What DAO governance has in common with ‘eggheads’ calling a recession
There are two stories I want to talk about that are related, but not directly. The first: it seems possible that the US economy is or will soon enter a recession – but the officials making this call are reluctant to say so. Second, a popular Ethereum-based staking protocol overseen by a decentralized autonomous organization, aka a DAO, is bracing for a bear market.
Every story is a macroeconomic story now. Inflation is roaring. Wage growth and disposable income are down. Asset prices are depressed. And on Thursday, a preliminary reading of second-quarter gross domestic product is due out, with hopes the data can determine whether we’re in a recession.
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The White House said this week that even though the figure shows the economy is contracting, he would not use the r-word. Generally, a recession is defined as two consecutive quarters of negative GDP. We already had one. Economists expect annualized sequential growth of 0.4%, but it could be negative (and in any case, it will probably be revised).
Consequences in the world of cryptography
For crypto, a deteriorating economic outlook could mean accelerated job cuts, slower hiring, and delayed launches. Turbulent markets and rate hikes by the Federal Reserve will also cause people to withdraw capital from the markets and make safer investments.
Some crypto projects are preparing for all of this. Last week, the management of Lido, a critically important Ethereum staking protocol, offered to sell some of the project cash assets to venture capital firm Dragonfly Capital. The deal was to sell 10 million LDOs for 14.5 million DAI dollar-denominated stablecoins.
The governance proposal was rejected, mainly because the sale of $1.45 per LDO token was below the market price and there was no token lock. This second point is important because even though the deal was touted as a way to strengthen the bond between Dragonfly and Lido, there were real concerns that Dragonfly would dump the tokens at a convenient time for the fund but few convenient for holders.
If this sounds like a win for crypto governance, you need to take a closer look. The deal was expected to go through – despite community objections to giving free money to venture capitalists – until an anonymous whale wallet containing 17 million LDO tokens voted to scuttle it. (the defiant reported that this address has transactions related to Alameda Research.)
Lido has 75 employees and must find a way to ensure its solvency in the event of a multi-year bear market. Its cash is mainly denominated in LDO, ETH and stETH. The proposal to cash in stablecoins was made after a community member “the back of the napkin” calculation that the protocol was looking at bankruptcy at current burn rates.
Lido management intends to publish a revised proposal, taking into account community feedback. Cobie, the mega-popular Crypto Twitter personality who said he works for Lido and still has significant exposure, launched the idea that the DAO hire a chief financial officer.
But the prospect of whales is of concern – a separate Lido holder with 15 million tokens voted in favor of the original deal. Governance in a market where motivated parties can literally buy voting tokens on the open market can always be suspect. But at least it’s a bit transparent.
Bloomberg’s Steve Matthews wrote an excellent article on the “obscure sign of ‘egg heads’” from Stanford University who will have a say in whether the United States is in a recession. Indeed, even if everyone has the impression that we are in a recession, the ultimate call goes to the National Bureau of Economic Research.
See also: ENS and the limits of DAO governance | Opinion
This means that on Thursday, if the data shows that US GDP fell for the second consecutive quarter, we may not be officially in a recession. In a way, that could be a good thing. In these “story-driven” times (the same trend that gave the world meme stocks and dog tokens), beliefs about the economy matter. And a single word could have an outsized impact.
The political implications here are strange. Is it fair that one entity can set a trend that affects everyone – potentially contrary to common sense? What if they vote for the greater good and give people what they want in the end? Either way, these machinations are everywhere.
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