How Much Does A (Crypto) Vote Cost?
In a recent post, Joel Monegro from Placeholder VC explores how to calculate the cost of participating in a protocol’s governance decision, as well as the impact that price might have on the security of individual governance processes. The rise of lending markets now introduces an opportunity cost for voting participants in the form of potential interest lost. On the other side of the transaction, users can participate by borrowing voting power at the expense of the available borrowing rates.
Joel posits that given an asset’s APR, users can influence the outcome of a vote at a known cost relative to the length of the voting process. A short voting process (minimal lock-up period) is, therefore, more susceptible to manipulation. But as Joel points out, systems can alter “the cost of governance simply by changing how much time it takes to complete a vote.” In addition to manipulation protection, this strategy could impact the price of the token (perhaps favorable). But it may also degrade the user experience for voters if the voting process is too demanding.
Why it matters:
- Joel is not the first to expand on the potential impact crypto lending services might have on the security of crypto protocols. Tarun Chitra contended on-chain lending and various decentralized finance (DeFi) applications could threaten staking participation rates on Proof-of-Stake (PoS) chains. As new platforms start to support DeFi ecosystems, to Joel’s point, protocols that feature on-chain governance will need to address the security implications on the voting process as well as staking (if applicable).
- Token-weighted voting systems are still early in their life-cycle, and there is a fine line between providing a user-friendly voting experience and one that is prohibitively expensive to manipulate. On-chain governance systems could benefit from having a dynamic voting process, one that increases the cost for more important protocol changes but keeps costs minimal for less controversial upgrades.