What is Ungovernance, and why does it matter?

An Analysis of Ungovernance and Its Potential Impact on Protocol Sustainability.

On the Nature of Ungovernance

Decentralized Finance (DeFi) stands as a testament to the possibilities of blockchain technology in the tapestry of the digital realm. Within this panorama, the philosophical grounding of governance dances back and forth between pillars of decentralization and control – an oscillating, pendulum-like dance which has so far resulted in more questions than answers:

  • How can we tell that a protocol is sufficiently decentralized?
  • How can we ensure that a protocol STAYS decentralized?
  • How involved should governance stakeholders really be?

"Ungovernance" is seen by some, such as HAI’s Reza Jafery, as an emergent paradigm, challenging age-old conventions and providing a succinct solution to some of these questions – but what is it exactly?

Defining “Ungovernance”

At the heart of the ungovernance philosophy, there is a belief in the absolute ideal of decentralization: minimalistic, if not entirely absent, human intervention in a protocol's operations. It proclaims that true decentralization is achieved when a system operates without the customary bureaucratic layers of decision-making that have often characterized traditional systems, and increasingly, some DeFi systems.

The critical question is, how do we gauge the degree of decentralization? In traditional governance models, centralized agencies or bodies wield a disproportionate influence over system decisions. In a corporation, this looks like an executive board; in DAOs this could be a team of core developers, or whales who have acquired a controlling interest in governance tokens. In contrast, an ideal decentralized system is characterized by equitable distribution of power and influence, devoid of any single point of control or failure. In the theater of DeFi & DAOs, governance stakeholders hold the reins of power, making pivotal decisions ranging from protocol upgrades to fee structures. The extent of their involvement, however, is a matter of perennial debate. Ungovernance dictates a reduced role for these stakeholders, asserting that the system, once set into motion with its foundational code and algorithms, should be allowed to function autonomously. Like winding an old watch: once the original time has been set, there’s no need for further human interference.

So in short: Governance Minimization can be defined as the reduction or limitation of human intervention in the decision-making process of decentralized systems.

On the Benefits of Ungovernance

Ungovernance isn't merely a neologism; it's the distillation of a philosophy that seeks to pare down governance, thus reducing the human predilections for interference, or worse, indifference, in DeFi protocol management. Envision a DeFi landscape where protocols are impervious to manipulation—be it fund drainage, aggressive governance accumulation, centralized intervention, or general infrustructural weakness. This aspect of ungovernance is particularly attractive to stablecoin protocols, whose purpose is to build and maintain reliable and sustainable places to store and exchange money.

Systemic Autonomy: The Hallmark of Ungovernance

Recall our earlier analogy: a traditional timepiece, a self-winding watch. Once its mechanisms are set in motion, it functions autonomously, requiring minimal external intervention. In the world of DeFi, ungovernance seeks to achieve something similar: protocols that, once initialized, perpetuate themselves, adapting and operating based on predetermined algorithms and parameters without the need for frequent human intervention.

Why Stablecoin Protocols Stand to Benefit

Stablecoins, such as USDC, RAI and OpenDollar, which seek  to maintain price stability and peg to a reference value, are sensitive to and systemically at risk of external shocks and manipulations. Their very essence is tied to the idea of predictability and trust, values which have propelled the asset class to a “denomination of 80% of centralized exchange (CEX) trades” (Riyad Carey, CoinDesk). As such, the principles of governance-minimization provide an enticing prospect:

  • Predictability: Ungoverned stablecoin protocols, rooted in math and code, offer a level of predictability that can be resistant to external market shocks or deliberate manipulation attempts. Additionally, governance-minimized systems can be programmed to avoid the acquisition of “bad debt”, which has proved problematic in the space before. This offers a solace to investors and users, knowing that the underlying mechanics are purely algorithmic.
Image credit: Reflexer Finance
Image credit: Reflexer Finance
  • Trust: Trust in traditional systems often hinges on human actors or centralized entities, exposing semi-decentralized stablecoins such as USDC and USDT to the risk of de-pegging.  Governance -minimized stablecoin protocols shift this trust to code. In a world where "code is law," this form of trust is deterministic and verifiable.
  • Efficiency: With reduced interference, the system can operate more smoothly. By removing the constant noise of unnecessary governance decisions or debates, the protocol can function at an optimized rate, reducing friction and increasing transaction speed. As you can see from the chart below, this efficiency drives remarkable stability.
Image credit: Reflexer Finance
Image credit: Reflexer Finance
  • Accessibility: In an ungoverned stablecoin protocol, there’s no need for barriers to entry such as background checks or exclusionary practices (subject to jurisdictional AML and KYC considerations). This ensures a level playing field for all, promoting an efficient system where every participant has equal access and opportunities.

Compliance & Equilibrium in Governance

The ethos behind ungovernance is an introspection of the potential pitfalls of excessive governance, or overgovernance. Allowing unrestrained centralized control over protocol morphology widens the gateway for malevolent forces to access critical points of failure, jeopardizing the very security and sustainability DeFi seeks to uphold.

An illustrative analogy is the monetary policy of traditional financial systems, where the interest rates which dictate fiscal health are determined by centralized entities or individuals. Transpose this to the DeFi world: under a system of ungovernance, these rates are no longer at the mercy of capricious governance decisions or human fallability. Instead, they adhere to the forces of market dynamics and algorithmic precision, shielding the protocol from reckless gambits and general human ineptitude, as well as (hopefully) from the potential of resulting in overbearing regulatory dispositions.

