Compound Introduces an Improvement Proposal Process
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October 27th, 2022

TLDR: Compound DAO considers Compound Improvement Proposals, a new governance process that would work in conjunction with Compound Governor. The move results in part from governance challenges entangled with a failed oracle upgrade at the end of August.

Compound is one of the leading and most established DeFi protocols, with a track record of stability, security, and innovation — a rare combination. Among Compound’s several industry-leading developments was the introduction in 2020 of Compound Governor, an on-chain mechanism to provide “increasing decentralization” by shifting protocol governance from a central team to the wider community of COMP holders.

The current implementation of Compound Governor has a two-day review period for proposals, which is followed by three days of voting; voting is followed by a two-day Timelock before a proposal can be executed. Changes to the protocol, in other words, take at least seven days. This proved to be a problem after an oracle upgrade to the protocol in late August resulted in a denial of service for the cETH market on Compound V2: it required a convoluted, time-consuming process (see the governance actions here and here) just to revert the protocol back to using the previous oracle, risking some negative downstream effects for users (which included other protocols) all the while.

Luckily it was handled well, and the situation led to some important self-reflection that brought forth a number of ideas for preventing such an occurrence in the future. OpenZeppelin, a security advisor to the Compound DAO, wrote up a comprehensive post-mortem analyzing all the aspects of what went wrong. Here’s one of the several conclusions:

“The 7-day governance process…added a great deal of friction when attempting to revert the upgrade.” As a way forward, OpenZeppelin suggested the creation of a formal working group, “made up of prominent community developers,” to consider and eventually implement any changes necessary to avoid a repetition of such events. To lay the groundwork for some of the potential changes, OpenZeppelin recently proposed to layer in an additional governance process called Compound Improvement Proposals.

Proposal: Compound Improvement Proposals (CIP)

CIP-1, the inaugural Compound Improvement Proposal put forward by OpenZeppelin, “describes standards, processes, and enhancements intended to improve the Compound Protocol.” The new CIP process is designed to be the new default mechanism to “improve Compound.” It increases access to Compound governance by removing the requirement of holding 25k COMP to make a proposal: anyone from the community can use it to suggest improvements, develop opportunities to contribute, or request funding.

Three types of proposals are specified:

  1. Meta Process, a category for anything proposed “to coordinate Compound governance, development, or community efforts”;

  2. Protocol Enhancement, for changes to “the smart contracts that make up the Compound Protocol and Governor”; and

  3. Tooling & Support, meant to contain proposals to develop or adapt “off-chain infrastructure, tooling, documentation or other components that support the usage of the Compound protocol.”

Proposals follow the path outlined in the graphic below (taken from the CIP-1 proposal author). The process should be familiar to most who participate in or observe DAO governance.

In the outlined process, all proposals must be approved by the Compound Working Group, a newly designated committee. Additionally, CIP Editors are to be chosen from among the Compound community and will attend Working Group meetings and otherwise provide feedback on CIPs. Once the proposal has gained working group approval — and passed through the fourteen day final comment period directly after — it will follow one of several paths for implementation, as described in the graphic below (again borrowed from CIP-1).

What is notable here is that the proposal can be implemented off-chain through a “signal” (i.e. Snapshot) vote or direct grant funding and on-chain by being sent to Compound Governor (which is necessary for any smart contract changes). This allows the CIP process to accommodate a wide variety of proposals.

Why it Matters

Improvement-proposal style governance has become increasingly popular among DAOs, and not only because Ethereum EIPs set the precedent. They offer a recognizable process that is easily adaptable to a given DAO’s particular needs. This Compound Improvement Proposal, if successful, will significantly upgrade the governance process of a major DeFi protocol. Perhaps most importantly, it specifies the ways in which a much wider array of community members can actively participate in governance: the CIP process is much easier to initiate and accommodates a variety of protocol enhancements. Compound Governor not only requires 25k COMP to initiate a proposal; the proposal also needs to meet a high, 400k COMP quorum threshold, and voters need to pay gas to participate. Those requirements are important as they help prevent governance attacks — but not all proposals benefit from these impediments. The CIP and Governor processes can remain separate, but related (when necessary): one can be used for non-binding proposals left to the community to implement, while the other handles proposals (some of which will issue from the CIP process) that are executable on-chain.

CIP-1 also lays the groundwork for important and necessary changes to Compound stemming from the cETH price incident mentioned above. For instance, OpenZeppelin has stated that it intends to use the CIP process to issue its security recommendations following from their analysis of the event. Moving those recommended security updates forward would be more difficult to do outside of the CIP process.

Despite this very positive development, the Compound community might need to consider the role of the CIP Editors and the Compound Working Group in approving proposals for either “signal” or on-chain votes. There appears to be a kind of gate-keeping here, even if it is benevolent. Who sits on the committee? Who are the Editors? What are the criteria for proposal approval? And finally: Does approval indicate endorsement ahead of a community vote?


Updates

November 1, 2022: The inaugural CIP continues to be revised and adapted in response to community feedback – which is how the process is designed. Among other things, a preliminary group of CIP Editors is now identified and their responsibilities explained (see last paragraph above). The proposal adds the following important clarification with regard to Editor roles: “The editors don’t pass judgment on CIPs. They merely do the administrative & editorial part. Editors may still voice either support or opposition to the CIP’s claims of improving Compound but that should not factor into their decision-making criteria to approve a CIP.”


We’ll be tracking this proposal activity closely at Boardroom, follow our newsletter to stay up to date. If you’re a voter in a protocol, make sure to check out Boardroom Portal.

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