Synthetix (SNX): In 2022, Synthetix was considered a leader in the decentralized finance (DeFi) space, with a strong focus on governance and decentralization. The project had plans to transition to a DAO structure and address inefficiencies within its governance system. The goal was to empower the community and ensure a smoother transition to full decentralization.

Current Status (January 2024): Synthetix has indeed made progress in its journey towards decentralization. The creation of multiple DAOs was an attempt to distribute power more evenly among the community members. However, it appears that there were challenges and inefficiencies in the process, with the need for meta-governance and legal leaders to guide the transition.

The project’s commitment to decentralization and community involvement remains strong, but it’s essential to ensure that the transition to a DAO structure is carried out efficiently and effectively. The community’s ability to coordinate decisions and maintain control without falling into the hands of a minority is crucial for the project’s long-term success.

In summary, Synthetix continues to be active and committed to decentralization, but challenges in governance efficiency persist. The project’s success in achieving its goals will depend on its ability to address these issues and maintain community support.

Mirror Protocol: In 2022, Mirror Protocol was highlighted as a synthetic asset protocol operating on the Terra blockchain, with a focus on providing access to real-world assets such as stocks. It had introduced token incentives to encourage liquidity providers but was still in the early stages of community governance.

Current Status (January 2024): Mirror Protocol’s development and governance have likely evolved since 2022. The project’s success depends on its ability to address challenges related to governance token distribution and community participation. The transition from token incentives to more sustainable governance mechanisms is crucial for its long-term viability.

It’s important for Mirror to strike a balance between community involvement and preventing centralization of power among a few large stakeholders. The use of tokens for voting and decision-making remains a key feature, and the project must work on ensuring the loyalty and active participation of its community members.

In summary, Mirror Protocol has the potential to succeed in providing access to real-world assets in the DeFi space, but it needs to continue refining its governance and tokenomics to maintain community support and long-term sustainability.

General Insights (DeFi 2.0): The broader DeFi landscape has likely continued to evolve and grow since 2022. Key trends in DeFi include capital efficiency, governance optimization, and addressing challenges related to token incentives and decentralization.

DeFi 2.0 is expected to focus on optimizing liquidity sources and preventing asset withdrawal, among other innovations. As the DeFi Total Value Locked (TVL) has likely grown, projects will face increased competition, making efficient governance and community involvement even more critical for success.

The crypto space remains dynamic, with opportunities for innovative projects to emerge. Projects like SNX and MIR can serve as catalysts for future market waves, but they must adapt to changing circumstances and challenges to maintain their positions as leaders in the DeFi ecosystem.

Abstract: Is DAO really a better choice for the long-term governance and operations of the decentralised self-governing organisation?Compared with traditional industries, the organisational structure and governance methods of crypto

Projects are more diversified. However, in the process of governance, the core team of the project often needs to give up part of the governance power or control of the project, or even sacrifice the principle of decentralisation. DAO is not a universal organisational structure. It is obviously not reasonable to satisfy investors’ false sense of decentralisation at the expense of the ongoing developments of the project.

The market demand for cryptocurrencies has been rising. People are looking for economic models that can offer them digital assets and better alternatives to the traditional financial system. While we see many projects addressing core issues, there is also a shift in liquidity, scalability, and capital efficiency. To clarify the innovation led by DeFi projects, we need to focus on projects that optimise TVL and create healthy cash flow. Capital efficiency and governance optimization will be the key to the next big trend of the DeFi project. Reducing volatility, boosting the loan market, and operating through direct governance will be key features of the new generation of projects in Defi 2.0.

Source: defillama

Over the past year, DeFi has made rapid progress, and innovative projects around basic components such as cross-chain, derivatives, stablecoins, and more are emerging. Synthetic assets are such key innovations. Both Synthetix and Mirror are the leading projects in the field of synthetic assets and have achieved strong growth, among which Synthetix’s warehouse lock assets and even trading volume performance are at the top for a long time. This paper will start from the current DAO governance mode of the two projects, carefully identify their internal development framework, and try to establish a clear project development logic for investors from a more far-reaching and essential perspective, in order to bring readers a more intuitive direction of synthetic asset projects.

