Let me begin by saying that I believe the Gotchi Vault is a fantastic product with excellent product-market fit, and is a valuable resource for Aavegotchi asset holders. The managers of the Vault are highly valued members of the community who by all accounts act with the best interest of the protocol in mind. Everything said here is in the spirit of protecting the integrity of the Aavegotchi protocol well into the future. I am anticipating that other custodial solutions will emerge that present similar voting power challenges that I will outline here. The Vault just happens to be the main example we have to examine the issue of proxy voting at this time.
The VLT Token and its Role in Aavegotchi DAO Governance
One of the trade-offs to custodying assets in the Vault is that the owners of those assets are entrusting their voting power to the Vault managers. The VLT governance token is issued to the owners of assets held in the Vault during the initial six-month period following the Vaultâs launch. This provides a mechanism for these owners to still participate in governance of the Aavegotchi protocol via the Vault managers as their proxy, but is not a 1-1 representation of voting power to assets owned. Should a user remove their assets from the vault, they retain their VLT token and ability to influence the Vaultâs vote.
VLT is a decentralized governance token that can be freely traded on DEXs, with a current market value of around $4 USD. Through investing in VLT, anyone could bypass the purchasing of Aavegotchi native assets and just buy VLT if they ever wanted to have a larger influence over the Aavegotchi DAO and base protocol.
The Problems with Proxy Voting
The numbers Iâll outline below suggest to me that the Vaultâs voting power creates an outsized influence on the DAO that does not accurately reflect the purposeful will of the owners of the assets contained within. This is in large part because a majority share (perhaps as much as two-thirds) of the assets in the vault are passively owned by parties that do not participate in VLT governance, yet whose voting power is still exercised vis-a-vis the Vault. This being the case, VLT holders who do vote have a disproportionate say over the Aavegotchi DAO relative to the assets they own.
Asset owners are delegating their voting power to the vault in exchange for passive asset management, however there is not an easy way for them to opt to take their voting power back in time to vote on a specific proposal. This is due to the fact that once a DAO proposal is created, a snapshot is taken and voting power is irrevocably allocated to the Vault instead of the asset owner.
The lack of participation by many VLT holders suggests that had these same owners self-custodied their assets rather than placing them in the Vault, they most would likely either be abstaining from DAO votes just as they have abstained from the VLT votes, or are still voting using their non-Vault assets and are unaware of the Vaultâs VLT voting process.
The net effect of this is that the Vaultâs voting power is transferred from a majority share of passive asset owners to a minority of VLT holders who actively participate in governance. As a result, it takes a very small number of VLT holders (sometimes as few as 2 or 3 wallets) to sway the majority of the VLT vote and in turn wield a near-majority of the Aavegotchi DAO voting power.
Results of Recent DAO and VLT Votes
Here is a summary of VLT and GHST voting data from the most recent coreprops as well as two recent sigprops where voting was substantially closer than the coreprops:
Sources:
- Aavegotchi DAO (GHST) Votes: https://vote.aavegotchi.com/
- Gotchi Vault DAO (VLT) Votes: https://snapshot.org/gotchivault.eth
Key Observations and Thoughts
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The average total GHST vote for the coreprops was about 17.2 million GHST worth of voting power (sigprops are 13-14 MM GHST) The Vault currently holds a total of 6.8 million GHST worth of that voting power - split nearly evenly between two voting addresses - representing a roughly 40% share of the overall GHST vote for the coreprops (roughly a 50% share for the recent sigprops).
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In one recent instance where the VLT vote was relatively close, the Vault Managers split the Vaultâs voting power between its two voting addresses. This is a useful approach for close votes, however it has limitations in my view, as it is not feasible for the Vault to split its vote in a precise manner according to the VLT vote. Itâs either 100%, ~50/50 split, or abstain.
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The average VLT voting power that was exercised on recent votes was ~58,600 VLT. The top 3 VLT holders collectively hold over 30,000 VLT- representing the majority needed to determine the outcome of those votes.
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There are currently over 2,000 holders of the VLT token. An average of 88 voters participated in the VLT vote in the recent batch of coreprops- representing about â of the total VLT voting power. The Vault does not have a quorum requirement for VLT votes on Aavegotchi DAO proposals.
A Possible Solution
The spirit on which the DAO operates is that the asset holders express their purposeful will by actively participating in voting. Rather than having custodians such as the Vault vote on behalf of the owners of the assets it custodies, is there a way to allow DAO participants to retain their voting power and cast their votes directly and individually even while their assets are held within the Vault?
As part of such a solution, the DAO would need to require any custodial solutions to disclose their wallets to the DAO, and those wallets would be excluded from DAO voting to prevent double-voting. At the same time, the DAO would instead credit the asset ownerâs wallet with the appropriate voting power for their assets held by a custodian.
In short: everyone votes normally, regardless of whether your assets are in the vault or out of the vault. The vault does not vote for you. Everyone has exactly the amount of voting power the DAO allows based solely on the Aavegotchi assets they own and nothing else.
This does require the asset owner themselves to participate in DAO voting in order to obtain the XP rewards, rather than passively earning XP via proxy voting. I see this as a positive side effect for the protocol. (Correction: Vault gotchis do not receive passive XP when the Vault votes)
Some integration with the Vaultâs contracts and the Aavegotchi DAO would obviously be needed for snapshot to calculate the correct voting power. I have not investigated whether such a solution is technically feasible.
Final Thoughts
Proxy voting poses a risk to the credibility of the Aavegotchi DAO voting process in that the integrity of the DAO vote becomes dependent on trusting an outside party. In the example of the Vault, the VLT token is acting as a de-facto governance token for the Aavegotchi protocol, in addition to its intended use case as a governance token for the Gotchi Vault protocol.
At best, this is a bad look for the Aavegotchi protocol and presents an obstacle to achieving truly on-chain governance in the future. In a worst case scenario, a proxy voting system with substantial voting power could leave the Aavegotchi DAO and its $7 million+ USD treasury vulnerable to a Sybil attack by an adversarial party.
Iâve tried to be as thorough and unbiased in my thinking on this as I could here, so at this point I would leave it to the community to discuss constructively as to whether the concerns Iâve raised here are warranted and what, if any, proposals should be introduced by the DAO.
The Short Version (TLDR)
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Proxy voting implemented by the Gotchi Vault via the VLT governance token is not an accurate representation of the purposeful will of the owners of the Aavegotchi assets contained in the Vault. This is due to low participation of VLT voting and it not being a 1-1 representation of Aavegtochi asset owners who are utilizing the vault for its amazing asset management services that it provides the community.
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The voting power held by the Gotchi Vault is significant - near a majority of the overall DAO voting power and can be influenced by 2 -3 VLT holders. While we may trust these people to have integrity and Aavegotchiâs best interest at heart, we do not know for certainty who else may hold a large share of VLT tokens in the future. This poses a great risk to the DAO as their VP has the power to sway any vote in their favor.
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A simple solution would be to disallow proxy voting in the protocol and to require all voting power to be allocated to the asset owners instead of the custodians managing those assets. This would require some technical integration between the DAO and the custodians.