It’s hypocritical to accuse parties of running a “governance attack” against a DAO when voter participation is low, the co-founder and CEO of Tally Protocol said.
In order to create a better DAO governance environment, stakeholders need to be incentivized, just like in the traditional finance world.
You can’t blame people for playing by the rules. And the recent resolutions by a group of governance-token holders to create a yield-bearing product on the Compound lending protocol were not a “governance attack,” according to Dennison Bertram, CEO and co-founder of Tally Protocol.
Just because other COMP token holders responded with apathy doesn’t make Humpy and the Golden Boys’ proposal an attack, he said. Smart contracts were not exploited, and the actions taken were within the rules of the decentralized autonomous organization (DAO) that runs the protocol.
What it shows is that the democratic process of governing a DAO is imperfect and needs improvement.
“Someone had a really strong opinion that was outside social norms, and they did the requisite legwork necessary to get it to pass,” Bertram said in an interview. “Many of the people that you should expect to vote no on something like this didn’t show up.”
Take, for example, the latest proposal from pseudonymous Humpy, the Golden Boys’ ringleader. The proposal to create goldCOMP – which they agreed to cancel as part of a resolution – garnered only a 49% participation rate in the voting process.
This lack of participation has been noticed by many observers of the DeFi industry.
Bertram said the recently announced Tally Protocol, which will be in testnet within the next couple of weeks, is an attempt to address the low participation and attention in DAO governance by creating incentives for active engagement.
Tally has previously raised two rounds in 2021 in order to build out DAO governance dashboards and tooling.
Through a process called governance staking and restaking, the protocol allows users to mint Tally Liquid Staked Tokens (tLSTs), which are tokens that earn passive, auto-compounding yield while maintaining governance rights for DAO participants, Tally explained in a post.
By staking governance tokens with Tally, users receive tLSTs that earn passive yield and can still vote back at the DAO.
This mechanism ensures token holders are rewarded for their participation rather than just holding tokens passively and waiting for the price to hit the right amount so they can exit.
“People need to be paid to run these billion-dollar organizations,” Bertram said. “Not only do you not get paid to participate in these organizations … you actually have to spend your free time reading the forums, digesting these posts, understanding what they mean, auditing the code, showing up, and actually paying your own money to vote.”
Bertram points out that swings in token prices can result in misaligned incentives.
“DAOs fail at both ends of the spectrum. If the token price of a DAO goes to zero, it’s dead. If it goes to infinity, everybody sells their token because that’s the maximum financial opportunity,” he said.
That behavior underlines the need for participants to be compensated proportionally for their contributions.
The program also differs from a dividend, which is given out to any shareholder, even completely idle ones. To separate DAO tokens from securities – which the SEC often accuses them of being – DAO token holders must be rewarded in proportion to their efforts.
“By attaching an economic incentive that’s proportional to performance, you drive towards more sophisticated, more attention-paying, more driven participants,” he said.
After all, nobody is doing all this work in TradFi organizations with the market cap of Compound for free. The COMP token has a market cap of about $450 million, according to CoinGecko data.
“What the Tally Protocol does is really say the quiet part out loud: The people who operate protocols need to have value returned to them in proportion to their contributions to the organization.”