Synthetix: The troika dominates the flat DAO, but it becomes inefficient

The power of community members and chain governance has always been the spear and shield hanging over the head of DeFi projects. How the community distributes power determines the effectiveness of the project’s development. While Synthetix has long been a leader in decentralized governance, its intent to split the foundation into four DAOs seems more of a compromise. Current Synthetix DAO organizations include ProtocolDAO that control protocol upgrades and variable configuration, grantsDAO funding public goods in the Synthetix ecosystem, Synthetix DAO for demand management and deployment funding for contributors and other projects, and Ambassadors DAO responsible for multi-signature licensing. These subdivided DAOs paint an interesting picture of different community members having the ability to contribute to their respective unique areas of expertise.

Source: research.binance

The move highlights how startups building open-source protocols differ from traditional businesses. In the “Old World,” founders usually seek as much power as possible. While in the new world of decentralized finance and Web3.0, the ultimate goal of many projects is to give more power to scattered individuals, and ultimately the project community will have full control. There are two main reasons for this: one is the so-called “anti-vulnerability”. By delegating and dissolving any centralized entities associated with the project, it will be harder for regulators to close down and review them (at least in theory). Second, the token-based governance system is opening up a new business model, and users are also owners. Tokens act as ballots to incentivize activities which, ideally, will reward founders and contributors and lead to system self-operation and maintenance. While grantsDAO has been fully operational for a long time, there seem to be a lot of problems. Inefficiency has become the main problem in blocking Synthetix. Earlier, Synthetix founder Kain Warwick posted that Synthetix’s core contributor team had become inefficient by losing management since it left its daily decisions and handed management to the Spartan committee, so he decided to campaign committee members and help coordinate the implementation of Synthetix’s roadmap for 2021. Build a lightweight DAO, meta-governance, and legal leaders to jointly resist the vulnerability of governance.

In essence, the decentralization of agreements means that no entity or individual can gain control over the entire network and fulfill its will. Beyond that, the community network must be invulnerable to the attack, which means that the attack should make the network stronger. To keep control from falling into the hands of a minority, the Synthetix community has been looking for a way to coordinate decisions in a robust way to engage every community member and make the best ideas shine. The goal of Synthetix is to fully transition from the current governance status to DAO. But before that grand goal is achieved, the core team and the community must be convinced that the network can survive independently. Migrating to a DAO addresses most of the legal and operational problems. As an established DeFi project, Synthetix’s protocol change has gradually become a more community-driven style, and its company has more experience and merit in DAO governance. Previously, Synthetix deliberately created an extremely flat structure to achieve decentralized DAO to avoid core contributors gaining excessive power in Synthetix and undermine new decentralized governance, which further exacerbated the problem. The project founding team finally realized that the fundamental problem was to confuse the role of the project leader with the role of the core contributor leader. Decentralized projects have no legitimate way to have “leaders,” which is exactly what the Spartan Commission aims to address. For the core contributor, having a leader is absolutely necessary. The Synthetix founder realized that the experimental ideas of excessive members were consuming the future development of the protocol, although achieving a certain false sense of governance achievement. As a result, creating a lightweight DAO can lay the foundation for a faster and more seamless transfer of governance to the community. In the process of determining control, DAO needs meta-governance, that is, to explore the way of “governance”. This process does not require an external arbiter, but requires a “legal leader.” DAO deployment needs to meet a previously agreed approach or lose legitimacy. The legal leader needs to deliver the code and other results during guiding the delivery of the agreement, but cannot control it. Token holders can take control directly or indirectly, making the agreement decentralized enough to prevent dominance from being taken.

Decentralization is not a binary structure, it is a constellation composed of different degrees of components. There are very few examples of projects outside of Bitcoin and Ethereum becoming decentralized enough. We believe Synthetix can be well a case of such token projects, shifting project control from core teams to token holders.

Mirror: The community starts cold by subsidies, and it is worth watching whether the community will continue to be active later

Mirror protocol is a Terra chain-based synthetic asset protocol, which is an on-chain price risk synthesis protocol for real-world assets. Users can mortgage the Terra money’s stablecoin UST to synthesize real-world assets, such as stocks, etc. U.S. stocks are a very attractive asset class around the world, with star stocks like Apple and Tesla emerging, but for most people around the world, access to the $36.3 trillion stock market is scarce. Mirror’s DAO community governance and voting mechanism also expose some problems because its running history is not as long as Synthetix. Since the total amount of incentives for system governance and liquidity is set in advance, adding new assets will dilute the income of the existing LP, including insufficient incentives to participate in governance, resulting in low Mirror system turnout, large households have no incentive to support or even oppose the increase of new assets, and a large number of proposals cannot be passed. This leads to inefficient communities in asset expansion.

