Decentralized governance is a wonderful thing. Unless, of course, a few whales have enough tokens to sneak through self-serving proposals.
That's the argument being made about a proposal on decentralized exchange Uniswap that would give analytics firm Flipside Crypto $25 million in funding over two years. Uniswap and other decentralized finance (DeFi) protocols—which facilitate cryptocurrency lending, trades, and other transactions without traditional intermediaries—issue "governance tokens" that allow people to propose and vote on features and spending.
Dune Analytics sounded the alarm as the proposal looked set to pass a vote expiring this evening. "Grants should go to community members, not service providers," it tweeted.
Flipside's proposition was that UNI token holders would tap funds from the protocol's treasury to bestow it with a $15 million grant. Assuming the program was successful, the grant would be re-upped for $10 million the following year. Half of the funding amount would go toward bounties—not the bug bounties for hackers who find flaws in the code, but to new Uniswap users eager to become analysts and learn to more effectively participate in the DeFi protocol's ecosystem. The goal was to, first, attract new users, and, second, keep them.
It anticipated 900 new members with more UNI tokens staying within the ecosystem, rather than being cashed out.
Flipside, uncoincidentally, already funds similar programs for Aave, Yearn, and Uniswap. The proposal would allow someone else to fund the service, though the proposal notes that other analytics providers, such as Dune and The Graph, would also be eligible.
So far, so good. Or, at least, reasonable.
However, the remaining half of the grant would go completely to Flipside to run the program, including full salaries for seven staff members and partial salaries for another seven. It would then use the yield earned via the program to keep funding itself. Essentially, Flipside would leverage the Uniswap governance process to become the protocol's official service provider of continuing education—and get paid for it.
Moreover, the seven-member allocation committee, charged with generating a 30% return on the provided funds, and the three-member oversight committee, responsible for voting on whether the program should continue into a second year, both featured representation from Flipside, but no other analytics firms. If Flipside representatives voted as a block in either committee, they'd need only to convince one other member to vote alongside them in order to get their way.
Dune Analytics, a Flipside competitor, took issue with that.
PSA to all $UNI holders 🚨🚨🚨
A @uniswap governance proposal that will let @flipsidecrypto manage up to $25M in $UNI tokens and use yield to fund their own operations is about to pass in <24 hours with almost zero community attention.
Please help RT.https://t.co/BHXQGt58EA
— Dune Analytics (@DuneAnalytics) August 19, 2021
“This proposal is de facto giving [Flipside Crypto] single provider control of the allocation committee and the oversight committee, which makes little sense for driving forward UNI analytics broadly,” Dune Analytics CEO and co-founder Frederick Haga told Decrypt.
Conflicts of interest like this have been a common theme throughout Uniswap's governance process.
A similar instance occurred last month during the controversial "DeFi Education Fund" proposal, in which the grantees sold $10 million in UNI tokens shortly after having their proposal passed. The fallout even led to the creation of a similar initiative called the "Builder-First Legal Activism DAO" launched by DeFi founders and a crypto-specific legal group called LeXpunK.
"Without guide rails [or] transparency in the process, even absent outright conflicts of interest or malfeasance, you get into scenarios where everything becomes a perceived conflict of interest because there is a lack of faith/loss of trust. We can see this real-time creating a lot of friction in their governance process," a representative of LeXpunK told Decrypt regarding Flipside's latest proposal.
After Dune Analytics, other members of the crypto community also voted against the proposal.
Robert Leshner, CEO of DeFi lending protocol Compound, agreed with Haga, as did other major UNI token holders, among them the Dharma and Argent wallet teams and PartyDAO's John Palmer. All have voted with their tokens against the proposal.
Yet they face an uphill battle. At the moment, the vote is narrowly due to pass, thanks in part to strong votes from the university blockchain organizations, two of whom will be named to the allocation committee. Blockchain organizations from UC Berkeley, Stanford, Penn, Michigan, and MIT have contributed a combined 19.3 million UNI tokens—40% of the total.
Dune has publicly pleaded with these organizations, as well as the top voters—Variant Fund founder Jesse Walden and Slingshot Finance COO Kenneth Ng—to rethink their "yea" votes.
"Funding the operations of one single provider when the market is full of analytics services like @DuneAnalytics, @graphprotocol, @tokenterminal, @nansen_ai, @Covalent_HQ and more makes no sense [for] $UNI holders nor analytics community members," Dune tweeted.
But this is DeFi, where people with the most money get to make the decisions. Whether they make sense or not.