October 31, 2024
What to Do About Uniswap's DAO Drama
Dear Subscriber,
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| By Jurica Dujmovic |
Last week, I took you on a tour through the controversy bubbling in Uniswap’s (UNI, “C+”) decentralized autonomous organization, or DAO for short.
As a reminder, Uniswap is decentralized. So there’s no single authority to make decisions. All choices are voted on by UNI token holders as part of the DAO.
The issue is that power is starting to consolidate, as more VC firms and big-foot investors exert their influence over Uniswap’s governance.
Here’s the crux of the issue: Without crypto’s core ideal of decentralization, Uniswap may not be able to survive.
Crypto purists will likely use other DEXes in their search for true decentralization. And there are more convenient centralized exchanges for traders to use.
And, as of right now, the means DAO members have to voice their discontent is limited.
In fact, their primary way to put their foot down is the nuclear option — defunding the Uniswap Foundation.
Obviously, I hope it doesn’t come to that. The market tremors from such a move would be tough to navigate.
But that got me thinking. How can the Uniswap DAO shift gears to address the threat of centralization?
In considering possible approaches, I came up with an interesting concept. At least, I think it is worth exploring.
I call it "Quadratic Delegation."
Imagine a hybrid system that could help protocols better balance professional expertise with community involvement.
Here's how it would work …
Rather than simply giving more voting power to holders with the most tokens — as is the case now — this system would give governance rights through a two-tiered system based on:
- How long a token holder has owned their UNI tokens
- How active a holder has been
Then, the cost of additional votes per holder would increase quadratically — i.e., squaring the number of votes.
For example, if one vote costs one token, two votes might cost four tokens, three votes would cost nine tokens, and so on.
The quadratic increase means it becomes exponentially more expensive to accumulate more voting power. In short, it would discourage large entities from dominating the voting process by simply buying more tokens.
To illustrate my point, I’ve created a simple graph you can interact with. And below is a still image as an example:
Long-term token holders would gain increased voting power but with a crucial twist: Their influence would grow based on the square root of their holding period, not linearly.
This approach would naturally dilute the immediate voting power of large VC positions. And on the other hand, it would reward genuine, long-term commitment to the protocol.
And that’s not all. Activity within the community — from participation in governance discussions and successful proposal submissions to consistent voting and more — would earn "delegation credits" that could be used to amplify voting power on specific issues.
Last week, I explained how one of crypto’s biggest VC firms — a16z — was responsible for 15 million votes for a new bridge. That was out of a total of 17 million.
I said then those numbers clearly showed a push toward centralizing power.
Now, imagine if a16z's 15 million votes were subject to this quadratic scaling. Its influence would remain significant … but not overwhelming.
Especially if their coins were more recently purchased.
Meanwhile, smaller holders who've actively participated in governance for years would see their voices meaningfully amplified.
Sounds like a win-win, right? And even more interesting is my idea isn’t just theoretical. Projects like Gitcoin (GTC, Not Yet Rated) have demonstrated the viability of quadratic funding in grant allocation.
If quadratic scaling is applied to decentralized governance, it could create a more nuanced power structure. One that preserves the benefits of professional investment and prevents plutocratic control.
However, Quadratic Delegation isn't a silver bullet. As with any deterministic system, those with sufficient resources and motivation could find ways to game it.
Large capital holders could fragment their holdings across thousands of wallets to exploit the square root scaling. In that case, we could see the creation of sophisticated "wallet farming" operations to accumulate holding-period bonuses. We may even see the establishment of proxy networks to aggregate voting power away from retail holders.
Yet, I remain cautiously optimistic. For me, the question isn't whether we can create perfect systems. Rather, I believe the focus should be on how to create better ones.
The key here lies not in creating an “ungameable” system. That's likely impossible. But we can make manipulation economically inefficient. This is how traditional financial markets evolved their regulatory frameworks, and it's how DeFi governance will mature.
In my Quadratic Delegation approach, that could take the form of several defensive mechanisms:
- First, on-chain identity verification using zero-knowledge proofs could make wallet fragmentation prohibitively expensive while preserving privacy.
- Second, we could implement "suspicious pattern detection" that automatically adjusts quadratic scaling factors when it detects coordinated voting behavior. Third, economic penalties for detected gaming attempts could include both voting power "slashing" and token lockups.
Now, let’s play “what if.” What if these measures were in place for the new bridge vote I used as an example last week.
Before it could deploy 15 million votes in a concentrated block, a16z would have needed to weigh the economic costs of either maintaining multiple legitimate long-term positions across several wallets — which is expensive and capital-inefficient …
Or, to get the same voting power, it would have had to risk detection and penalties for manipulation attempts.
Meanwhile, genuine community participants would face no such constraints.
Look, Uniswap has already revolutionized decentralized trading. I believe, with the right direction, its DAO can lead the next stage in crypto evolution and balance institutional expertise with genuine, decentralized community ownership.
That path needs to be charted. And soon. As more VC firms and TradFi institutions gain interest and access to crypto communities, we’re likely to see more attempts to centralize power.
Not only would that undermine crypto’s core ideology of decentralization and trustlessness. It would also create a volatile environment for average investors like you and me.
The path forward may be complex. But the DeFi community has consistently shown that with thoughtful design and collective effort, we can build systems that are both powerful and truly democratic.
But this is just my idea. I want to hear your ideas on how to solve this governance conundrum! How do you think Uniswap can go about protecting decentralization without limiting future growth?
You can tweet @weisscrypto and let me know!
Best,
Jurica Dujmovic
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