DAOlitical Parties and DAOliticians: A Future in the Metagovernance World
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0xkydo
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March 31st, 2022

Written by 0xkydo (@0xkydo).

Metagovernance will give birth to a new political system.
Metagovernance will give birth to a new political system.

Introduction

Metagovernance has been a recurring topic in the discussion of governance in different crypto protocols. In this article, we will define metagovernance as holding one DAO’s token in order to influence decisions in another DAO(s). This definition is borrowed from this post.

Metagovernance is possible because of on-chain composability between protocols. One protocol could acquire voting power in another protocol and have direct influences through on-chain voting. Metagovernance has been used to bootstrap liquidity, deepen liquidity, and increase yield. Some of the prominent players utilizing metagovernance in these regards are Convex Finance, Abracadabra Money, Yearn Finance, Redacted Cartel, and Frax Protocol.

Although these account for most value transfers in the metagovernance space, a few more nascent and less explored areas of metagovernance are strategic collaborations such as the metagovernance event among Fei Protocol, Index Coop, and Aave. Fei Protocol established a strategic position in Index Coop’s governance token and listed itself onto Aave, in which Index Coop holds voting power.

In this post, I will brainstorm on the future of metagovernance and the potential future where metagovernance becomes a more common theme in the protocol governance landscape.

DAOliticians for metagovernance

If the metagovernance trend continues, I hypothesize that different interest groups will form political-party-like DAOs to advance their agendas. I will call these political-party-like DAOs “DAOlitical parties,” and key individuals representing these parties “DAOliticians.”  They are pronounced like political and politicians but replace the po- sound with dao.

Metagovernance introduces a venue for voters to unionize, decreasing friction to vote and increasing their collective voice (and/or yield). The most primitive example of this idea is Convex Finance. Before Convex Finance, $CRV (Curve Finance’s governance token) holders could lock their $CRV within Curve Finance to boost their LP position and vote on the gauges. This posed a great challenge for $CRV holders without an LP position. Convex Finance created a marketplace to match LPs with $CRV token holders to solve the lack of LP issue. To crowdsource voting power among $CRV holders, Convex Finance introduced an interesting dynamic in which $CRV holders could exchange 1 $CRV for 1 $cvxCRV. After the exchange, $CRV holders would have additional yield compared to locking their tokens on Curve Finance directly. In exchange for this higher yield, $CRV holders delegate their $CRV voting power to Convex Finance. This voting power is then controlled by the holders of $CVX, Convex Finance’s governance tokens. Through this design, Convex Finance was able to acquire more than 50% of the voting power in Curve Finance. So, one may even say that Curve Finance is controlled by Convex Finance. There are problems with this design as it encourages vote bribing but it is a primitive version of unionization nonetheless.

Simplified diagram describing $CRV holder’s interaction with Convex Finance
Simplified diagram describing $CRV holder’s interaction with Convex Finance

Taking a step back, the interaction between Curve Finance and Convex Finance can be abstracted into the following:

A group of people within Curve Finance wanted to maximize their yield on their $CRV (their agenda). However, individual voice is not enough to shift the pendulum. So, they pooled their voting power together (unionizing) in Convex Finance (the union) to achieve it.

Although these agendas currently revolve around additional monetary value, they could evolve into more specific agendas without a direct monetary value. For example, if an interest group were to form around decentralized stablecoin’s adoption, it could adopt a similar format as Convex Finance. Since this interest group would no longer be purely driven by financial returns, it could cast its voting power just for decentralized stablecoin adoption even though there might be higher ROI voting strategies.

In the union model of metagovernance, an important role would emerge. I call it the DAOlitician. A DAOlitician’s main role would be convincing others token holders to join their cause and delegate tokens to their union. Surprisingly for Convex Finance, a dedicated DAOlitician did not exist. This is possible because, in terms of monetary gains, numbers speak loudly for themselves. However, for more nuanced topics, such as stablecoin adoption or staking derivative adoption (eg. stETH), DAOliticians would be extremely important in generating buy-ins and winning mindshares from token holders.

DAOliticians are similar to politicians but also different in important ways. We will use the United States’ representative model in comparison since many other democratic systems share similar structures. First, a DAOlitician’s voting power is different from another DAOlitician’s, but all politicians share the same voting power. For example, each congressman/woman’s vote is counted as one, regardless of the number of constituents in his/her district; but DAOlitician’s voting power is determined by the votes delegated to its union, which is different. Second, politicians are elected with term limits but DAOliticians are on a continuous election cycle (if we assume vote delegation can change easily), reflected in their voting power’s change. Third, in the union model, the DAOlitician’s responsibility is narrower than the politician’s. Politicians normally govern on a wide range of topics from public health to military spending. However, for a DAOlitician in the union model, his/her duty mainly revolves around one set of issues. This narrow scope for unions would be an issue for it to scale. Since each token holder can only delegate to one union, what if he/she wants to advance more than one union (decentralized stablecoin adoption and staking derivative adoption)? Since naturally, token holders would care about different agendas all at once, I propose a higher level DAOlitical party would form on top of different unions to fulfill this need.

