When Andreessen Horowitz (a16z) invested in the decentralized crypto exchange Uniswap, it earned a massive trove of the project’s UNI tokens – crypto assets that double as votes in the exchange’s decentralized autonomous organization (DAO).
The venture capital firm’s ownership of those tokens – and the votes it controls – are suddenly at the center of a crypto debate over how decentralized Uniswap really is. On Twitter and elsewhere, some industry observers and stakeholders in the project are asking whether there is a potential conflict of interest given a16z’s stakes in multiple projects that might benefit from a business relationship with Uniswap.
This article originally appeared in Valid Points, CoinDesk’s weekly newsletter breaking down Ethereum’s evolution and its impact on crypto markets. Subscribe to get it in your inbox every Wednesday.
Last week, in a community poll that was viewed as crucial in a cut-throat race between crypto infrastructure platforms, the Uniswap DAO selected a crypto “bridge” called Wormhole as a key part of its infrastructure for a planned expansion to Binance’s BNB blockchain.
Unlike official, “on-chain” DAO votes that can automatically execute blockchain code when they pass, this one, hosted on the website Snapshot.org, was a more informal “temperature check.”
A16z didn’t cast a vote in the “temperature check” poll, and its absence from the tally may have cost LayerZero, one of its portfolio companies, the highly coveted spot. (A16z later clarified that it would have voted for LayerZero, but that it was unable to participate for technical reasons.)
Now an official vote is pending on whether to ratify Wormhole’s selection, and a16z has voted against it. A key question is whether the firm should be allowed to derail or delay Uniswap’s effort to move forward with its expansion to prevent LayerZero’s competitor from gaining an advantage.
So far, a16z has used 15 million UNI tokens to vote against the proposal – not enough to block it from passing. In other words, the entire issue might be moot in this case.
But the issue raises the question of how things might have played out differently if a16z had made full use of its voting powers.
The venture firm’s 15 million UNI represents just a fraction of its total holdings. A representative for a16z tells CoinDesk that it has “delegated” over 40 million additional tokens to third parties – many of whom voted against a16z in this week’s vote. Theoretically, a16z could, in future votes, reclaim those UNI tokens, and the votes, for itself.
If a16z loses this week’s Uniswap vote – which currently seems likely – it will not prove that the Uniswap DAO has lived up to its “decentralized” governance ethos. Instead, it will only prove that a16z has chosen to exercise self-restraint rather than draw attention to the full weight of its influence within Uniswap’s decentralized ecosystem. Moreover, the example of a16z and Uniswap underscores how little we know about how power is distributed in the pseudonymous world of decentralized governance.
A16z’s Uniswap DAO vote mishap
Uniswap DAO is currently facing a time crunch: If it doesn’t deploy Uniswap V3 onto Binance’s BNB blockchain before Apr. 1, its business license will expire, and other companies will be allowed to clone its code to launch competitors.
To move onto BNB Chain, Uniswap DAO first needed to vote to select a bridge platform – a piece of infrastructure that allows users to communicate from one chain to another and, in Uniswap's case, form the backbone of its governance apparatus.
Uniswap DAO’s governance process frequently feels more procedural than anything else, with most proposals garnering limited community discussion and near-unanimous approval.
“One of the largest issues in governance is voter apathy,” said David Shuttleworth, director of token engineering at Binance’s VC arm, Binance Labs. “Maybe you get 10% turnout, and a lot of those votes are not highly contested.”
Against this backdrop, the Uniswap-BNB bridge vote was uncharacteristically contentious.
“I think a lot of the community believes rightly or wrongly that the bridge protocol that Uniswap uses for BNB Chain will be adopted by other systems,” Robert Leshner, the founder of the crypto lending platform Compound, told CoinDesk. Given its perceived importance, the race drew a wave of attention as competitors and stakeholders debated the security and flexibility of competing bridge platforms on Uniswap community forums.
The Wormhole bridge won the vote, earning 62% versus a16z-backed LayerZero’s 38%.
But a16z complicated the tally at the last minute, stating in a community forum post just before polls closed that it was unable to participate due to vague technical constraints having to do with a custody service that it uses to hold its UNI.
“We’re unable to vote in the current Snapshot due to infrastructure limitations with the custodian on short notice,” wrote Porter Smith, an a16z partner. A representative for a16z would not clarify the technical constraints any further for CoinDesk.
