Nikolas Sargeant
Decentralized finance is an exciting industry to make money. However, it is also a vertical where governance is in the hands of users and token holders. Finding new ways to compound both aspects is crucial and doesn't require intermediaries.
The New Era of DeFi Governance
People involved in decentralized finance projects will often receive native protocol tokens. Those tokens can be sold on exchanges for other cryptos, although they also hold certain rights and benefits. The tokens may have a monetary incentive depending on the protocol, but most will primarily focus on governance. With the help of a Decentralized Autonomous Organization (DAO) structure, all token holders have a say in the project and its future. It is decentralized voting and governance at its finest.
That said, the DeFi industry also struggles with the governance aspect. There is lower governance participation when token prices fall due to crypto market conditions. For instance, Uniswap's UNI token soared to over $40 after its launch but trades for less than $7 today. Many people sold their tokens - and the governance rights - to the highest bidder once momentum soured, focusing on the financial aspect rather than contributing to the project.
A new approach making inroads throughout 2022 is "vote locking". Through that process, users can lock tokens for weeks/months/years to ensure there is a transparent commitment to the protocol. Various projects embrace this concept, including Frax Finance, Curve DAO, Yearn Finance, etc. In addition, "vote locking" can enhance the yield generated by these protocol tokens. As such, the tokens provide governance rights, long-term commitment, and boosted rewards from protocols and pools.
It is plausible to assume there will be numerous iterations of this idea. Some DeFi protocols may opt for locking tokens but only boosting either governance rights or rewards, but not both. Others may do both and offer flexible locking periods. It is a powerful concept that, when implemented correctly, can elevate decentralized finance to a new level.
Having The Best Of Both Worlds
Some DeFi protocols already go all-in on maximizing pool token yield and enhancing governance rights through vote locking. One example is Aura Finance, which aims to bring this functionality to the broader Balancer ecosystem. Balancer is one of the many multi-chain decentralized finance protocols. It runs on Ethereum, Polygon, and Arbitrum, with a Total Value Locked of over $1.5 billion. Users provide liquidity to the protocol to earn trading fees and BAL rewards and govern the protocol.
What Aura Finance provides is the same, but with the addition of AURA token rewards. Those native tokens can be vote-locked for the Aura Finance protocol. However, users can also direct incentives to Balancer gauge with veBAL. A Gauge is a contract determining the allocation of Liquidity Mining tokens on Balancer.
In essence, users gain more say in Balancer and Aura Finance while receiving more rewards. It is an intelligent way to ensure users are committed to Balancer and AUra Finance long-term with ongoing governance and yield incentives.
Harnessing Decentralization
The core aspect of decentralizing governance is to establish a solid community. Many people are enthusiastic about their favorite DeFi projects, while others may need extra convincing. Compounding financial and governance rewards may be the next big thing in this industry vertical.
Directing incentives and parameters across multiple protocols - in a trustless manner - captures the essence of decentralized finance. It is for the people, by the people, without intermediaries. Smart contracts offer transparency and allow for innovative approaches. Meta governance can become a powerful trend in DeFi, especially if projects build on already established protocols.