An illustration of the relationship between DAOlitical parties, unions, and the base layer protocol
An illustration of the relationship between DAOlitical parties, unions, and the base layer protocol

DAOlitical Parties for Multiple Protocols

In the previous section, we explained how Convex Finance can be thought of as a union within Curve Finance, how this union model can be applied for other interest groups, and why a DAOlitical party is necessary. In this section, we will continue this train of thought and discuss the implication of metagovernance when interacting with more than one base layer protocol.

Cross-protocol DAOlitical parties will form because most token holders hold more than one token and to achieve any sets of agendas would require more than one base layer protocol. In the decentralized stablecoin adoption example, while Curve Finance is important for trading experience, other factors such as decentralized stablecoin’s utility are equally important. These utilities include but are not limited to: borrowing+lending, education+onboarding, treasury diversification, and many more. Therefore, having voting power in one base layer protocol, such as Curve Finance, is not enough. The DAOlitical party should hold a wide range of tokens (or voting power in those tokens) to successfully advance its agenda.

Index funds are great DAOlitical party vehicles. They hold a significant stake in multiple tokens’ voting rights. Although they currently do not have any stated agenda on voting, other protocols could acquire index funds’ governance tokens to propose such changes. An early example of this is the interaction among Fei Protocol, Index Coop, and Aave. Fei Protocol acquired a long-term position in Index Coop and utilized Index Coop controlled Aave’s voting power to list $FEI onto Aave. You can see here for a detailed walkthrough of the event.

A possible future may be represented by the diagram above. For each base layer protocol, there will be different unions formed around it aiming for different purposes, such as yield maximization, tokenomics reforms, or any other protocol-specific issues. On top of these unions are DAOlitical parties (could be in the form of an index fund). These DAOlitical parties combine different agendas together. DAOliticians attract capital and also voting power for their DAOlitical parties. This reminisces the political structure in the real world. The parties are political parties and each union is a lobby or interest group. The base layers are fundamental issues such as health, military, education, etc.

Implications for Our Future

While many early versions of this structure already exist, such as Redacted Cartel + (Convex, Frax, OHM) and Index Coop’s Metagovernance Committee, no protocol has a clearly stated agenda. Even if an agenda exists, it is hard to differentiate it with others. We believe this is expected at the stage of crypto. Most stakeholders share similar beliefs about how protocols should operate. However, as crypto matures, we will see differences between stakeholders increase. One related example is the current trend of DeFi, crypto games, and NFTs slowly moving into their own camps on Crypto Twitter (CT). They might all benefit from the same base layer protocols, but each has a different agenda.

Another important trend to note is the financialization of votes in the crypto world and its impact on this structure. Since each vote has a price, which is the token price, the amount of capital a DAOlitical party controls will determine its voting power. While similar to real-world politics (where a political party’s budget is important), in crypto, a DAOlitical party will never win given a smaller capital size (while a political party with less funding could beat a better-funded opponent). This over-financialization might not be the most suitable voting model in the future if we were to consider some protocols as public goods.

The role of DAOliticians has been taken on by protocol founders: Joey for Fei Protocol, Do Kwon for Terra, and Sam for Frax Finance. These DAOliticians are active in different forums to spread their ideas. They can take up this responsibility because they are experts in their respective domains and have a personality that people like. However, as the protocols and different verticals mature (presumably with more regulations), the role of DAOliticians will be shifted to external individuals who can better facilitate cross-protocol cooperation.

Closing Summary

In this piece, we brainstormed about the future of metagovernance. We begin with the union model, inspired by Convex Finance, on how token holders could unionize to achieve a common agenda. Then, we introduce the concept of DAOlitical parties to allow users to contribute to more than one union. Lastly, we discussed a future where DAOlitical parties expand their control to more than one base layer protocol through DAOliticians.

Crypto is an amazing testing ground for new political and coordination systems because of its composability and interoperability. With great power comes great responsibilities. We know many inefficiencies exist in our current political systems and the DAOlitical space could only be different if we are conscious about the design choices we are making and the things we are optimizing for. Although there are differences between the real-world political system and the DAO world, these differences alone are not enough. We hope this article serves as a way to jumpstart this conversation and design a sustainable system together.

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