Gridlock around crucial Uniswap vote reflects the challenge of DeFi governance

Uniswap’s community is facing a conundrum. 

The Ethereum-based, non-custodial exchange’s popular liquidity mining program — put in place in September as a way to incentivize people to add liquidity to the automated market maker — came to an end Monday night.

Arguably, this development wasn't unexpected. The liquidity mining program launched with a scheduled end date of November 16, and when that date came, the protocol ceased distributing UNI tokens to liquidity providers.

The problem is that almost no one in the community — including most of the so-called "protocol politicians" — wanted the program to end. Even though most of the community agrees that it should be renewed in some form, it can’t agree on what that form should be.

"At a high level everyone wants this to happen, but no one is acting to make it happen,” said Navad Hollander, co-founder of crypto wallet provider Dharma, a large UNI delegate.

At this point it is not clear when a new proposal will be proposed and accepted. Some delegates anticipate it could take as long as a month while others think a decision could come this week.

Decentralization is difficult

Uniswap's policymaking difficulties reflect the thorny challenge of governing decentralized financial (DeFi) protocols. Decisions are left up to token holders, rather than a traditional management team. While that may capture the decentralized ethos of the crypto world — and perhaps help a project avoid the ire of securities attorneys — it means DeFi platforms must cultivate robust community engagement in order to function.

That’s easier said than done.

Technical tools such as Gauntlet and Boardroom have arisen to help communities develop standard and reliable processes and tools for governance and risk management. But governance is “as much a social problem as it is a technology problem," said Hollander. "It's kind of like a tragedy of the commons problem.”

The political challenge is amplified by the technical complexity of the decision. Unlike typical questions that a traditional firm would face, like who it should appoint to its corporate board, DeFi protocol proposals are often rooted in complicated mathematics.

That can keep some individuals from weighing in, according to Kevin Nielsen, CEO of Boardroom, a platform that aims to make it easier for token holders to delegate their voting power to protocol power-users.

"The complexity and frequency of these decisions requires specialized knowledge," he said. "There's this utopian vision that everyone will be involved ... but it's unrealistic to think that the majority of users are going to make those decisions themselves."

A change to the liquidity incentive program is an especially difficult problem to address, according to Tarun Chitra, founder of Gauntlet, another influential UNI delegate.

"There's a lot more technical work for this proposal," he said. Chitra thinks Uniswap's delay has more to do with the technical work related to the upgrade than the thorniness of governance.

Filling the void

Not everyone has to participate in the process for Uniswap’s governance system to work, however. Uniswap lets passive investors delegate their voting responsibilities to more active individuals.

"Delegation allows community members typically excluded from governance to build decisive stakes and those that prefer a passive approach to participate in a representative fashion," said Uniswap's strategy lead Matteo Leibowitz.

"This combination permits a wide range of stakeholders to provide diversity of insight and checks on power as well as active participation of fewer, community-trusted delegates," he added.

Still, Uniswap has struggled to achieve this. In a previous governance decision regarding the UNI airdrop, Dharma stepped in to play a leadership role, but this time it is planning to take a backseat, said Hollander. "It's not a healthy position for Uniswap for us to be running the show."

The dearth of interest in taking charge is what Robert Leshner of Compound says pushed him to get involved. "In order to help break the Uniswap governance logjam, I put myself forward as a delegation candidate, and suggested some compromise solutions to expiring incentives," he said in a Twitter direct message.

Leshner can be thought of as a kind of protocol politician within the Uniswap community, and he’s presented his own idea for the liquidity mining program via Twitter.

Many others have also shared ideas about how to extend the program. But don’t expect Uniswap’s management team to weigh in. It has chosen to take a laissez-faire approach to governance — and will remain uninvolved in decision making.

That's different from how Compound's governance system has evolved, according to Leshner.

"Compound progressively launched the Governance tools & process; first, with a limited group of stakeholders from April to June, and then, began distributing COMP to the community," he said. "By the time the public had COMP tokens, they were participating alongside an experienced group of users."

The fact that early Uniswap users don't have cues to take from a management team could be fueling the gridlock, said Hollander. "Personally, I'd like to see the team slightly more involved doing what the Compound team did with Compound governance," he said.

Legal experts in crypto have questioned whether functioning governance systems makes a DeFi tokens less likely to be deemed securities, especially in the scenario in which the development team plays a key role in that governance. The downside of a relatively heavy-handed approach like the one Leshner has taken is that it could open a platform up to regulatory issues that the team at Uniswap may avoid, thanks to their caution.

Uniswap is confident that its community will grow and trusts its current approach.

"Our community is large and active and we want to hear from them and let them lead,” said Leibowitz. "But getting governance right is hard. The founders began with the Articles of Confederation, learned from it, and adopted the constitution. Compound’s governance will adapt and evolve, we believe, as will ours."