygwei.substack.com/p/exploring-governance-in-ethereum


Recently, with the launch of yEarn/YFI and COMP, people have been getting really excited about decentralized governance systems again – well, more excited than they have been with all the DAO activity happening lately. In today’s piece, I’m going to explore the different kinds of governance systems out there in the context of blockchains.

Just a note: I’m not going to cover yEarn/YFI in detail in today’s piece so if you want to learn more about it then you can read this excellent piece from Daryl Lau. You can also check out information about Yield Farming both YFI and other tokens here.

When it comes to governance in the context of blockchains, there are two core types – binding on-chain governance and off-chain governance. “Binding on-chain governance” is when a blockchains rules can be changed by token holders (such as in Polkadot) and off-chain governance is when those rules cannot be directly changed by token holders – rather, they are changed by an off-chain process (that can also use on-chain processes as a signal).

The Ethereum blockchain itself does not have any form of binding on-chain governance so ETH holders cannot directly change the protocol rules by all banding together to vote with their coins. For the protocol’s rules to change, it has to go through an off-chain governance process (via Ethereum Improvement Proposals) that involves a number of diverse parties (developers, ETH holders, community members, ecosystem spokes/projects, and miners/other network participants). Ethereum Improvement Proposals (EIPs) are changes that can be proposed by anyone and follow a defined process that eventually ends in the EIP moving to an ‘Accepted’ state. Once an EIP is in the ‘Accepted’ state, Ethereum client developers will code up an implementation of it for inclusion in a future network upgrade (hard fork). A network upgrade date is typically set based on a block number sometime in the future. Once that block is mined (and if everything went well with the upgrade) then that EIP will be live on the network.

Projects built on top of Ethereum can use either an on-chain, off-chain governance mechanism or no governance mechanism at all. For example, Uniswap v1 does not have any governance built in – the smart contracts will simply live on Ethereum forever and cannot be altered (unless someone was able to gain control of the entire Ethereum network of course). On the flip-side, all parameters for projects like yEarn can be changed by YFI token holders through a binding on-chain governance process. Other examples include MakerDAO where MKR holders can change parameters such as the stability fee and add new collateral types as well as Compound where COMP holders can alter things like collateral ratios for assets.

Personally, I’m not a big fan of on-chain governance for layer 1 (aka the blockchain itself). I won’t dive into every reason as to why I’m bearish on the idea but the main reason is basically that I believe on-chain governance systems are just plutocracies dressed up in fancy tech. You can just look at the token distribution of these new on-chain governance chains for proof – the distribution is typically centralized in a few big players hands. Additionally, if the base layer is at the mercy of a small set of token holders then that means every app built on top is also at the mercy of those same token holders.

Speaking of token holders – getting a “fair distribution” of tokens among a wide and diverse set of people is also incredibly hard. What’s even harder is incentivizing these same people to actually participate in the governance process and using their tokens to vote (instead of just speculating). This isn’t even taking into account how difficult it is to get a bunch of people to actually agree on something! The best token distribution that I’ve seen so far was the recent YFI yield farming event that basically launched with no founder or team allocation, no pre-mine, no investor/VC tokens – just a simple fair launch for everyone to participate in. This has actually resulted in an amazing distribution of token holders so far (note that there are currently only 30,000 YFI tokens in existence).

In saying all of this, with different apps on Ethereum now becoming so intertwined, it begs the question: can one app that is governed by token holders be compromised to bring down the majority of the network? Well, we can take Maker as a simple example here. Dai is used in basically every app on Ethereum as it’s a core building block of DeFi so what happens if the Maker platform is messed with in some way by token holders? In theory, MKR token holders could vote to do things like change the oracles so that they reflect a price of $0 (causing liquidations) or directly drain the vault of ETH. Though, in Maker’s case, there is a delay of 12 hours on changes going through once approved by governance. Though do note that this delay can also be changed by Maker governance!

Obviously governance isn’t exclusive to crypto-networks/blockchains – these are issues that humanity has been dealing with since we came into existence. What blockchains do enable are new ways to coordinate using both cryptoeconomic and social incentives in a globally distributed way. Which way is best? Only one way to find out!

Have a great day everyone,
Anthony Sassano


All information presented above is for educational purposes only and should not be taken as investment advice.


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