DAOrayaki: The Ultimate Guide to Meta-Governance and Analytical Framework
Original Author: Ben Giove
Image credit: Logan Craig
Image credit: Logan Craig
With the collapse of various DeFi protocols, lower yields and lower token prices, many DeFi commentators have begun to wonder whether we have played an open, permissionless, composable, blockchain-based financial system. system potential.
But in some areas, the value proposition of DeFi continues to shine. These shining points will also continue to prove that DeFi can achieve things that the traditional financial system cannot.
One of the shining points is meta-governance, which refers to the act of one DAO participating in the governance process of another DAO through the use of tokens. Meta-governance is an emerging strategic lever exercised by digital organizations in pursuit of specific goals.
Meta-governance has similarities to investment management in traditional finance, where asset managers can vote on stakeholder proposals for their asset products. However, meta-governance in DeFi is more transparent and public. Holders of any meta-governance token can use this tool. Unlike making decisions in secret in TradFi (traditional trading finance), it is also possible for individual investors to find Alpha from this trend.
The DAO is the smart money of DeFi. They are a group of investors with their own unique investment criteria and understand the inner workings of the industry better than retail and institutional investors. Alpha can be found if the tokens that the DAO is interested in can be predicted or purchased in advance.
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What is meta-governance?
As we defined above, meta-governance is the act of one DAO participating in the governance process of another DAO through utility tokens.
A simple example will help us understand this definition better.
First, let's assume there are two media DAOs named after the co-founders of the anonymous company: RyanDAO and DavidDAO.
The two DAOs each run a top-notch podcast program hosted by the founders, and issued their own native tokens: $RYAN and $DAVID. Token holders enjoy the governance rights of RyanDAO and DavidDAO respectively. Among other things, $RYAN and $DAVID holders will be able to vote on which guests can appear on their DAO's podcast.
In the midst of an intense viewership war, members of RyanDAO voted via Snapshot, making it clear that they wanted Ryan to appear on DavidDAO's podcast. To achieve this goal, $RYAN holders approved an off-market purchase of 100 $DAVID, which is the minimum amount of tokens required to reach a quorum in the (DAVID DAO) weekly voting, DavidDAO can vote to select the next guest on their podcast.
With this transaction, RYAN holders can now vote on DavidDAO's governance proposals.
When the next guest voting is held, RyanDAO can use its $DAVID to vote for Ryan to appear on DavidDAO's podcast.
Although the competition is tight, the amount of tokens held by RyanDAO is enough to help them win the vote, and their founder will appear on DavidDAO's podcast.
With this simple example, we can see how meta-governance works:
One DAO (RyanDAO) participates in the governance process of another (DavidDAO) by using tokens (DAVID).
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Meta-governance as a strategic tool
Now that we have some understanding of how meta-governance works, let's dive into some more complex examples. This allows us to better understand how DAOs use meta-governance to further their strategic interests, and what role meta-governance tokens play in this process.
Well-known examples of using meta-governance to achieve strategic goals to date include: Fei Protocol, Aave, and Index Cooperative. Among them, FEI Protocol, a stablecoin issuer, holds INDEX tokens through DPI and has meta-governance rights, and successfully launched its token FEI on the Aave currency market.
Let's analyze in detail how this is done.
Fei Protocol is the issuer of FEI, a fully reserved, USD-pegged stablecoin. In June 2021, DAO proposed to have FEI launched on Aave, the largest currency market in TVL on the chain. Fei Protocol attaches great importance to this market launch, because if it can be integrated with popular applications like Aave, the utility of FEI can be increased, thereby increasing the demand for FEI.
However, in order for FEI to go live on Aave, it must abide by the money market's decentralized governance procedures. Unsure of how AAVE holders would vote, and the minimum 80,000 AAVEs (worth ~$20 million at the time) needed to make governance proposals, Fei decided to purchase 100,000 INDEX tokens (worth ~$2.5 million at the time) to accomplish this. One integration. INDEX is the governance token of Index Cooperative, an asset management DAO that has created multiple thematic indices and structured products, such as DPI (DeFi Pulse Index) and GMI (Bankless DeFi Innovation Index).
While it must be enabled for a single asset, INDEX holders are entitled to governance rights over the constituent tokens included in the DAO offering. So INDEX is a meta-governance token and an asset whose purpose is to transfer meta-governance rights to its holders.
INDEX meta-governance is currently available across five assets included in DPI: UNI, COMP, YFI, BADGER, and AAVE. This means that DAO does not need to purchase each token separately, as long as it purchases INDEX, it can obtain the governance rights of these constituent assets.
