While Prop 10 was not without its issues, ultimately, we would rather make incremental positive improvement than no improvement at all.
3 min read
Published on June 24, 2020
Dharma is a voting delegation in the new Compound open governance system. We have decided to record our governance decisions in blog posts, so that the community can see our reasoning and voting record over time.
Adjusting COMP distribution speed to match Ethereum network block time and increasing higher-risk assets Reserve Factor (link)
Dharma Vote: Yes
This was a difficult vote for Dharma to make. We considered this proposal through two lenses:
1. Did this proposal occur via healthy governance process?
2. Do the proposed changes effectively accomplish the desired outcomes?
Lens 1: Did this proposal occur via healthy governance process
Emphatically no. While decentralized governance in Compound is new and formal procedure has yet to be ironed out, this proposal violates two commonsense governance norms:
1. Do not make meaningful protocol changes without facilitating a healthy discussion first
2. Do not lump multiple changes into a single proposal
Voting on proposals should occur after the proposer facilitates a healthy discussion (we propose at least 3 days, ideally at least 1 week). Currently, these discussions are taking place on Comradery, and to our knowledge there was not a dedicated thread for this proposal prior to it being put to a vote, nor was there (nor is there) a thread for any of the individual changes that have been lumped together. While the individual changes have been discussed in various threads, there was no single thread dedicated to these changes prior to the proposal, and blck should not have made this proposal without first giving the community the opportunity to discuss.
Moreover, bundling all of these changes into a single proposal is bad practice. We propose that a norm for Compound governance should be single-change proposals. This eliminates the risk of “pork barrel“, the practice of bundling special incentives into controversial legislation.
Lens 2: Do the proposed changes effectively accomplish the desired outcomes?
We understand the motivation for this proposal to be: combat unhealthy COMP-harvesting. In our view, COMP-harvesting is caused by several factors:
1. COMP is trading at a higher value than anyone expected, causing unexpected distortions to market dynamics
2. Given the higher COMP price, the value of COMP that is distributed on a daily basis is much higher than anyone expected
Now, what makes the current COMP-harvesting unhealthy (vs. just unexpected) is:
1. Interest rate models are not standard across assets, and the practical effect is that harvesting is clustered in illiquid assets (e.g. BAT, REP, ZRX)
2. The primary assets being used to harvest are very illiquid, and when coupled with the size of these markets, now represent real default risk in the case of a price shock
3. The primary assets being used to harvest have low Reserve Factors, so the protocol is not being compensated (through increased reserves) for the increased risk
Taking each of these factors in turn, there are several ways to mitigate the unhealthy COMP-harvesting:
1. Decrease COMP price — impractical
2. Decrease the amount of COMP distributed daily — practical, directly addresses problem
3. Standardize interest rates — practical, directly addresses problem, Dharma is already working on this
4. Increase collateralization requirement for illiquid assets — practical, directly addresses problem of risk, indirectly addresses COMP-harvesting
5. Increase reserve factors for illiquid assets — practical, directly addresses problem of protocol-compensation, indirectly addresses COMP-harvesting
Prop 10 includes a provision for decreasing daily COMP distribution by 15% and an increase in the reserve factors to 50%. As such, while do do not think this proposal addresses the heart of the matter, we believe that it does target some of the right levers to mitigate unhealthy COMP-harvesting.
Ultimately, we would rather make incremental positive improvement than no improvement at all. And while we feel it is critical to establish explicit and effective governance procedures, we feel it would be inappropriate to penalize this proposal (and blck as its author) for failing to adhere to norms that have never been established. We are encouraged by the discussion of governance norms taking place here and hope many of these will be adopted by the COMP governance community.