Venus Protocol, with its lofty goal of democratizing finance on the BNB Chain — and potentially the world — is a very interesting experiment. Experiments, particularly the kind involving billions of taxpayer dollars, deserve hellacious scrutiny. As someone who has spent years navigating the complexities of traditional finance, I see some glaring governance flaws that, if left unaddressed, could undermine the entire project.
Whale Watching: Concentrated Voting Power
Decentralization is the siren song of DeFi, but the reality is often much less glamorous than the utopia. Like many DeFi projects, Venus Protocol originally launched with a focus on fairly distributing XVS tokens. Instead, this has led to a huge concentration of voting power in the hands of a small number of large holders.
Think of it like this: imagine a national election where 5% of the population controls 60% of the votes. Warren, would you consider that an accurate reflection of the will of the people? Of course not!
This isn’t to say we want to demonize all the “whales.” This is simply to acknowledge the greater risk. It allows a well-connected small group to on their own force through the community harmful or expensive proposals that primarily benefit the smaller group. We've seen it happen in traditional finance – remember the 2008 crisis? – and we can't afford to repeat those mistakes in DeFi.
We should look find mechanisms that reduce the harm caused by whale voting. Quadratic voting, in which the cost of each additional vote you buy increases exponentially, making it more expensive the more votes you buy, could be one possible direction. Another is delegation, albeit with smart and strong safeguards against collusion and to guarantee real accountability and representation.
Regulatory Blind Spot: A Ticking Time Bomb
DeFi is inherently regulatory arbitrage game that always works in a legal grey area. Each think that they have insulated themselves from the ramifications of their actions. This is dangerously naive. Regulators are circling, and they won't hesitate to crack down on protocols that don't take compliance seriously.
That makes Venus Protocol, which has a synthetic stablecoin, VAI, a juicy target. Stablecoins are already facing immense scrutiny, and we know that algorithmic stablecoins have a history of dramatic collapses. While the over-collateralization mechanism provides some protection, it is no panacea.
What the protocol must do is take a proactive approach with regulators, showing that TNCs have taken their commitment to transparency and regulatory compliance seriously. This could require KYC/AML measures, for better or for worse, and even if it is counter to the spirit of decentralization. The other option – getting crunched by regulators – is much worse.
Think of the early days of the internet. From the beginning, many – including myself – thought that it should be a totally free and clear, unregulated space. That dream soon fell apart as nefarious and predatory behavior spiked alongside dangerous misinformation. DeFi is at a similar crossroads. Without proactive governance and regulatory involvement, it has the potential to devolve into a Wild West.
VIP Bottleneck: Slowing Down Innovation
Venus Improvement Proposals (VIPs) are the lifeblood of the protocol, propelling upgrades and helping to pivot with the ever-changing market. The current process is slow, and especially in the area of health technologies, is quite the bottleneck and binder to innovation.
It’s a little like a business with one too many vice presidents. A great idea is stuck in interminable meetings and approvals while the competition zooms forward.
The new fast-track VIP system is still complicated and time-consuming and should be simplified even more. At the same time we must empower smaller teams to experiment and iterate quickly with appropriate levels of oversight. We might instead institute a system of state “innovation grants.” This would give developers the freedom to build new features and adequately test them without having to go through the full VIP process.
Not only must the actual voting process be made efficient and effective. Today, it can take days or weeks to get a unanimous agreement on significant rulemaking proposals. Unfortunately, this is just not fast enough in the quickly iterating world of DeFi. We really do need to think about how we can make the voting process quicker, like implementing snapshot voting or liquid democracy.
Consider the world of Formula 1 racing. Those opportunities are rich in promise with teams always innovating, iterating and pushing the boundaries of what’s possible. They don’t put off changes to their vehicles for months like we do – they change things in real-time. DeFi protocols will have to take a similar approach, focusing on being agile and experimental.
We have to address these governance issues to make sure that Venus Protocol can live up to its potential and help the most people. The future of DeFi depends on it. Now is the moment for our community to come together, have the difficult conversations and discussions that are needed, and call for real change.
