What is Governance in Decentralized Finance?

A look into what Governance represents in crypto and how we should look at it.

Liberty Finance DEX
3 min readMay 11, 2023

In DeFi, governance refers to the process by which protocol upgrades, tokenomics, and other key aspects of the ecosystem are decided. It allows the community of token holders to participate in the decision-making process and shape the protocol’s future.

Governance mechanisms can vary depending on the protocol’s design and the type of token used. For instance, some protocols use a simple voting system, while others use more complex systems like quadratic voting or liquid democracy.

Different Governance Models in Decentralized Finance

There are two main governance models in DeFi: off-chain and on-chain governance.

Off-chain governance relies on social coordination and discussion to make decisions. In this model, token holders can discuss and vote on proposals through forums, chat rooms, or other communication channels. Once a proposal has gained enough support, the development team implements it.

On the other hand, on-chain governance relies on smart contracts to make decisions. This model requires token holders to vote directly on-chain, and proposals are implemented automatically once they reach a certain threshold.

Another important distinction is between delegated and non-delegated governance. In non-delegated governance, all token holders can vote directly on proposals. In delegated governance, token holders can delegate their voting power to a trusted party, such as a protocol contributor or a community member. This model is often used to encourage participation and reduce voter apathy.

Strengths and Weaknesses of Governance in Decentralized Finance

One of the main strengths of governance in DeFi is that it allows for a decentralized decision-making process. By giving token holders a say in the protocol’s future, DeFi protocols can avoid the centralized control that plagues traditional finance.

Moreover, governance can improve transparency and accountability. By making the decision-making process more transparent, token holders can hold the development team accountable and ensure that their interests are being represented.

However, governance also comes with some challenges. One of the main weaknesses is voter apathy. Many token holders may not have the time or resources to participate in the decision-making process, leaving the governance process vulnerable to manipulation by a small group of token holders.

Moreover, governance can be slow and bureaucratic. As more and more token holders participate, decision-making can become increasingly complex, leading to delays and inefficiencies.

Governance plays a critical role in decentralized finance, allowing the community to shape the protocol’s future and ensure that its interests are represented. However, it’s important to consider the strengths and weaknesses of different governance models to ensure that the decision-making process is fair, transparent, and efficient. By doing so, DeFi can continue to grow and innovate while maintaining its decentralized ethos. Join the DeFi Revolution, and join Liberty Finance!



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