TLDR

This analysis and accompanying governance analytics dashboard examines trends in voting participation and decentralization in Compound governance from 2020-2023. Key insights include:

• Participation, measured by the number of unique voting addresses, spiked in 2022Q2 but subsequently declined in 2023 back to prior levels, signaling a need for ongoing voter engagement over time.

• Despite temporary participation growth, overall voting power exhibited minimal change, indicating new voters had limited voting power.

• Concentration of voting power rose steadily over the 2020-2023 as measured under the Herfindahl-Hirschman Index. However, the minimum voters needed for majority control was relatively stable, suggesting persistent defenses against adversarial coordination.

• Compound’s level of concentration in vote distribution has historically been between those observed for Uniswap and Aave, with Compound typically more concentrated than Uniswap and less concentrated than Aave.

Introduction

Decentralized governance is a defining feature of DeFi protocols, allowing community control through on-chain voting systems. Governance is enacted through participatory mechanisms like proposal voting, enabling users to shape policies and future development.

Monitoring governance health is crucial for protocols like Compound that rely on community control. While some power concentration is expected, excessive centralization and consolidation could compromise the promise of decentralized governance. This analysis examines the state of governance for Compound, a leading DeFi lending protocol. It utilizes data on voting and power distribution from 2020 through mid-2023 to quantify engagement and decentralization over time.

Specifically, the analysis looks at:

• Trends in voter participation - How many unique addresses are voting on proposals? Is participation consistent or variable over time?

• Concentration of voting power - Are proposals being controlled by a wide group or narrow subset of voters? Has influence consolidated or spread?

• Minimum voters for majority control - How has the minimum number of voters needed for 51% control changed? Does this indicate structural defenses against adversarial coordination have strengthened or weakened? Note: assessment of a protocol’s collusion resistance is complex and cannot be directly measured using the simple measures presented in this report, as it requires an understanding of the relationships, expectations, etc. of the various participants. However, we believe that simple measures such as the Nakamoto coefficient can still be informative.

The analysis also aims to quantify Compound's decentralization standing both longitudinally and relative to peers. Therefore, Compound's governance health is benchmarked against fellow DeFi leaders Uniswap and Aave using the same metrics.

Data Source and Definitions

Underlying voting and delegation data is sourced from Flipside. Please note that data source freshness may vary and is subject to updates based on the underlying data pipeline extraction schedules.

Voting Power: Sum of votes cast. Voting weight is determined by the number of votes the account had delegated to it at the time the proposal state became active.

Unique Voting Addresses: Number of addresses that cast a vote on a proposal. Note that if a delegate has multiple addresses delegating to it then it will still only count as one unique address.

Proposal Quarter: A proposal's assignment to a Proposal Quarter is determined by the minimum date of a vote cast for that proposal. Note that the decentralization metrics' quarterly values are weighted averages based on voting power by proposal.

Nakamoto Coefficient: based on metric originally defined in Srinivasan and Lee (2017). For this application, it is calculated as the minimum number of entities (i.e. unique voter addresses) required to control 51% or greater voting share. (Reference)

Herfindahl-Hirschman Index (HHI): measure of market concentration, most notably used by the United States Department of Justice (DOJ) & Federal Trade Commission (FTC). It is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of 30, 30, 20, and 20 percent, the HHI is 2,600 (30^2 + 30^2 + 20^2 + 20^2 = 2,600). The HHI can range from 1 (least concentrated) to 10,000 (most concentrated). The DOJ and other governmental agencies historically consider markets under 1,500 to be low concentration, markets between 1,500 to 2,500 to be moderately concentrated, and markets in excess of 2,500 to be highly concentrated.(Reference)

Gini Coefficient: a measure of equality within a community, commonly used to quantify income inequality. A low/high value represents a more equal/unequal community. It is calculated as the ratio of the area between the perfect equality (dotted) line and the Lorenz Curve divided by total area under the perfect equality (dotted) line. (Reference)

Key Findings

The accompanying dashboard presents summaries on both an individual proposal and quarterly basis. This analysis focuses on the quarterly aggregated governance metrics to evaluate overall trends and developments in Compound's governance voting.

