Synthetix Foundation exits protocol governance, transferring governance to three decentralized governance organizations

The decentralized exchange platform Synthetix announced in a statement yesterday (28th) that the Synthetix Foundation has officially stepped down from protocol management and transferred governance rights to three decentralized autonomous organizations (DAOs). This marks a significant milestone for the project in the decentralized finance (DeFi) space.

Synthetix Foundation Transfers Governance Rights

Synthetix, currently the third-largest DeFi platform by total locked value, has locked assets worth $480 million in its smart contracts, according to data from DeFi Pulse. This represents an increase of over 20 times compared to a year ago. The platform's token, SNX, has also increased by over 10 times in value, reaching $3.20.

Since its launch in 2018, the Synthetix Foundation has largely controlled the development direction of the protocol, both in terms of decision-making and execution. However, in a recent announcement released yesterday, the Synthetix Foundation declared its gradual withdrawal from governance, transferring governance rights to three decentralized autonomous organizations (DAOs). The Foundation stated in the announcement:

"These changes mark a transition in Synthetix governance. While governance has been conducted through rough consensus in the community over the past period, this shift will place more power directly in the hands of token holders."

Decentralized Governance

The organizations taking over protocol governance include ProtocolDAO, GrantsDAO, and SynthetixDAO.

ProtocolDAO is primarily responsible for handling technical issues and uses a 4/8 multisig to control Synthetix's smart contract upgrades (meaning protocol upgrades require signatures from four out of eight key holders). Additionally, key holders have the authority to temporarily pause smart contracts within a limited scope to ensure fund security in case of emergencies. To prevent key holder abuse, the system also has mechanisms in place, such as token holders being able to veto key holder decisions through voting.

SynthetixDAO focuses on ecosystem growth and provides funding for the network's development. The announcement indicates that SynthetixDAO currently has three members representing major stakeholders in the network, core contributors, and significant token holders. It manages around 450,000 ETH (approximately $140 million) in funds. It is reported that the Synthetix Foundation, holding more than 6% of the circulating SNX supply, is expected to transfer its tokens to SynthetixDAO. The announcement stated:

"It is expected that within the next three to six months, we will be able to migrate the entire treasury under the control of SynthetixDAO on-chain. At that time, existing custodians will manage funds on-chain on behalf of SynthetixDAO."

GrantsDAO operates on a 4/5 multisig mechanism and is responsible for managing community donations, fund allocation, and ecosystem project incubation. The announcement notes that anyone in the community can propose grant suggestions, and token holders have the power to replace inadequate key holders through voting.

Governance Weight of the Core Team

Although Synthetix has opted for decentralized governance, this does not mean that the core team will lose all influence over the protocol. According to a report released by Binance Research on July 9, it is expected that the SNX holdings of the Synthetix team will increase from less than 10% to around 18% by 2023, allowing core team members to retain a certain level of decision-making power within the community.

For the protocol, this may not be a bad thing, as core team members remain the most familiar with the project and having a certain governance share can help maintain the protocol's stable development.