Vincent A Saulys' Blog
Incentives in Crypto & DeFi get Nuts When the Amounts are Huge
Tags: crypto defi
July 13, 2021

As many DeFi projects start to dramatically increase in value, we come to a crossroads: will they not be jerks?

Something not apparent to many is that while MakerDAI, Duck, and other defi projects are ostensibly demoracies somebody has to hold the keys. And that person can always decide to not listen to community votes.

So what keeps him not doing that? What's his incentive?

His incentive is the token value would crash -- affecting his own share.

People who build these projects hold on to X% of the total initial token sale. They typically agree to voluntary lockins, theoretically enforced by contracts that prohibit selling, and want that value to grow. Not listening to the voice of your fellow token holders is a great way to tank your net worth.

But is this so secure? I'm reminded of Uber circa 2017 when Travis Kalanick was fired by the board. Bill Hurley supposedly lead the ousting. He is one of the principal partners at Benchmark Capital.

Uber was --- and stil is -- Benchmark's largest IPO ever. Their stake was worth more than all their other exists combine. They had every incentive to land this plane. Whether or not you agree with their decision to fire Kalanick, they had every incentive to make sure an IPO happened because even if Benchmark went down it would still be worth it.

When trusting DeFi & other crypto developers to do the right thing, we can be fairly safe in knowing that there are incentivized for them so... to a point. Eventually, these projects may became big enough that they will not care if the token price crashes provided they get out in time. The money may be too much, the incentive too strong. I predict this will happen at least once.

What does this mean for crypto?

It means a move to a very decentralized, fractured world in which developers are pushed-and-pulled between people who want them to be valuable but become nervous when they get too large.

Too valuable? They pump-and-dump, leaving everybody else holding the bag, reputation be damned.

This will encourage more clones to pop up, not less. That would mean a drastic change from our current technology climate in which incumbents naturally get bigger over time.

Perhaps I'm too optimistic?

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