Unique Voters

Unique voter address participation increased sharply in 2022Q2 compared to prior periods, indicating broader voter engagement. However, participation subsequently dropped back to previous levels in 2023.

New vs Returning Voters

The 2022Q2 spike was driven by an influx of nearly 1,100 new voters, making up over 90% of participants that quarter. Short-lived participation growth highlights the need for ongoing engagement. The temporary surge in participation that was not sustained highlights an opportunity to promote more consistent voter involvement over time. The drop in governance participation from its spike starting in 2022Q2 follows the broader bear market that accelerated in 2022 and through 2023. Some decline in engagement is expected given weaker market conditions and sentiment. However, there remains an opportunity to engage a broader base of users in governance to promote consistent participation through market cycles.

Voting Power Exercised

The participation spike did not translate to voting power. Despite more unique addresses participating in 2022Q2, the total voting power exercised remained stable over the same period.

Herfindahl-Hirschman Index (HHI)

The Herfindahl-Hirschman Index (HHI) shows voting power becoming increasingly concentrated from 2020-2023. The HHI rose from ~1,400s in 2020 to exceed 2,000 by 2022. This has continued to increase in 2023. Continued monitoring is warranted.

Nakamoto Coefficient

The Nakamoto coefficient has remained relatively stable, hovering between 2.5-3.5 from 2020-2023. This range indicates that while some consolidation of voting power has occurred, it has not been as marked of a change as in HHI. Ongoing tracking of the Nakamoto Coefficient is important to quickly identify any significant shifts that could impact  governance integrity.

Gini Coefficient

The Gini coefficient observed in governance voting has oscillated considerably throughout 2020-2023 within a range of 0.66 - 0.96. Such high Gini coefficient scores often indicate significant levels of concentration. Yet, there are also limitations from relying too heavily on the use of a Gini coefficient as the main signal of the level of inequality amongst a community, as further described in a July 2021 article by Vitalik Buterin. Further, given the way the Gini coefficient is calculated, an increase in voter participation amongst token holders with relatively smaller vote share will lead to an increase in the Gini coefficient. Therefore, a positive engagement with the broader community may actually appear in the data as an increase in the Gini score. Overall, the Gini coefficient alone is insufficient as a sole measure of decentralization---it should continue to be used but complemented with other measures.

Recommendations

Based on these findings, the following steps are recommended:

• Broaden engagement through educational campaigns and governance tutorials to ease onboarding barriers for new users.

• Analyze voter drop-off and churn to optimize retention after initial participation, promoting an engaged core community.

• Assess outreach, UX, and understandability of the governance portal. Benchmark against high-participation protocols like Uniswap.

• Monitor changes in inequality metrics quickly and respond to concerning consolidations in voting power.

• Increase transparency through regular reporting on governance health metrics for the community.

• Evaluate perceptions of the community through polls and surveys to identify areas of concern or disconnect from current governance.

• Explore incentives like rewards programs to encourage long-term participation and decentralization-promoting behaviors.

• Review delegator models and explore possibility of a fractional delegation mechanism, eg Franchiser.

Ongoing quantification of governance metrics will enable Compound to track progress over time. But most importantly, these indicators should inform action to uphold Compound's commitment to decentralized, community-driven governance.

Conclusion

This analysis explored the evolving state of decentralization in Compound governance using data-driven assessment of participation and power distribution.While some trends such as declining engagement and increasing concentration warrant increased monitoring, Compound has generally preserved resistance to centralization thus far. With targeted initiatives to broaden involvement and voting power equality, Compound can reinforce its standing as a leading example of community-governed DeFi protocols.

Grant Acknowledgement

This dashboard and associated analysis was made possible by support from Compound Grants Program 2.0