Source: Xangle (MIR token attribution address)

Mirror protocol follows the routine of most of the new DeFi projects. In the early stages of the project, the expansion of the DAO community mainly encouraged liquidity providers through Token, with very high annualized returns. It seems that this token incentive does play a certain role. Through the initial high subsidies, more community members can participate in the liquidity pool, and quickly increase the locked value of the agreement in the cold start stage, and the later system will gradually switch from the token compensation economy to the mode of relying on the commission incentive. However, the allocation of governance tokens to users also depends on the members buy. With the volatility of the market, this cold start mode will quickly fail, especially in the governance of tokens and poor market performance. In addition, can the governance tokens in the hands of users certainly become their belief? At least the Mirror also needs time to prove community loyalty. Of course, relying on tokens to vote on the future development of the agreement, decentralized DAO is a necessary structure to avoid major regulatory shocks. Token governance is only part of the long success.

Mirror protocol’s DAO governance is not as flat and complex as Synthetix, being done mostly through opinion polls and voting. The MIR serves as a governance token for the protocol. Only users with MIR can vote, and each user will receive a voting right weighted by the number of MIR they have held. Users with a higher share of MIR will have greater influence when making decision votes. The Mirror’s governance recommendations are called opinion polls. Any user can create a proposal with an initial deposit. Once submitted, it can be voted on by the community until the end of the voting period. If the proposal passes a quorum and threshold conditions, it will be approved and its content can be automatically applied after a specified period of time. These changes will take effect automatically without the need to update the core agreement contract.

The role positioning within the Mirror ecosystem is relatively simple. From this point of view, the future development of the Mirror is in the hands of large community households. Core teams may still influence decisions based on their position in the community or the number of tokens they hold, but the rules in smart contracts and any changes made based on community voting will determine future changes. Everything from new product development, hiring, fee changes to marketing campaigns will be proposed and voted on by token holders.

In summary, by providing economic incentives to the DAO users, contributors, and a broader ecosystem of stakeholders, and giving these stakeholders a say in DAO governance, Mirror has the opportunity to build a strong foundation. But whether it is possible to achieve the most powerful network effect alone remains to be discussed, especially considering that a single token governance means that it cannot fully adapt to and develop long-term value in a way that the community believes will generate the maximum revenue. That said, Mirror should be wary of using tokens to motivate individuals that are becoming ’too comfortable’. They should develop and design more governance functions and governance structures. Giving too much power to too few stakeholders (but many tokens) causes slow action. Or if certain big households do anything else that might irritate enough community members, the threat that leads to division always exists. From this point of view, the Synthetix can better deal with this problem through multiple organizational decentralization.

Summary and Outlook

The DAO is a novel idea in the cryptosphere, but giving ownership and control of a project or company to the community is not the ultimate goal; achieving better governance and project development is. However, the deeper I delve into the DAO models, the more I think that role positioning and ownership distribution of stakeholders are very complex and difficult. We did not have prior techniques or models to coordinate such widely distributed governance and ownership. I am confident that both Synthetix and Mirror Protocol will eventually achieve the above goals. As long as their communities can attract enough smart people, the communities have enough enthusiasm, tools, authority, and incentives, plus a culture of survival of the fittest. But that is far from enough, synthetic assets allow DeFi citizens to replicate all assets, and is expected to unlock the “everything tokenable” market potential. The next big trend in crypto will start with DeFi. DeFi’s entire TVL is well over $150 billion, and who knows how much more it can grow. This value has grown a lot over the past year as more users understand how decentralized applications strike a perfect balance between revenue and efficiency. The amount of liquidity flowing into these DeFi applications is staggering, but it justifies the power of new project-party innovation. Overall, there are not many effective models available today, and this is our opportunity. The success of SNX, MIR, and other projects will be seen as a catalyst for the next market wave, and will take user capital efficiency to greater heights. Current top projects are likely to stand firm because they can optimize liquidity sources and prevent users from withdrawing their assets. Governance is just one direction for DeFi 2.0, so there are great opportunities for other branches. These waves are not necessarily limited to happening only once or at the same time.