Governance Token Holders and DAO Participation Challenges

Governance Token Holders and the Complexities of DAO Participation

In the realm of decentralized finance (DeFi), the actions of governance-token holders often spark intense debate. Recently, a group of these holders proposed the creation of a yield-bearing product on the Compound lending protocol. This initiative, however, was not labeled a “governance attack” by Dennison Bertram, the CEO and co-founder of Tally Protocol. Bertram emphasized that the lack of engagement from other COMP token holders does not equate to an attack on the governance structure.

According to Bertram, the smart contracts governing these proposals were not compromised, and the actions taken by the group were entirely within the established rules of the decentralized autonomous organization (DAO) managing the protocol. This incident highlights the imperfections inherent in the democratic processes that govern DAOs and points to the necessity for improvement.

“Someone had a strong opinion that deviated from social norms, and they undertook the necessary steps to push their proposal through,” Bertram explained in a recent interview. “Many who would typically oppose such initiatives simply did not participate.”

A notable example is the recent proposal put forth by the pseudonymous figure known as Humpy, who leads the Golden Boys. Their suggestion to create a new product, dubbed goldCOMP, ultimately faced backlash and was agreed to be rescinded. The voting participation for this proposal was alarmingly low, with only 49% of eligible participants casting their votes.

This trend of low participation rates has not gone unnoticed by industry observers. In response, Tally Protocol has announced plans to enhance engagement in DAO governance, aiming to address the significant challenges associated with low voter turnout. The protocol is set to launch a testnet within the coming weeks, which is designed to incentivize active participation among token holders.

Tally has successfully raised two funding rounds in 2021, focusing on the development of governance dashboards and tools for DAOs. Through a novel approach known as governance staking and restaking, the protocol enables users to mint Tally Liquid Staked Tokens (tLSTs). These tokens accrue passive, auto-compounding yield while allowing DAO participants to retain their governance rights.

By staking their governance tokens with Tally, users can earn tLSTs that generate passive income while still retaining the ability to vote within the DAO. This innovative mechanism ensures that token holders are rewarded for their active participation rather than simply holding tokens and waiting for favorable market conditions to sell.

“People need to be compensated for managing these billion-dollar organizations,” Bertram stated. “Not only do participants not receive payment for their involvement, but they also invest their personal time in reading forums, digesting proposals, auditing code, and covering their own voting expenses.”

Bertram further noted that fluctuations in token values can lead to misaligned incentives within the DAO ecosystem. “DAOs can falter dramatically at both extremes. If the token price plummets to zero, the project becomes defunct. Conversely, if the price skyrockets, participants may sell their tokens to maximize financial gain,” he explained.

This behavior underscores the essential need for participants to receive compensation that aligns with their contributions. The Tally program diverges from traditional dividends, which are distributed to all shareholders regardless of their level of participation. To distinguish DAO tokens from securities—something the SEC frequently scrutinizes—it’s crucial that token holders are rewarded in proportion to their efforts.

“By linking economic incentives to actual performance, we can foster a community of more engaged and driven participants,” Bertram articulated. “After all, no one is managing organizations with the market capitalization of Compound for free. With a market cap of approximately $450 million for the COMP token, it is clear that contributors deserve fair compensation.”

Ultimately, what the Tally Protocol proposes is a candid acknowledgment of a fundamental truth: those who operate and maintain these protocols must receive value that reflects their contributions to the organization.