Like politicians and bankers, governors in DeFi systems can be short-sighted, focusing on immediate payoffs rather than the long-term. They can also be outright malicious, especially in DeFi where governors are practically anonymous. We term these issues of short-termism and malicious exploits as governance extractable value (GEV), which need to be minimized to maintain a secure DeFi protocol. Read more in our recent GEV article and in our our DeFi paper (Sections V.C and VI.B).
The Gyroscope governance mechanism is the best ever designed for DeFi. It automatically aligns governors with the long-term interests of the protocol by minimizing GEV.
How? In any functioning algorithmic stablecoin, someone always pays ~$1 for each newly minted stablecoin. Where this $1 goes is critical. In designs today, part or all of this dollar goes into someone’s pocket: e.g., shareholders in seigniorage shares designs. For the long-term interest of the protocol, this is a mistake. It reduces governors’ skin in the game whereas we really want to increase it. As long as farming yields are big enough in the short-term, they have no reason to care about the small stake they stand to lose if they don’t get out in time.
Gyroscope is different. Gyroscope governors work toward future cash flows, which only unlock if the system remains healthy. We call this Conditional Cashflows. Governors manage and curate the reserve portfolio and new investment vaults. If times are good, and governance token valuation is sky high, governors are incentivised to auction off new tokens early to boost the reserve. Just like Tesla’s issuance of new shares at an all-time-high on 8th December 2020.
But how do we know that governors can’t abuse their power in other ways? In Gyroscope, governors are forced to keep to this path through a system of checks and balances. If governors try to deviate from the shared vision of the protocol, Gyro Dollar holders can exercise optional veto powers during a time delay to stop it. We call this process Optimistic Approval. Ordinarily, Gyro Dollar holders do not need to do anything if governance actions are sound. However, if governance actions are contentious, Gyro Dollar holders can exercise the option to veto, and if enough do, the action is blocked.
Gyroscope is about empowering the community to govern their own money, making its users its owners. It provides best-in-class mechanisms to bring this to life. Fairness and decentralization are top priorities in the governance token distribution.