After close cooperation with the two communities, in September 2021, Fei Protocol held the meta-governance rights of 100,000 INDEX, participated in the formal voting of FEI's launch on AAVE, and successfully completed the integration.
In this example, Fei accomplished "leveraged meta-governance". The term was coined because of the ability of a DAO to "leverage" or expand its governance capabilities. At the time, INDEX, worth approximately $4 million, was able to influence the voting rights of approximately $36 million in AAVE held within the DPI.
In short, Fei can control $9 worth of AAVE with just $1 of INDEX.
This vote demonstrates the incredible power and cost-effectiveness of DAOs utilizing meta-governance to pursue strategic goals. With INDEX tokens, Fei is able to buy the required governance rights at a price 9 times cheaper than buying the same amount of AAVE directly.
Not only was this event the first significant instance of meta-governance within DeFi, it also marked the birth of meta-governance tokens as a sub-asset class.
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Practical examples of meta-governance
In the field of DeFi, there are also many famous cases of meta-governance.
For example, "Curve War" is a prime example of meta-governance action. Through meta-governance, holders of Convex Finance's native tokens can vote on the release and distribution of CRV on Curve Finance, the decentralized exchange with the highest TVL.
There are currently more than 20 DAOs who have purchased CVX directly, or paid bribes to CVX holders every two weeks, for some purpose. For example, some stablecoin issuers offer bribes to guide liquidity in order to strengthen the pegability of their issued currency and the confidence of users.
In addition to their use in protocols, we also examine the development of tokens specifically designed to maximize meta-governance leverage.
An asset currently under development that meets this requirement is glBTRFLY from the REDACTED Cartel.
[Redacted] is a meta-governance DAO that aims to create and extract value through governance incentives for DeFI. [Redacted] is the company behind the creation of the Hidden Hand bribe market, governed by the BTRFLY token. In the upgrade of Redacted V2, DAO will adopt a dual token model, where BTRFLY holders can lock their tokens and get rlBTRFLY or glBTRFLY.
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A framework for evaluating meta-governance tokens
Now that we understand what meta-governance is and how it is used across the DeFi space, we can now build a framework for evaluating meta-governance tokens.
Whether it is a DAO wanting to add a meta-governance token to its balance sheet, or a retail investor looking to predict and gain early access to future benefits from these entities, there are three main things when it comes to exploring and determining the utility of a meta-governance token Standards to keep in mind:
Standard 1: What are the basic governance tokens?
The first thing to note is the underlying set of tokens controlled by meta-governance. It is important to note that not all governance rights are equally important or valuable to a DAO. Looking back at the above example, Fei only wants to use the AAVE governance rights of the INDEX token to ensure listing. Although the meta-governance token INDEX also controls other types of tokens such as “UNI,” Fei’s strategic goal is not to leverage UNI’s governance rights.
Important reminder: Please think carefully about the utility conferred by the underlying governance rights of meta-governance tokens, and which types of DAOs this utility is attractive to.
Standard 2: What is the process of implementing meta-governance?
Another important criterion when evaluating meta-governance tokens is: the implementation process of meta-governance. Like most on-chain governance systems, meta-governance voting typically requires a certain minimum voting participation threshold, or quorum, to activate the associated rights.
This minimum threshold can always be met although there are protocols for voting directly through financial incentives (i.e. bribes). But those protocols without such a mechanism (such as INDEX), there has been a tendency to fail to reach a quorum. Voter apathy leads to wasted governance capacity. As I will mention below, voter participation is critical in determining the availability of meta-governance capital.
Additionally, investors must always be mindful of voting options based on meta-governance power. For example, some options are "all or nothing", which means that all base tokens can only be voted for one option; or governance rights are proportional among different options according to the number of tokens voted for each option distribute?
Additionally, investors and DAOs should be aware of the requirements to participate in meta-governance. For example, in order to participate in Convex governance and future glBTRFLY meta-governance, token holders must lock their tokens for a period of time, while INDEX meta-governance does not require participants to take this liquidity risk.
Criterion 3: What is the potential leveraged governance capacity (LGP) of each token?
Last, and most important, investors must evaluate whether they meet the criteria of a "good deal" when purchasing meta governance tokens. Essentially, to determine whether the DAO can exert more governance power by purchasing a $1 meta-governance token than by purchasing the $1 base token alone.
Like Fei's case, does a $1 meta governance token have more governance power than a $1 native token? And, to what extent can this leveraged governance power be exercised (LGP) in terms of voter participation and the value of the underlying assets held?
