MakerDAO Flash Loan Threat Weakens Tokenized Governance

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In Brief
  • A recent MakerDAO governance vote was exploited by a flash loan.

  • The Maker community has proposed token burns to prevent re-occurrence.

  • Many DeFi protocol tokenized governance systems are still centralized despite claims to the contrary.

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Decentralized finance protocols are striving to achieve an accolade of tokenized governance. But more examples of weakness are appearing in the system, and MakerDAO has been the latest ‘victim.’



A recent MakerDAO governance vote was marred by a flash loan that enabled a controlling party to influence the outcome and pass the proposal. Essentially the team making the proposal wanted to white-list access to MakerDao’s price oracle, so took out a flash loan to manipulate the process.

A flash loan is one that is taken out and paid back within the same transaction. It has been used previously to carry out arbitrage attacks, most recently on Harvest Finance. In this case, the flash loan was used to influence tokenized governance voting.

The team detailed the shenanigans on the protocol blog, posing the question: should the Maker community burn the attacking MKR in the event of a governance attack that leads to a protocol redeployment?

Does Tokenized Governance Really Work?

A DeFi platform called B Protocol wanted to be white-listed, so submitted the proposal on October 23. On the 26th several transactions took place gaining the team enough crypto collateral to borrow $7 million in MKR which were used to vote and pass the proposal before being paid back.



Although not entirely malicious as the team was transparent with its actions, the move has kicked off the tokenized governance debate again. Maker initiated another proposal to prevent further flash loan exploitation.

“The purpose of this signal is to disincentivise large MKR Holders from providing MKR Liquidity on Lending Platforms and AMM Platforms until such a time as the Maker Governance contracts can be replaced with versions that cannot be attacked using flash loans.”

DeFi industry insider Chris Blec, who previously criticized tokenized governance, was equally vociferous with this latest debacle.

 

Power to the Whales

The first Uniswap governance vote was also mired in controversy as the proposer, Dharma, was also one of the largest token holders. At the time it wanted to reduce the quorum which would effectively give it even more control over the voting process.

Fortunately for the sake of continued decentralization, the proposal did not achieve quorum despite gaining 98% of the votes (which came through just a handful of whale accounts).

Other protocols that claim to be decentralized such as SushiSwap are also governed by whale accounts that raise questions as to the effectiveness of tokenized governance systems.

As previously reported by BeInCrypto, most DeFi governance systems mirror those of corporations, with big bagholders acting as the executives and CEOs.

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Martin has been writing on cyber security and infotech for two decades. He has previous trading experience and has been actively covering the blockchain and crypto industry since 2017.

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