Governance Wars Break Out Over Proposal to List BOND on Aave

DeFi’s latest DAO war is offering an inkling to just how thorny tokenized governance can get.

Supporters of the tokenized risk protocol BarnBridge are upset as a proposal to list the project’s BOND token as collateral on lending platform Aave has been met with unexpected resistance from a handful of large token holders in the final stretch of the on-chain vote.

“Muh decentralization. muh future of finance. more like muh [f*cking] dictatorship,” crypto influencer, Dark Crypto Lady tweeted, surely echoing the sentiment of many watchers.

The process had started out simply. 

Anjan Vinod of investment firm ParaFi Capital posted the proposal to list BOND on Aave’s forum on June 9. The proposal had 52 votes for, none against, and didn’t receive any pushback in the comments. 

Plus the two protocols already have a cozy relationship. BarnBridge contributes over $150M to Aave’s total value locked, and had been working with the Aave team to build integrations into the lending protocol for months, founder Tyler Ward said.  

So it was easy to believe that when put up for a final vote, BOND would be accepted by Aave voters.

Except that hasn’t happened. Currently, there are 611K “nay” votes from AAVE and StkAAVE holders, who cast votes on Aave Improvement Proposals (AIP). And those outnumber “yae” votes by almost two to one. 

What’s more, 99.9% of the nay votes have come from only six wallets. 

A Few Whales

Aave co-founder Stani Kulechov tweeted about the vote calling it “governance wars.”

“Scary how few whales can carry an AIP… were the nay arguments clearly set out and debated in advance?” was one of the most liked comments under the post.

Crypto asset fund Defiance Capital controls the top two no-voting wallets, 48.6% the no-votes, according to analytics platform, Nansen (disclosure: Defiance is an investor in Defiant Media).

“Our reason for voting no is very simple, BOND liquidity is too low for it to be added as collateral right from the beginning,” tweeted Arthur Cheong, founder of the fund.  

If the proposal went through, BOND could not only be lent and borrowed, but borrowed against as collateral. Using an asset as collateral introduces risk to Aave, as borrowers against a relatively illiquid and therefore volatile asset like BOND could more easily be liquidated, introducing bad debt to the system. 

“We would support adding $BOND as an asset for lend/borrow first and turn on the collateral option once the on-chain liquidity improves substantially,” Cheong continued.

While BarnBridge’s Ward was frustrated at first, last night he wrote a thread accepting that BOND may, in fact, be too risky for Aave. “We have to take a bitter look in the mirror and accept that, ultimately, $BOND would be the lowest liquidity, most volatile asset on AAVE taken as collateral,” Ward wrote. “I think Arthur’s concerns as risk-first make me think we actually should work with them in some capacity if the bridge isn’t burned.”

How About a Head’s Up

As the dust starts to settle, State.eth, a user who runs Aave’s governance channel, suggested that teams like BarnBridge give Aave voters a heads up before posting an AIP. Cheong said as much, asking, “isn’t this the responsibility of the BarnBridge community to reach out to major Aave token holders to do [a] temp check first if they want this to be passed?”

The obvious take in this situation could be that token governance is easily swayed by a few wallets as only interested parties are incentivized to participate. In this case though, it could be that the final outcome was to the benefit of the ecosystem, if it means that DeFi’s largest protocol is now safer. But it’s hard to believe that there will always be a happy ending.

Regardless, it’s important to note all of this drama happened out in the open.

“Seeing this play out in the open instead of behind closed doors is truly powerful,” Andre Cronje, founder of yield aggregator Yearn Finance, tweeted. “Even when we ‘fight,’ we push forward transparency and open finance.”