Ending the Staking Trade-Off Can Save DeFi Communities

Voter apathy is killing the spirit of community in DAOs. Mismanagement and indecisiveness has left many decentralized autonomous organizations (DAOs) wounded and vulnerable to crypto’s equivalent of the 1980s corporate raider.

Even MakerDAO, one of the early proponents of this novel form of organization, is battling to revive governance participation with its long and complex “endgame” restructuring.

The reasons for anemic participation rates in many DAOs vary. Mainstream institutions and retail investors are often skittish about taking part, particularly given the evolving — and often murky — regulatory picture in the United States and other jurisdictions. Or DAO participants who jump in enthusiastically may lose interest after the initial flush of enthusiasm has passed and prices are deflated.

This article is part of CoinDesk’s “Staking Week.” Taylor Johnson is the co-founder of PsyFi.

One major driver behind disengagement from governance, though, is the central dilemma facing users in many decentralized finance (DeFi) communities: how best to deploy their assets — and their energies — in an ecosystem.

In networks where there is a clear divide between governance tokens and reward-generation assets, users are left with an impossible decision: should they stake to earn rewards? Or concentrate on participation in governance?

All too often, it is the desire to earn personal profit from rewards that wins out over helping a project advance toward its mission.

But there is a solution to the asset deployment dilemma. Staking. To spare users the Hobson’s Choice of where to put their assets, staking — already one of the most powerful innovations in DeFi, which is itself a construct based on automated incentives — can now be retooled

As headline-grabbing incidents this year involving protocols such as NounsDAO, Hector Network on the Fantom blockchain and Parrot Protocol on Solana have shown, disengagement can leave DAOs vulnerable to predators who can swoop in, buy up governance tokens from less-interested community members, and force projects to liquidate their treasuries or take other steps that can decimate a project.

Apathy can have consequences that are less dramatic but potentially as damaging. It can sap the energy out of a community, leaving DAOs struggling to drum up…