Governance, it is often said, is one of the most important issues in the crypto industry. But whether democracy makes blockchain products better or just devolves into fights over wealth remains an open question.
One relevant test case just closed on Uniswap, though, offering a glimpse of what may be more akin to election-season stumping than boardroom politics (just with a lot more Discord). The specifics are secondary but here they are: A proposal to distribute $11.6 million worth of UNI to 12,619 wallets failed to pass because an insufficient number of UNI holders participated.
And because governance is seldom unpacked at length, here’s a detailed blow-by-blow of one of the most closely watched governance decisions in the history of decentralized finance (DeFi).
It was an episode that turned Uniswap’s pleasant September surprise into a mildly acrimonious bummer.
The gift of UNI
To do so, the firm behind the token-swap site decided to airdrop 150 million UNI governance tokens to a bunch of Ethereum denizens who had touched Uniswap in one way or another over the years. Going forward, the tokens would be the means by which a new class of overlords could determine Uniswap’s fate.
The most notable part of this airdrop was its magnanimity: Every wallet that had even tried to use Uniswap since its inception could claim 400 UNI, worth well over $1,000 at the time.
But everybody is never pleased. Shortly after the UNI token distribution, Dharma – the DeFi lending startup that became a savings startup that became a trading startup – raised an objection on behalf of its users. Many Dharma customers had missed out on the UNI airdrop because their use of Uniswap had been masked by Dharma’s proxy smart contract.
On Sept. 17, Dharma CEO Nadav Hollander announced his intention to ask UNI holders to retroactively airdrop 400 UNI (5,047,600 tokens in total) to the 12,619 accounts that had used Uniswap through a third-party dapp. MyEtherWallet, Argent and Dharma topped a list of nine dapps that had put DeFi composability into practice and built on top of Uniswap.
The proposal went to a vote on Sept. 24. It closed on Oct. 31 and it failed, even though “yes” votes held a vast lead. The final count came out to 37.5 million UNI (worth a little over $86 million) in favor of the proposal and 1.3 million UNI against it.
Because this, like most votes on blockchains, was a vote of tokens and not individuals. Felix Machart, a researcher at venture fund Greenfield One, who wrote a study on blockchain governance, commented on it to CoinDesk, saying, “You can buy yourself voting power, so it is more like shareholder democracy.”
Maybe so, but the case of Dharma’s bid for retroactive airdrops may point to a future in which on-chain decision-making looks more like congressional decision-making than corporate governance.
The SushiSwap sidebar
Of note: Uniswap didn’t just release UNI out of nowhere. If DeFi Summer had been an action movie in the Marvel franchise, Uniswap would be the young superhero learning to test his powers in the opening act and facing off in the climax against an opponent that looked like his bigger, meaner twin.
That opponent for venture-backed Uniswap was SushiSwap, the instigation of the mysterious NomiChef, who innovated vampire mining and launched his Uniswap fork with a governance token baked in.
But a few chess moves later, Uniswap announced UNI. In doing so, it broke from other governance token distributions that had come before. Previously, these schemes only worked on a forward basis, announcing ways that liquidity providers would be rewarded with a new token for deposits.
Uniswap would also reward everyone who had already helped it establish a market. Not limited to depositors, the team rewarded traders too. Anyone who’d ever touched Uniswap got a thank-you note worth 400 UNI. As CoinShares’ Meltem Demirors said at the time, that made it “really special.”
Uniswap founder Hayden Adams did not respond to a request for comment for this story, but it is reasonable to suspect that the team moved up its timeline for dropping UNI in order to deliver the coup de grace to SushiSwap’s SUSHI and the many other lesser forks that had come along.
Whether that was the intention or not, it worked.
After the quake
The airdrop created roughly three kinds of UNI holders, who collectively have control of the current version of Ethereum’s most popular buying-and-selling robot.
Most new holders would have only 400 UNI.
Past liquidity providers would have a modest amount more.
Meanwhile, staff, investors and advisers collectively received about 40% of the total supply of UNI, though it was all locked up in a four-year vesting period (meaning a little would shake loose every day). Vesting only makes tokens illiquid, though. It doesn’t mean they can’t be used to vote. That said, the Uniswap team promised it would not participate directly in governance decisions.
All told, the surprise UNI drop made as many as 250,000 tiny holders (the users) about 50,000 moderate-sized holders (the liquidity providers) and a few dozen really big whales (the staff, investors and advisers). Many of those who could sell, did.
The whale factor is important because of the way the governance rules work. It takes 10 million UNI backing a proposal to move it to a vote. After that, the measure passes with a simple majority, but only if votes in support exceed 40 million UNI (that’s how quorum is defined – it ensures adequate voter participation to make the vote legitimate).
There’s also been a lot of selling and consolidating. As of this writing, several days after the vote ended, only 95,300 wallets hold UNI, according to Etherscan. The nation of UNI is small.
On an Oct. 22 episode of the YouTube DeFi show, Trust Bubble, Hollander said, “Tokenized governance, in general, is a flawed system, in that it reverts to plutocracy. … Unfortunately, we don’t know of a better system for now.”
A UNI holder expressed a similar view in the forum on Sept. 21. “Currently it seems impossible for ordinary users to make any changes,” a commenter named dharper wrote.
But for the entrepreneurs building on Uniswap (for whom no UNI airdrop was allocated), advocating together has at least helped them find a common cause: showing their users they could lobby for their interests when it comes to free crypto.
Shane Hong of the Kyber Network, another decentralized exchange, told CoinDesk, “I think this is the first time many different DeFi projects are working together on a common goal.”
The Dharma declaration
Dharma worked to gather as many other third-party apps that had enabled users to interact with Uniswap as it could. All the startups with users in a similar position worked together over GitHub to assemble a list of addresses that could be shown to have interacted with proxy addresses that then used Uniswap.
The first list was comprised of the aforementioned 12,619 addresses that had used nine different dapps to indirectly use Uniswap. This was the list involved in the vote that ended Saturday. Had the first proposal passed, a second list of 26,598 accounts (those who had touched Uniswap via five different DEX aggregators) would have also been put forth.
In a phone call with CoinDesk, Hollander said his view of Uniswap stakeholdership was necessarily expansive. The fact that some were a step removed shouldn’t matter, he said, because the whole idea of DeFi and its money legos is to build upward.
“Anybody who interacted with Uniswap, no matter how many levels of indirection, was acting as a market taker,” he said. “They would count as being an early supporter of Uniswap.”
But again, a unique wallet address does not always equal a unique individual.
Shortly following Hollander’s initial post, some commenters wrote in the governance forum of “overlap” concerns, or the contention that many third-party app users had probably already ridden the UNI gravy train.
Hollander disputes this view.
“I would say a solid majority of our users interacted with Uniswap for the first time through Dharma,” he said. “I would push back on the assertion that this is, in some way, a frivolous or redundant airdrop.”
The protocol populists
Hiturunk is a computer science student in Arkansas who has risen to prominence in Uniswap governance circles.
A longtime lurker in crypto going all the way back to Mt. Gox, Dharma’s proposal was the first to stir him to speak up and find others aligned with his viewpoints. On that episode of Trust Bubble, he was there to say that a retroactive UNI airdrop was the wrong frame for this whole conversation.
“I think we need to restructure the proposal process so we’re talking about a Uniswap Improvement Proposal,” Hiturunk said, referring to the process for updating most open-source projects, including Ethereum and Bitcoin.
Each dapp’s team, he felt, should make its case one by one, not in one proposal representing nine different organizations. It’s worth…