What if DeFi projects do not become decentralized?

The DeFi sector has to be decentralized in such spheres as governance, finance, and technologies — but will this goal become a reality?

Governance plays a crucial role in developing the industry of decentralized finances. Presently, the key players have been arguing the purpose of such governance, debating the way it will look after such a transition.

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Sam Bankman-Fried, of FTX, stated that although his company will be involved in DeFi, it will only be for the short-term profits as he does not expect to see long-term influence in protocols through governance. Bankman-Fried also added that he uses DeFi protocols for the purposes they identified.

Regardless, who knows whether it’s true or not. There are multiple mining programs that are established in such a way, that’s why Bankman-Fried doesn’t break any rules. If these mining programs refuse such involvement, then it has to establish its program accordingly.

Decentralized governance has to become one of the core goals of DeFi

Decentralized Finance (DeFi) was designed to establish a transparent and clear financial system that can be easily reached by the population. Generally speaking, governance tokens were established with several goals in mind. Mainly, projects use them in order to decentralize the decision-making process. If lots of people are involved, abuse is less likely to occur from one party.

In order to reach the first aim, broadly speaking, the tokens are used to incentivize holders with the aim of making them participate in order to make advantageous decisions for the DeFi protocol. Thus, governance tokens may be connected to the traditional shareholding system in companies as well. Furthermore, it drives capitalism’s success by incentivizing shareholders to lend capital and rule a company out of self-interest.

Taking into consideration the fact that one of the aims of DeFi is the decentralization of token holders, still, a problem occurs when a concentration of governance tokens are held by several holders. However, this can be vital during the early stages of a project.

If there is a centralized decision-making system, the projects will move faster and more effectively. However, from a long-term perspective, a decentralized token distribution is far more effective via wide participation from the community in the development of the project.

Many projects follow an approach of progressive decentralization. If they are limited in the supply of governance tokens, the holders will probably have an idea of their voting power, which in turn makes it more complicated to be exploited by potential bad actors.

Blockchain development experts from INC4 have stated that liquidity mining and yield farming is a new method to earn rewards with cryptocurrency holdings. Even still, DeFi is expected to change the way people deal with money.

The question is how should projects hold the liquidity and create a broad foundation of governance token holders if the users sell their governance tokens?

Governance means autonomy, but is it beneficial?

There are multiple founders who sell their governance tokens and lost projects. Still, governance tokens are just another investment pipedream that makes the founders of a project rich and leaves the customers with empty pockets. As always, there are some exceptions to this rule.

It’s important to do your research and calculations before agreeing to participate and make an investment — as with anything, you need to fully understand the risks. Many corporations are aware of the risks, which is why they use risk-adjusted returns for investment decisions.

Decentralized governance is highly-effective as has been proved by multiple successful companies with open-source software. Remember, a project has a better chance for success if collective wisdom is involved.

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