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DeFi governs token value capture

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Manage the value of tokens that people tend to overlook.

Original title: value capture of DeFi governing tokens

Blue fox notes

Each token of the blockchain project has its own purpose. There are value storage directions, such as bitcoin, which can be used to store value and circulating value. (note: of course, bitcoin is still far from mature. It is mainly for investment or speculation, supplemented by value storage and circulation.)

In addition to bitcoin, some tokens pay for transactions, and ETH pays for gas. There are also some as the right to work, only pledge a certain amount of tokens can participate in the network out of the block, such as a variety of PoS tokens (such as EOS, Harmony, etc.); Others capture transaction fees, such as kyber, by destroying tokens to capture value. There are also tokens to governance, such as MKR, 0x tokens. Of course, most tokens have more than one purpose. Some tokens, such as MKR and Kyber, both capture fees and can be used for governance.

The fundamentals of the value of tokens that capture transaction fees are often derived from the volume of their business, such as the size of the transaction, and the premium is derived from the expectation of future growth in their business, which is easy to understand. What blue fox notes wants to talk about today is the governance value capture of DeFi governance tokens, whose game value is not as obvious as transaction cost, so it is easy to ignore.

The premium for DeFi governance tokens is largely due to the size of the assets locked in by the project itself, which is also related to security. With the increase of the size of locked assets, the game demand for governance also increases.

The premium from the governance game

Early blockchain projects, such as PoW's bitcoin, struggled to agree on governance. Disagreements between the bookkeeping miners and the core developers tend to lead to extreme hard bifurcations.

Many have since learned lessons, such as the extent to which governance tokens can ease decision-making disputes. The DeFi project also has some governance tokens, such as MKR, COMP, Kyber, and so on, that can be used to solve problems. The DeFi project currently has less than $1 billion in pledged assets (currently more than $700 million, down from a high of more than $1 billion as ETH declines) and is relatively small. If future DeFi projects lock up assets worth billions, billions, or even hundreds of billions of dollars, the stakes are high. As bitcoin has grown in value to the tens of billions of dollars, the debate over its path has grown.

Suppose that if the lock-up on Maker reaches $100 billion and DAI reaches $40 billion, then any measures taken by Maker, such as the stabilization rate adjustment, the collateral adjustment, etc., will be of great concern. Once there is no consensus or a relative majority, and the divergence of community widens, then there is inevitably a need to control the direction of governance. All parties not only need to mobilize people to support their own schemes, but also need to buy MKR in large quantities in order to realize the control over the decision-making of different factions, which will bring a premium to the governance token, and all parties will worry that one party will gain the absolute control. This game gives the governance token value.

The current MKR token captures some of the stabilization costs, but in the long run, its more important value capture may come from a huge need for governance.

Special events bring about a possible spike in DeFi governance tokens

As a common chain, the governance of bitcoin is different from that of the intelligent contract platform. Where miners' power is decisive in bitcoin's hard fork, the hard fork of the smart contract platform may depend more on the ecosystem on it. In the beginning, the public chain provided the basic platform for the operation of protocols and applications, but with the growth of business and the interweaving of user interests, the protocols and applications based on ecology have more say.

If ethereum has a hard bifurcation due to something like ProgPoW, the choice of the DeFi ecosystem is critical. DeFi ecological projects such as Maker, Compound, Synthetix, Uniswap, Kyber and so on have chosen that chain, which is actually a positive chain and is a more valuable chain.

Due to the importance of protocols such as Maker in DeFi, the final decision of these DeFi projects is significant in the event of a hard fork. And these final decisions need to be implemented through governance. This means that the bifurcation on both sides in order to gain advantage, could try to grasp the DeFi management control of the project, especially for MakerDAO control DeFi foundation project, this will lead to the need for governance tokens (such as MKR) increased in a short period of time, in order to win, is likely to purchase a large number of governance tokens (e.g., MKR), which won the governance decisions, such a short period of time to MKR DeFi governance tokens, such as a large number of demand, may lead to short-term spikes in the price. Of course, this particular event is not common and cannot be regarded as a normal value.

That is, the value of the governance token depends not only on the cost of its capture in the market, but also on the value of governance. Once the extreme game occurs, MKR, COMP, Kyber and other governance tokens become particularly important. Even without extremes, to secure a DeFi project, the governance token must capture enough value to keep it secure, as long as the size of the locked assets is large enough. This is also the value of the governance token.

Governance attacks increase the demand for governance tokens

Some time ago the bZx incident showed you the power of flash loans and the power of DeFi composability. Future attacks on DeFi projects will certainly not go away. If the demand for governance tokens due to the dispute of development direction is a normal game, while governance attack is a malicious behavior.

After the flash loan attack occurred some time ago, in order to prevent the governance attack on Maker, some MKR token holders withdrew a large number of MKR tokens from the Uniswap pool, mainly to prevent attackers from carrying out governance attacks by purchasing MKR through the flash loan strategy. Of course, later on, as MKR went through a delay cycle, new code had to be packaged by modules before it could be deployed to the system and waited for a 24-hour review cycle, reducing the likelihood of governance attacks.

But it is not clear what will happen next. Once there is the possibility of a governance attack, it will create a large demand for governance tokens, which will drive up the price in the short term. But this demand is not conducive to project development and sustainability.

conclusion

The value of DeFi governance tokens is derived not only from transaction costs but also from the value of its governance game. First, the conventional governance game demand, in order to achieve the governance balance. The second is the demand of governance game due to special events, such as the hard fork of the bottom common chain or the governance attack, which may lead to a huge increase in the demand for governance tokens.

As the value of the DeFi project lock-in increases and the importance of the DeFi project to the entire ecosystem, the ability of the governance tokens to capture value will increase, which will become more evident over the next two to three years.