Introducing Sherlock DAO
0xE400
February 16th, 2022

TL;DR

Sherlock is committed to a fully decentralized future.

Tokenholders will play a direct role in the most crucial activities of the protocol including managing the security team.

Why Decentralization?

Decentralization is one of the most important aspects of the Web3 movement. One could even go as far as to say that without decentralization, there is no Web3. One of the key principles of the Web3 movement is censorship resistance. Until crypto came along, there was always a party somewhere who could take money out of your bank account, repossess your assets, or muffle your voice.

Because blockchain nodes are highly distributed, shutting down or censoring information on a blockchain becomes orders of magnitude harder than the same action before blockchains existed. The Sherlock team has built on top of Web2 platforms in the past and seen the censorious effects of centralized power firsthand. Vitalik would refer to this as building on top of bulldozers, and the Sherlock team vowed to never do it again.

However, Sherlock is built on top of Ethereum. This is precisely because Ethereum is a decentralized vetocracy, and not a bulldozer. The design of Ethereum instilled confidence in the Sherlock team to build on top of it.

The Sherlock protocol must have the same confidence-instilling vetocracy as Ethereum, otherwise actors who interface with Sherlock will not have the confidence necessary to rely on it.

The Path to Decentralization

The Sherlock team is fortunate to stand on the shoulders of many giants who have come before. These giants have graciously served as case studies on the many possible forms of decentralized governance.

The Sherlock team has concluded that the power must ultimately rest in the hands of individual tokenholders, otherwise the governance is a sham.

The Sherlock protocol will continue to see material iterations on its design for the foreseeable future, and because of this the team thinks it is likely that Sherlock will follow in the footsteps of decentralization as carried out by protocols like The Graph:

“…governance should enfranchise an increasing group of stakeholders, while being robust to the fact that not all stakeholders are subject-matter experts or have the time and inclination to engage actively. Governance should start with a small group of stakeholders to move quickly and decisively in the early days and expand that group as the protocol matures from rapid iteration to slower, less frequent upgrades and parameterizations.”

This is the essence of progressive decentralization and Sherlock thinks it strikes the right balance between the agile development required in the short to medium-term with the antifragility required in the medium to long-term.

Role of the SHER Tokenholder

Being a holder of SHER tokens will not be for everyone. It is a responsibility that is not to be taken lightly. There are 3 main roles for a SHER tokenholder:

Managing the Security Team

This is the most demanding role on a day-to-day basis. SHER tokenholders will have the authority to add or remove members of the security team. This could include individual members or audit firms or anything in-between.

The Sherlock protocol is a series of checks and balances. The Sherlock security team has a few checks in place, such as the association of their compensation with the performance of protocols they review and price. However, becoming a member of the security team can look like a “free option.” If you fail, the costs are low and it is mainly unearned compensation that is withheld, no slashing. If you succeed (which would be the expectation and the probabilistic outcome), the rewards are great. An imbalance exists.

In order to right this imbalance, SHER tokenholders will be in charge of adding and removing security team members.

But what is the check on SHER tokenholders to execute on this dutifully? If SHER tokenholders do not choose successful security team members, then protocols covered by Sherlock will inevitably experience exploits.

In this scenario, the SHER token price would likely drop. But that’s not all. The Sherlock protocol will also be designed to mint extra SHER tokens to repay the hack. This inflationary act should serve as a “slashing” mechanism for SHER tokenholders. If enough inflation occurs, eventually the unsuccessful SHER tokenholders will be replaced and the holders of the new SHER tokens will gain more voting power with which to make better decisions (hopefully).

This dynamic is still in development and is subject to change. However, any SHER tokenholder should be aware of this potential dynamic.

Protocol Governance

The Sherlock protocol contains many parameters such as the options for staking duration and the split between premiums to stakers vs. security experts.

Many of these parameters may need fine tuning in the future, and it is anticipated that the SHER tokenholders will have the ability to participate in governance votes that propose changes to such parameters.

Censorship Resistance

This is easily the most important role for SHER tokenholders, but the call-to-action will hopefully be very infrequent.

There may come a time when known actors, council members or other parties associated with Sherlock governance are pressured in one form or another. This pressure may result in certain actors, etc. stepping down from their roles, possibly under duress.

If such an event occurs, SHER tokenholders will be implicitly called upon to resume governance of Sherlock. Much like the nodes in the Ethereum blockchain, success will depend on a diversified and decentralized body of tokenholders who are collectively immune to the pressures of one or more concentrated actors. Of course, the protocol cannot require tokenholders to meet this challenge, but the Sherlock team thinks it is important to remind tokenholders of their ultimate mission -- and hope that they are never called upon to carry it out.

Incentive Mechanisms

Concurrent with the unlock of material amounts of the SHER token, the Sherlock team will create a voting contract and incentive mechanism for voting.

This mechanism can be thought of as similar to the veCRV design, with important differences.

The voting contract will reward those who stake SHER tokens into the contract with future SHER token rewards. The longer the SHER tokens are locked up for, the more voting power and rewards will accrue to those SHER tokens. Those who do not stake their SHER tokens into the contract will be at risk of missing out on future rewards.

This mechanism incentivizes long-term holders of SHER tokens and gives more voting power to those who are more aligned with the long-term performance of the SHER token.

Sherlock is still on the journey of progressive decentralization and many of the above topics will be fleshed out and formalized in future posts.

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