Editor's Note: This article comes fromUnitimes（ID：Uni-times）Editor's Note: This article comes from

, Author: Mohamed Fouda, Compiler: Jhonny, published with permission.

Currently, one of the main criticisms of decentralized finance (DeFi) is how decentralized is it really?

Critics assert that protocols such as Maker, 0x, and Compound cannot be labeled “decentralized” if they are smart contracts controlled by a centralized company that can shut down or terminate the contract at any time. Tag of. At best, they argue, these protocols should be described as non-custodial financial services.

While there is some validity to this argument, there are also many strong arguments in defense of these “controls”, the most logical of which is the need to consider the time dimension: DeFi protocols are not 100% decentralized from day 1 , but will become more and more decentralized over time. At the same time, there should be some mechanism, such as the ability to activate a self-destruct switch to stop the operation of the protocol in an emergency, so as to protect users' funds.

Another strong argument in defense is that all these DeFi protocols are open source and auditable. If the development company of an agreement decides to close/terminate the project, other companies/individuals can use the code of the agreement.

No matter which camp you belong to, it needs to be admitted that DeFi still has room for improvement in terms of decentralization. And DAO (Decentralized Autonomous Organization) may be the best tool to further improve the decentralization of DeFi products. DAO allows DeFi users to make decisions on major decision-making aspects, such as adding features to the DeFi protocol, or deploying a new version of the DeFi protocol, and so on.

In addition, users can also vote on who should activate the emergency self-destruct switch, and even vote to create a "child DAO" (child DAO) to handle this important task.

Although the concept of DAO is the cornerstone of promoting the decentralization of DeFi projects, it does not mean that projects such as Maker and Uniswap are 100% decentralized. On the contrary, while these DAO projects have set a path towards full decentralization, there is still a long way to go to achieve this goal.

• First of all, it is necessary for us to explain the definition of DAO:

• DAO membership is open and not limited to specific groups/individuals;
  

• DAO members/investors can propose/vote on decisions, and no decision can be blocked or modified by some central authority;
  

DAO members obtain economic incentives directly or indirectly through participation, thus ensuring the consistency of the incentive mechanism.

These characteristics of DAOs are critical to achieving truly effective decentralization. In this sense, we can consider Bitcoin to be the most successful DAO. In the Bitcoin network, anyone can participate by running a node or just holding BTC. Anyone can propose, support or criticize Bitcoin Improvement Proposals (BIPs), and ultimately all participants can (at least Indirectly) benefit from participating and keeping the system running according to the rules.

Another benefit of using the DAO governance mechanism in the DeFi protocol is that if this mechanism is used properly, it will help developers of the DeFi protocol mitigate some regulatory risks. In fact, this is a complex and delicate legal subject worthy of its own article. While many developers believe that if they do not have full control over smart contracts then they should not be responsible for how those contracts are used, regulators such as the SEC (United States Securities and Exchange Commission) disagree.

The most notable of these is the stability fee, the interest fee charged on CDPs (Collateralized Debt Positions). In March and April of this year, MKR token holders voted to continuously increase the stability fee, in this way to stabilize the price of DAI at $1, because the previous transaction price of DAI was 3-3% lower than the anchor price. 4%.

image description

The change curve chart of the transaction price of DAI against USD (top) and the stability fee of DAI (bottom)

Another important decision MKR token holders need to make through voting is for multi-collateralized DAI (ie MCD), users can choose which ERC20 tokens to use as collateral. According to the news published on the MakerDAO official blog on June 27, the Maker community will vote among REP, BAT, DGD, 0x, GNT, OMG and other tokens to become the first batch of candidate assets that can be used as collateral.

Although Maker's DAO structure is based on a lot of governance rights of MKR token holders, Maker's DAO structure is not perfect:

Another limitation of MakerDAO is that the current distribution of MKR tokens is such that if a few entities with the most MKR tokens participate in a vote, the outcome of the vote will be greatly influenced by them.

• Decentralized exchanges (DEXs) were one of the first products to emerge in the DeFi space. While the goal of a DEX is to enable users to trade and exchange tokens in a non-custodial and decentralized manner, a DEX is the most difficult system to achieve decentralization without sacrificing important functionality and performance. We can explain it through the core operation of DEX. The core operations of DEX include:

• decide which tokens to list;
  

• Organize order books to speed up trade execution and order matching;

Get transaction fees as the income of DEX.

And DAO has always been considered as a mechanism to solve this centralization problem, as we have seen in decentralized exchanges such as IDEX, 0x, and Uniswap.

Although the Uniswap project team does not advertise itself as a DAO structure, a careful study of how Uniswap operates reveals that it fully meets the definition of a DAO.

Among the three core operations of DEX mentioned above, Uniswap realizes the second most difficult operation to achieve decentralization in an automated way, and realizes the first and third in a DAO-like way operation.

The most difficult part of DEX, that is, market making and order matching, Uniswap solves this problem by using an automated market-making technology and creating a transaction price automatically determined by a smart contract.

How Uniswap works as a DAO

In terms of deciding which tokens to list, Uniswap enables any participant to " List" any ERC20 token for trading. By providing liquidity to a liquidity pool, participants can share a portion of the liquidity pool's revenue.

Participants can also "delist" a certain token by withdrawing liquidity and destroying their share in the liquidity pool.

Through this process, Uniswap participants have the right to list/delist any ERC20 token.

Additionally, all Uniswap transaction fee revenue (3% per transaction) goes back to the liquidity pool providers. In this way, Uniswap participants can directly earn benefits by running the system.

In addition, Uniswap can manage its system through a formal DAO organization and benefit from it. For example, it can make decentralized decisions on aspects such as changing the fee structure, upgrading automated market-making technology, and adding features to Uniswap DEX.

Many interesting DeFi projects and protocols have implemented some elements of DAO, such as voting or obtaining benefits by participating in the protocol. However, if these projects/protocols do not meet the three main characteristics of DAOs listed above, they cannot be classified as DAOs.

For example, the loan agreement Compound allows anyone to participate, and the participants of the agreement can benefit by earning interest, and the platform allows users to vote to decide which tokens to provide as loans or collateral, just like the Compound community voted before. The method determines the same as listing WBTC tokens on the platform as a loanable asset. However, this vote is not binding, and the Compound team can ignore the result of the vote, so the Compound protocol is not a DAO.

Similarly, the decentralized exchange IDEX is taking an incremental approach to decentralizing the platform by allowing users to run the project's infrastructure by staking the project's tokens. Users who assist and participate in the operation of the platform's infrastructure nodes will be able to obtain a certain percentage of platform transaction fees (currently 25% of the platform's transaction fees). However, IDEX does not meet the definition of a DAO because users do not have the right to decide which tokens can be listed on the exchange, so it is not a DAO.

In addition to improving the decentralization of current Ethereum-based DeFi products, DAO can also play an important role in bringing DeFi to Bitcoin.

Many feasible ways to use Bitcoin in DeFi rely on creating a side chain (such as the Bitcoin side chain Liquid created by Blcokstream, the sender can convert BTC into the native token L-BTC of the Liquid network, and in the Liquid network Complete a quick transaction, after the transaction is completed, the recipient will convert L-BTC into BTC), or create an area anchored to Bitcoin on other blockchains such as Ethereum (such as WBTC and Cosmos).

The fundamental question with this solution is whether the choice of validators to maintain the peg process is sufficiently decentralized.

For example, Blockstream selected 35 trusted entities for the Liquid sidechain as members of the Liquid Federation (including some exchanges and financial institutions) to monitor the anchoring process with the Bitcoin blockchain. The problem with this approach is that the selection of validators is centralized.