The Role of Governance in Decentralized Stablecoins

On-chain governance allows token holders to vote directly on protocol changes using blockchain transactions. This creates a transparent and immutable record of all decisions.

• Proposals are submitted and executed via smart contracts, like in MakerDAO's governance portal.
• Voting power is typically proportional to governance token holdings, such as MKR or COMP.
• This matters as it enables decentralized, community-led upgrades without relying on a central authority, directly impacting system parameters like stability fees.

Stability fees are interest rates charged on loans backing the stablecoin, used as a primary tool for maintaining the peg.

• Governance votes adjust these fees to incentivize or discourage the creation of new stablecoin debt.
• For example, if DAI trades below $1, Maker governance may vote to increase fees to reduce supply.
• This matters for users as it directly influences borrowing costs and the purchasing power stability of the stablecoin they hold.

Collateral management involves governing the types and ratios of assets accepted to back the stablecoin, which is critical for solvency.

• Governance decides on adding new collateral types, like adding ETH or real-world assets to a vault system.
• It sets risk parameters such as the Loan-to-Value (LTV) ratio and liquidation penalties.
• This matters for users as it determines the security and diversification of the backing assets, affecting systemic risk and trust in the peg.

Emergency shutdown is a last-resort governance mechanism to protect the system during extreme failure or attack, allowing for the orderly settlement of assets.

• It freezes the protocol and enables users to redeem collateral directly for their stablecoins at a fixed rate.
• MakerDAO's emergency shutdown process is a key example, triggered by a governance vote.
• This matters as it provides a final backstop for users to recover value, ensuring the system fails safely if necessary.

Governance tokens confer voting rights and often capture value from the protocol's success, aligning holder incentives with the system's health.

• Holders vote on proposals and delegate votes, as seen with Curve's veCRV model for gauge weights.
• Tokens may also grant a share of protocol revenue or fees.
• This matters for users as it decentralizes control and creates a stakeholder economy where participants are financially motivated to govern responsibly.

Parameter tuning via governance involves adjusting system constants, while oracles provide trusted external price data critical for operations like liquidations.

• Governance votes can change liquidation ratios, debt ceilings, and oracle security modules.
• For instance, a vote might adjust the ETH/USD oracle feed sensitivity or its delay time.
• This matters for users as precise, secure parameters and data feeds are essential for maintaining accurate collateral valuations and preventing exploits.

Collateralization Ratio defines the value of assets backing each stablecoin unit. A higher ratio provides a stronger safety buffer against market volatility.

• Overcollateralization is common, e.g., DAI requiring >100% collateral in assets like ETH.
• Adjustments are voted on to respond to market stress, protecting the peg.
• This matters as it directly impacts the system's solvency and user confidence in redemption.

Stability Fee is an interest rate charged on loans generating the stablecoin, used to control supply and demand.

• Increasing the fee discourages new minting, helping defend a de-pegging below $1.
• Fees are often paid in the protocol's governance token (e.g., MKR for MakerDAO).
• This parameter is crucial for maintaining the peg by economically incentivizing or disincentivizing minting and burning.

Debt Ceiling sets a maximum borrowing limit for specific collateral types, managing risk concentration.

• Prevents overexposure to a single volatile asset, like capping WBTC vaults.
• Governance votes to raise ceilings for trusted assets to increase liquidity.
• This protects the protocol from systemic risk if one collateral type crashes, ensuring overall stability.

Liquidation Ratio triggers automatic collateral sales when a vault becomes undercollateralized, while the Penalty is an added fee on liquidated positions.

• A lower ratio means quicker liquidations, reducing bad debt risk.
• Penalties (e.g., 13% in Maker) incentivize keepers and compensate the system.
• These parameters are vital for protecting the protocol's collateral base and ensuring orderly market operations during volatility.

Oracle Governance involves managing the price feeds that determine collateral values and trigger liquidations.

• Governance selects and monitors oracle providers (e.g., Chainlink) to prevent manipulation.
• Votes can adjust price feed delay times or emergency shutdown triggers.
• This is a critical security layer, as inaccurate data can lead to unjust liquidations or insolvency.

Emergency Shutdown is a last-resort governance mechanism to freeze the system and redeem users at a fixed collateral price.

• Activated via governance vote in extreme scenarios like a hack or prolonged de-peg.
• Upgrades to smart contract logic also require community approval.
• This ultimate parameter ensures user asset recovery and demonstrates final community control over the protocol's fate.