Ending the Staking Trade-Off Can Save DeFi Communities

The reasons for anemic participation rates in many DAOs vary. Can staking breath life (and capital) into the sector?

AccessTimeIconSep 27, 2023 at 2:22 p.m. UTC

Voter apathy is killing the spirit of community in DAOs. Mismanagement and indecisiveness has left many decentralized autonomous organizations (DAOs) wounded and vulnerable to crypto’s equivalent of the 1980s corporate raider.

Even MakerDAO, one of the early proponents of this novel form of organization, is battling to revive governance participation with its long and complex “endgame” restructuring.

The reasons for anemic participation rates in many DAOs vary. Mainstream institutions and retail investors are often skittish about taking part, particularly given the evolving — and often murky — regulatory picture in the United States and other jurisdictions. Or DAO participants who jump in enthusiastically may lose interest after the initial flush of enthusiasm has passed and prices are deflated.

This article is part of CoinDesk's "Staking Week." Taylor Johnson is the co-founder of PsyFi.

One major driver behind disengagement from governance, though, is the central dilemma facing users in many decentralized finance (DeFi) communities: how best to deploy their assets — and their energies — in an ecosystem.

In networks where there is a clear divide between governance tokens and reward-generation assets, users are left with an impossible decision: should they stake to earn rewards? Or concentrate on participation in governance?

All too often, it is the desire to earn personal profit from rewards that wins out over helping a project advance toward its mission.

But there is a solution to the asset deployment dilemma. Staking. To spare users the Hobson’s Choice of where to put their assets, staking — already one of the most powerful innovations in DeFi, which is itself a construct based on automated incentives — can now be retooled

As headline-grabbing incidents this year involving protocols such as NounsDAO, Hector Network on the Fantom blockchain and Parrot Protocol on Solana have shown, disengagement can leave DAOs vulnerable to predators who can swoop in, buy up governance tokens from less-interested community members, and force projects to liquidate their treasuries or take other steps that can decimate a project.

Apathy can have consequences that are less dramatic but potentially as damaging. It can sap the energy out of a community, leaving DAOs struggling to drum up enough votes to get even rudimentary decisions passed — never mind mission-critical proposals. The resulting bottlenecks can lead projects to miss out on opportunities in the fast-moving DeFi space.

But retooled staking, coupled with measures such as greater automation in decision-making and support for delegation, can make a difference.

It is perfectly possible to build elegant infrastructure that supports a new form of dual-purpose staking: one that provides real yield for stakers in the form of a share of protocol revenue, while also allowing community members to retain a voice in how a project divides its income.

With infrastructure of this kind, community members no longer have to choose between having a say and earning rewards. And projects will benefit from enhanced liquidity, streamlined  decision-making, and more productive dialogue with protocol users.

I’ve always been a firm subscriber to the view that a rising tide lifts all ships. If such tooling is to help DeFi chart a choice toward a brighter horizon, it must be open source and available for every community on a blockchain to use.

There are such tools in Ethereum and on Ethereum Virtual Machine (EVM) blockchains, but it’s time their transformative power reached non-EVM networks. On many platforms, tokenomics tend to be fragmented, with a firm divide between governance tokens and assets purely geared toward rewarding users for activities such as liquidity provision or liquidity farming.

A group of us — the development teams behind PsyFi and HXRO Network, another long-standing Solana project — aim to help change that. We’ve created a free-to-use hybrid staking mechanism that any project in the ecosystem can use.

The longer users lock up their tokens, the more influence they gain over project direction – and the greater the share of the protocol generated rewards. This isn't just a tool for PsyFi; any Solana team can use it, build upon it, and customize it to their needs to better align their token holders and products.

By giving community members a stake in a future we can all benefit from, this kind of infrastructure can reinvigorate user engagement across DeFi, making decision-making faster and more efficient and heading off predators before they strike.

Edited by Daniel Kuhn.

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Taylor Johnson

Taylor Johnson is the co-founder of PsyFi, an ecosystem of DeFi products built on Solana.