“To be totally unambiguous, we at a16z would have voted 15m tokens toward LayerZero if we were technically able to,” said Eddy Lazzarin, a16z’s head of engineering, in another Uniswap forum post the day after the vote closed. “So, for the purposes of a ‘temperature check,’ please count us this way.”
A16z recently led a $135 million investment round into LayerZero.
Uniswap's governance policies explicitly define the process by which polls like this one are supposed to operate. In accordance with those rules, the Uniswap Foundation – a non-profit organization tasked with managing the day-to-day operations of Uniswap’s governance machine (among other things) – said in a forum post that a16z’s uncast votes would not be counted.
A16z votes its bags
The a16z drama grew more intense when the official “on-chain” vote to bring Uniswap to BNB Chain opened to voters on Feb. 2.
A16z is the largest voting entity on Uniswap, and its 15 million UNI tokens, voted “against” the proposal, were enough, for a brief period last weekend, to tilt the vote nearly 70% against the BNB Chain deployment.
A16z representatives say the firm’s votes were cast against the proposal because of concerns about Wormhole’s security.
“We do not believe Wormhole offers the most secure or decentralized bridging option,” an a16z representative said in a forum post explaining the decision. (Wormhole did not respond to CoinDesk’s requests for comment.) Also – despite supporting LayerZero in the previous vote – a16z said that it now believed the DAO should hold off on selecting a bridge partner until a “formal assessment is completed.”
Not everyone was convinced by a16z’s rationale. To some, it seemed as if the VC firm was willing to hold Uniswap’s expansion objectives hostage in order to achieve a favorable outcome for LayerZero, its portfolio company.
These allegations highlight a key tension in the governance of decentralized protocols: Should DAO voters elect in favor of their self-interest or should they optimize solely for the protocol that they are governing?
Leshner, currently the third-largest voter in the Wormhole BNB vote, said he voted “yes” on the BNB Chain proposal even though he believes that LayerZero is superior to Wormhole. He is, alongside a16z, a LayerZero investor.
“I just want to see the thing deployed and not go through this extended governance period,” Leshner told CoinDesk. “I think what's most important is Uniswap being deployed onto BNB Chain period, full stop, and there's already a solution that's proposed and ready to go.”
How much power does a16z have?
Crypto Twitter seized on the a16z controversy for what the situation implied about the role of big money in the governance of a core, “decentralized” crypto pillar.
“Uniswap controlled by a16z?” tweeted Chanpeng Zhao, the CEO of Binance. (Binance is, ironically enough, reportedly the second-largest UNI holder, though an Ethereum address associated with the exchange has never voted on a Uniswap proposal.).
A representative for a16z told CoinDesk that it delegates a large amount of its UNI votes to independent third parties. It does this, the representative says, to ensure that Uniswap’s governance system remains decentralized. Among the third parties named by the representative were organizations like GFXLabs – which voted against a16z and in favor of launching Uniswap onto BNB Chain using Wormhole.
But the delegation defense leads to another question: How many UNI tokens does a16z hold in total?
According to a tweet from Lazzarin, a16z’s head of engineering, “We delegate ~40m votes to outside groups (with no conditions on how they vote).” Lazzarin did not specify the full size of a16z’s UNI holdings and neither did the representative that spoke to CoinDesk. But based on Lazzarin’s tweets, a16z owns at least 55 million UNI in all, counting the tokens it has delegated. The a16z representative told CoinDesk that its agreements with delegates theoretically allow the firm to re-claim its delegated tokens should it so choose.
With 55 million UNI, a16z would have had enough votes to throw any previous Uniswap proposal in its favor. (Just 65 million UNI have been cast so far in the Uniswap-BNB vote, and the largest-ever Uniswap DAO vote received 85 million votes in total.)
Just as a16z does not disclose the full size of its Uniswap holdings, neither do other parties. It is impossible to know who, exactly, has influence within Uniswap’s governance ecosystem. And this is unlikely to change. A person familiar with Uniswap Foundation leadership told CoinDesk that anonymity is a core feature of crypto culture, so it’s hard to imagine that the DAO would ever force all UNI holders to disclose who they are.
As the DAO space matures and protocol governance decisions become more contentious and lucrative, one expects that the money behind protocols like Uniswap will come under further scrutiny.