Compound Attack Exposes Flaws in Pseudo-Decentralized Governance
The recent attack on Compound's decentralized autonomous organization (DAO) has shed light on the fragility of governance systems in many cryptocurrency projects. On July 28, a group called the Golden Boys exploited Compound's voting mechanism, successfully passing a proposal that siphoned $24 million worth of COMP tokens to their own protocol.
This incident reveals a fundamental weakness in systems relying on governance tokens. The attackers, led by a whale known as Humpy, accumulated over 81% of the voting power required for quorum. They achieved this by combining their own holdings with tokens delegated from five wallets that acquired 228,000 COMP from the Bybit exchange.
The ease with which this concentration of power occurred raises questions about the true decentralization of many crypto projects. In Compound's case, the attack succeeded after two failed attempts, with the final proposal passing by a narrow margin of 682,191 votes to 633,636.
Such vulnerabilities stem from low voter participation in DAOs. A study from the University Complutense of Madrid found that half of all DAOs have fewer than ten active voters, while in larger DAOs, just 1% of members control over 50% of the voting power. This concentration of influence creates opportunities for well-funded entities to manipulate governance for personal gain.
Compound's response to the attack further highlights the limitations of its decentralization. The team resorted to negotiations with the attackers and threatened centralized interventions, such as removing voting power from certain wallets or creating a new token distribution.
When examining these events, one cannot help but draw a stark contrast with Bitcoin's governance model. Bitcoin's true decentralization stems from its proof-of-work consensus mechanism and the absence of a centralized governance token. In Bitcoin's system, no single entity or small group can amass enough power to unilaterally change the protocol or drain funds from a shared treasury.
Bitcoin's decentralization is rooted in its wide distribution of mining power, its open-source development process, and the need for broad consensus among users, miners, and developers for any significant changes. This structure makes it virtually impossible for a scenario like the Compound attack to occur within Bitcoin's ecosystem.
The Compound incident serves as a cautionary tale for the broader cryptocurrency community. It demonstrates that merely claiming to be decentralized or implementing a token-based voting system does not guarantee true decentralization or security against governance attacks.
As the DeFi sector continues to evolve, projects may need to reconsider their governance structures. They might look to Bitcoin's model for inspiration on achieving more robust decentralization. Alternatively, they may need to implement additional safeguards and incentives to encourage broader participation and prevent the concentration of voting power.