For years, traditional financial rules have assumed that you need a trusted middleman, like a bank, for complex financial transactions. But with systems like RAI and its subsequent forks like HAI, TAI, and OpenDollar, we're seeing that's not necessarily the case. This shift challenges regulators to rethink old assumptions and consider how existing rules can evolve to accommodate these innovative systems, rather than labeling them as threats.

The Fortitude of Immutability

Within the tenets of ungovernance, code immutability is paramount. Traditional DeFi paradigms often assign authority over the stewardship of protocol evolution to a centralized team of developers. This poses a problem: the protocol's integrity then hinges precariously on the security and judgment of this select group. The malevolent specters of SIM swaps, ransomware, and even physical coercion loom large - if any of the members of these core groups were to be successfully targeted, the supposed immutability inherent to the protocol’s design could be at risk. Governance minimized systems mitigate this risk by removing these points of failure entirely, or strongly limiting access to them, bolstering the promise of immutability.

On the Challenges of Ungovernance

While the appeal of ungovernance, with its minimized human intervention and maximized automation, seems a compelling vision for the future of DeFi, several challenges lie ahead for its mainstream adoption:

  • Evolving Economic Contexts: Economic realities are continually changing. If ungoverned protocols cannot adapt to these shifts, they risk becoming outdated. Theoretically, however, disasters such as the collapse of FTX at the hands of Sam-Bankman Fried should be mitigated by removing the possibility of human fallibility.
  • Loss of Nuance: Human intuition and judgment, for all its inherent flaws, provides an understanding of nuance and context, which purely algorithmic systems might miss. The absence of this discernment could theoretically lead to sub-optimal decision-making by an ungoverned protocol in certain situations.
  • Stakeholder Alienation: A truly ungoverned system could potentially alienate stakeholders who might feel their opinions, concerns, or expertise no longer play a part in the system's evolution. This would create an obvious issue for projects that rely on human interaction, but shouldn’t pose a problem for more “hands off” algorithmic protocols.
  • Lack of Crisis Management: In the event of a crisis, exploit, or an unexpected market downturn, human governance layers can act swiftly and decisively. In a fully automated system, the response might be slower or even non-existent.

On GEB & Ungovernance

Now that we’ve discussed the philosophies and conceptual reasonings for governance-minimizations, let’s explore an existing system which applies those tenets. GEB is a scheduled framework developed by RAI that consists of a multilayered approach with three levels gradually signaling progress towards minimization.

The GEB Framework and the Quest for Governance Minimization

GEB, inspired by the time-spanning triumvirate elucidated in Douglas Hofstadter’s Gödel, Escher, Bach, presents a formidable blueprint for crafting systems adept at stablecoin issuance. GEB differentiates itself from its precursor, MCD, by introducing a plethora of novel features, including intuitive variable nomenclature, an intricate feedback mechanism, the option for SAFEs insurance, and an ensemble of contracts that delineate long-term governance.

How does it work?

GEB's governance minimization journey is like a rite of passage, in which the protocol progressively sheds the shackles of overarching control. There's a meticulous roadmap, demarcated by distinct levels, each advancing the cause of minimization while retaining the protocol's integrity.

However, one might ponder: to what extent can GEB truly minimize governance? This is a tapestry woven with complexity, where each strand (or contract) possesses its unique potential and challenges for minimization. Some contracts might achieve near-total autonomy, while others, intricately intertwined with external components, may perennially necessitate governance oversight. GEB's governance minimization is kind of like a multi-level video game.

As the protocol matures, it unlocks new levels of minimization:

  • Level 1 (14 Months Post Launch) - Features removed from major contracts.
  • Level 2 (18 Months Post Launch) - Expanding on Level 1, this involves relinquishing control from the SAFEEngine, AccountingEngine, and more.
  • Level 3 - The protocol is now ungoverned, and decisions on further minimization are democratically enacted by DAO governance.

Conclusion: The Governance-DeFi Nexus

When it comes to decentralized finance (DeFi), the idea of "ungovernance" has got a lot of people talking. And it's more than just talk—projects like RAI's GEB show that we can build systems where decisions are mostly made by algorithms instead of people. This could lead to a fairer and more secure financial system.

But before we get too excited, let's be real: going full auto-pilot has its challenges. The world keeps changing, and sometimes you need a human touch to adapt. So, it's not about getting rid of all governance; it's about dialing it down to the right amount. The core question is not whether we can eliminate governance entirely, but rather to what degree we can minimize it without sacrificing adaptability and responsiveness.

Ungovernance also challenges our traditional understanding of regulatory frameworks. It asks regulators to adapt and evolve, breaking free from a century-old mindset that has long assumed the necessity of centralized intermediaries for complex financial transactions. So, it's an opportunity for rule-makers to be more creative and to think about new ways to manage and support this growing field.

In the end, the debate about ungovernance isn't just for tech nerds or finance buffs; it's about what we want the future of finance to look like. It's a topic that forces us to grapple with the core principles that drew us to this space to begin with: decentralization, autonomy, and inclusivity. As we explore this new frontier, it's clear that ungovernance isn't the end goal but a tool—one of many in our DeFi toolbox—that can help us build a financial system that's better for everyone.

Check out the Open Dollar App and get in touch with us on Discord.

Contributed by Kyler Wandler

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