Meta Governance Token Analysis: INDEX
Now that we have a framework for evaluating meta-governance tokens, we can apply the framework to the evaluation of INDEX tokens. In this way, it helps to understand how meta-governance tokens can be analyzed in practice.
basic governance rights
As mentioned above, INDEX holders enjoy governance rights over the five underlying assets (UNI, COMP, YFI, BADGER, and AAVE) of the DeFi Pulse index.
We can see that the current total value of the underlying assets is $27.1 million. Of these assets, perhaps the most strategically valuable are AAVE and COMP, as they can function to secure listings in TVL's two largest currency markets.
The process of implementing meta-governance
INDEX holders can vote on the governance proposals of the above five assets through Snapshot. In order to achieve a quorum, 5% of the circulating supply of INDEX must vote. According to the current price and circulation, it is about 1.2 million US dollars worth of voting rights. INDEX meta-governance voting options are "all or nothing", which means that all underlying assets will be used to support one of the voting options.
If the vote does not reach a quorum, a meta-governance committee of five Index community members will step in and vote. Any INDEX holder can participate in meta-governance and does not need to lock tokens to vote.
Estimate the maximum leverage governance capacity of each INDEX
Now, let's calculate the potential maximum leveraged governance capacity in governance per $1 of INDEX.
It is important to note that these values are estimates. As mentioned earlier, in the INDEX meta-governance vote, voter participation rates for different proposals also varied widely, with many minor proposals failing to reach a quorum. Therefore, using a single average participation rate per meta-governance vote will not be valid data.
Because of this, we will use different ranges of voter participation rates to understand different LGP situations.
5% governance participation rate
To determine the lower bound of the LGP range for INDEX meta-governance voting to take place, we will use a minimum 5% voter participation rate as a quorum.
As we can see, based on the current value of tokens that can participate in governance, the total amount of governance rights that can be affected by 1 USD of INDEX reaches 21.98 USD; including 7.4 USD of AAVE and 2.46 USD of COMP. It should be noted that turnout would not be this low if it was an important or contested vote.
25% Governance Participation Rate
As shown in the table above, as the number of circulating tokens participating in voting increases, the maximum governance capacity of INDEX per $1 will decrease.
If the number of circulating tokens participating in voting reaches 25%, the total value of governance power that can be affected by every $1 of INDEX will drop to $4.4. While this drop may seem exaggerated, a closer look reveals that in this case, only Uniswap and Aave are cost-effective to use INDEX meta-governance, because only in these two projects, the $1 meta-governance token Coins have more influence than native tokens of $1.
Key takeaway: We can see that with low voter participation, DAOs can greatly leverage the influence of meta-governance tokens through INDEX. But this leverage is mainly concentrated in two assets, "UNI" and "AAVE". This imbalance limits the interest in purchasing tokens for potential DAOs hoping to successfully list on the money market.
wider application
Innovation is not dead in DeFi.
While TVL numbers may be stagnant, meta-governance represents a new and exciting way that DAOs can participate in DeFi governance. Leveraging its governance capabilities through meta-governance tokens, DAOs can pursue strategic goals at a lower cost. Additionally, we have scratched the surface in terms of evaluating and analyzing meta-governance tokens as a DeFi sub-asset class.
However, with great power comes great responsibility. Since an entity can exert enormous influence through leveraged meta-governance, it is also reasonable to worry about whether the ecosystem will be subject to more governance attacks.
Extended reading
Extended reading
refer to
refer to
Smart money for DeFi: https://newsletter.banklesshq.com/p/what-smart-money-is-buying?s=w
Fei Protocol：https://newsletter.banklesshq.com/p/is-tribe-undervalued
"Leveraging Meta Governance": https://twitter.com/sdalcega/status/1448723816826359840
https://mirror.xyz/0x8BE2355417EF645f3A3739DD1B8aBd38C563c595/bjaYxf-5HrntOj7P2QmqqVpQsmgXIJQgk0ceKMnZRIo
0xKydo ：https://kydo.substack.com/p/metagovernance-in-crypto?s=r
Shawn Grub：https://indexcoop.com/blog/levered-metagovernance-fei-index
“Curve War ：https://newsletter.banklesshq.com/p/wtf-are-vetokens?s=w
REDACTED Cartel：https://newsletter.banklesshq.com/p/how-to-earn-governance-bribes
https://redacted-cartel.gitbook.io/redacted/btrfly/glbtrfly
