Crypto Research

Yearn Finance Comic – Part 4

What is governance in DAO? How does governance work in Yearn Finance?

Let’s explore.

Table of Content

Governance

Governance Token

Good and Bad

On-Chain and Off-Chain

Yearn Finance Governance

In Conclusion

Governance

Image credit: https://examples.yourdictionary.com/ancient-greek-government-4-main-types-explained

The idea of governance can be dated back to the ancient Greek government. Although the ancient Greek textbook categorized four common types of government: Tyranny, Oligarchy, Monarchy, and Democracy, people prefer democracy more in the modern-day because it gives everyone a fair share to live under the ruling in theory. 

Tyranny, Oligarchy, and Monarchy control resources and are more concentrated within a small group of people. Similar to centralization, they are ruling through controlling. It doesn’t mean democracy does not control anything. Democracy gives people a choice and an opportunity to express their views about the future.

Of course, it does not mean democracy is perfect, as many people dispute that democracy is bad because people can be easily swayed by a good public speaker or popular leader.

Governance Token

Image credit: https://academy.shrimpy.io/lesson/what-are-governance-tokens

Since crypto communities or DAOs are more toward democracy, they provide every member with the right to vote and to help navigate the directions of the future.

Governance token becomes a way to accomplish such a mechanism, either through controlling the system they created, soliciting more talented contributors, financing future projects, or accumulating investments. You can check out more from my article here.

Good and Bad

If the governance token is a vote without being able to convert it into monetary value, it works to push decentralization, collaboration, and inclusive and efficient community development.

If the governance token is a trading utility token, it works toward selfishness, lacks accountability, incubates whales, and becomes a more centralized community.

However, it does not necessarily become good or bad just because of the token governance usages. It also depends on actions on core teams to carry out.

Image credit: https://www.coinbase.com/learn/market-updates/around-the-block-issue-13

Many projects or communities use hybrid approaches to have their governance token as voting rights while incentivizing members with monetary compensations.

However, such an approach can incubate a plutocracy community in which tokens are held by a small group of people, and manipulating the supply and demand of tokens will result in unfairness and rug-pulling events.

Such events are very common in the crypto space. It does not represent the entire picture of the crypto space, but they denounced the credible few projects by scamming many innocent investors or crypto enthusiasts.

On-Chain and Off-Chain

It doesn’t seem necessary for the community to use on-chain governance just because it makes it more accountable through the blockchain mechanism. Off-chain governance is an informal way to carry out decision-making processes if members believe that it is more effective than on-chain governance. 

Bitcoin and Ethereum are off-chain governance processes to update their protocol. It doesn’t mean they operate centralized. If such a way makes their decision more effective, then it is a way they do their business.

Yearn Finance Governance

Image credit: https://medium.com/iearn/yearn-governance-explained-proposals-yfi-token-and-execution-113ec86c3a3f

Yearn Finance governance is a hybrid of the on-chain and off-chain governance processes. Off-chain proposal and discussion processes with on-chain voting processes. 

You can learn more about their governance here.

In Conclusion

Governance is a way to make the community toward democracy. Different communities will have their own way of carrying out the processes. Although there are many scams existing in the crypto space, keep educating yourself to avoid such scams and join governance processes to make a future.

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