Traditional governance was usually carried out by a strong centralized leader, or group of leaders and the laws/rules are rarely decided by the people themselves. Even in Democratic societies, the vast majority of our laws are made by elected representatives, and thus the power to decide the laws for hundreds of millions of people is still centralized in the hands of a few hundred people. The key point here is that governance tokens provide a much more direct form of democracy in which anyone that holds the token can vote on the proposals.
The centralization of power also applies to cryptocurrency platforms. Before the launch of governance tokens, the key decisions about the future of the protocol were made by the development team. This doesn't mean that the team acted malevolently or abused users. It simply means that there was no viable method to enable decentralized governance of the protocol, so the founding team had to act as a “benevolent dictator” so to speak. As governance tokens have come into their own, many decentralized financial development teams are handing over control of the protocols to the users through the use of the governance tokens. Users who hold governance tokens are able to vote on new proposals/upgrades to the protocol, and their vote is weighted in proportion to the number of governance tokens the hold.
Crypto protocols are meant to be governed by decentralized communities of stakeholders. Not because it’s more efficient, or important for ideological reasons, but because it’s necessary to unlock their core value proposition: that the underlying protocols will continue to run as designed, and will remain open to anyone who wants to use or build on them, without having the rules shift under their feet.
Bitcoin is the original embodiment of these concepts, creating the first internet-native money at scale. But they are equally applicable (and valuable) to other types of open financial primitives as well, including things like borrowing, lending, trading, and so on. Though the specific application may differ, the need for decentralized governance remains the same.
For crypto startups, transitions towards community governance are complicated, and raise difficult questions around ongoing development, voter participation, and incentive alignment between stakeholders. But they are ultimately necessary in order for the protocols to transcend their original developers and provide enduring value as open financial infrastructure.
The AAVE Protocol v2 was launched in December 2020. Tis brought along with it true community governance denoted as Governance V2!
With V1 governance, only the Aave Genesis Team could submit Aave Improvement Proposals (AIPs).
<aside> 💡 AIPs are binding on-chain governance proposals that require some technical knowledge and automatically execute once the votes are in and validated.
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Today, any Aave community actor that meets the requirements can create an AIP to add a new token to the protocol, update risk parameters, add a new liquidity market, and more! V2 governance aims to be inclusive of everyone with a stake in the Aave ecosystem and preserve decentralisation and security.
AAVE Token Holders Govern Aave Protocol
AAVE and/or stkAAVE token holders receive governance powers proportionally to the sum of their balance.
There are initially two powers associated with each governance token:
Any user can choose to delegate one or both of the governance powers associated with a token, either through our governance portal or programmatically.
At a high-level, here are the steps involved in a Governance Proposal.