Vote-buying is the equilibrium. Liquidity providers (LPs) with governance tokens vote for proposals that maximize their farming yields, creating a self-reinforcing cartel. This misaligns protocol development with long-term user growth.
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Blog
Why AMM Governance Must Evolve Beyond LP Incentives
Concentrating governance power solely with Liquidity Providers creates a structural misalignment that harms traders, integrators, and long-term protocol health. This analysis examines the data and argues for a multi-stakeholder governance model.
introduction
THE INCENTIVE MISMATCH
The LP Cartel Problem
AMM governance is captured by mercenary liquidity providers who optimize for emissions, not protocol health.
Incentive design is broken. Protocols like Curve Finance and PancakeSwap demonstrate that emission-directed liquidity is extractive. LPs chase the highest APR, creating fragile, mercenary capital that flees at the first sign of lower rewards.
Governance must evolve beyond bribes. The solution is fee-based governance power, where voting weight accrues from generated protocol fees, not token holdings. This aligns voters with sustainable revenue, not inflationary subsidies.
Evidence: In Q1 2024, over 90% of Convex Finance votes on Curve gauge weights were directed by bribe markets, prioritizing short-term LP payouts over strategic protocol development.
key-trends
WHY AMM GOVERNANCE MUST EVOLVE
The Symptoms of Misaligned Governance
Current governance models, designed for a single stakeholder, are breaking under the weight of protocol-owned liquidity, concentrated positions, and multi-chain deployments.
01
The Liquidity Black Hole
Protocols like Uniswap and Curve allocate billions in token emissions to LPs who provide generic, often mercenary capital. This creates a governance-to-farm loop where tokenholders vote for high emissions to attract TVL, diluting themselves to pay for a commodity.\n- Symptom: >70% of emissions often go to pools with minimal protocol utility.\n- Result: Token value accrual is outsourced, creating a permanent subsidy treadmill.
$10B+
Annual Emissions
-90%
Fee Capture
02
Concentrated Capital vs. Diffused Governance
The rise of concentrated liquidity (Uniswap V3) created a power asymmetry. A ~$50M position in a major pool has more direct economic impact than a tokenholder with 10M votes. Yet, governance power remains with the diffuse token, not the strategic capital.\n- Symptom: LP "whales" dictate pool success but have no formal governance stake in its parameters.\n- Result: Misaligned incentives lead to suboptimal fee tiers and capital efficiency for the protocol.
1000x
Capital Influence Gap
<5%
LPs in Gov
03
The Multi-Chain Governance Trap
AMMs like PancakeSwap and Trader Joe deploy on 10+ chains, but governance is siloed on a single L1 (e.g., Ethereum, Avalanche). Chain-specific decisions (fee switches, gauge weights) are made by voters with no stake in that chain's performance.\n- Symptom: Arbitrum users governed by BNB Chain tokenholders.\n- Result: Local optimization is impossible, crippling agility and creating one-size-fits-all policies.
10+
Chains
1
Gov Token
04
Vote Extortion & MEV Governance
Governance has become a financialized attack vector. Curve wars demonstrate how convex-finance can hijack gauge votes. Furthermore, on-chain voting creates MEV: frontrunning governance outcomes is a predictable, profitable strategy.\n- Symptom: Votes are a derivative asset, traded away from underlying tokenholders.\n- Result: Governance security is compromised, and decisions reflect financial engineering, not protocol health.
$1B+
Vote Market
~30s
Frontrun Window
deep-dive
THE INCENTIVE GAP
The Mechanics of Misalignment: Fees, Forks, and Friction
Current AMM governance is structurally misaligned, prioritizing short-term LP yield over long-term protocol health and user experience.
LP incentives dominate governance. Token-weighted voting prioritizes fee distribution and emissions, creating a principal-agent problem where LPs' interests diverge from traders and developers.
Protocol forks are a governance failure. The Uniswap v3 fork wars on BNB Chain and Polygon demonstrate that fee-less clones win when governance fails to adapt fee structures for new chains.
Friction is an externality. Governance ignores gas optimization and MEV protection. Projects like CowSwap and UniswapX succeed by abstracting these costs, which vanilla AMM governance treats as a user problem.
Evidence: Over 80% of governance proposals across major DEXs concern fee tier adjustments or emission redirects, not infrastructure upgrades or user experience.
THE INCENTIVE MISALIGNMENT
Governance Capture: A Comparative Look
Comparing governance models for AMM protocols, highlighting how different voter incentive structures lead to varying degrees of capture by liquidity providers (LPs) versus protocol users.
| Governance Metric / Feature | Token-Weighted Voting (Uniswap) | ve-Token Model (Curve, Balancer) | Dual-Governance / Vote-Escrow (Frax Finance, Aave) |
|---|---|---|---|
Primary Voter Incentive | Protocol fee share (0% currently) | Boosted LP rewards & fee share | Revenue share & governance power |
LP Influence on Emissions | Direct (LP tokens = voting power) | Extreme (ve-token lockers control gauge weights) | Mitigated (ve-token system separate from LP positions) |
User/Delegator Representation | None (requires holding UNI) | Minimal (costly to acquire ve-tokens) | Yes (vote delegation to representatives) |
Typical Proposal Turnout | < 10% of supply | < 5% of supply (concentrated) | 15-30% of supply (with delegation) |
Cost of a 1% Voting Stake | $40M (UNI market cap) | $15M (CRV market cap, requires 4-yr lock) | Variable (requires lock & governance token) |
Critical Parameter Control | Treasury, fee switch | Emissions, fee distribution, new pools | Monetary policy, revenue allocation, integrations |
Resistance to Bribe Markets | Low (e.g., Uniswap <> Gauntlet) | Very Low (e.g., Curve Wars, Convex) | High (delegates are accountable for platform health) |
counter-argument
THE INCENTIVE MISMATCH
The Steelman: LPs Bear the Risk, Shouldn't They Rule?
The core argument for LP governance is sound but fails to account for the evolving, multi-stakeholder nature of modern AMMs.
LP governance is a logical default. Liquidity providers stake capital and face impermanent loss, so aligning protocol control with their risk profile prevents rent extraction. This model works for simple, single-chain DEXs like early Uniswap v2.
Modern AMMs are multi-sided platforms. Protocols like Uniswap v3 and Curve serve traders, integrators, and layer-2 ecosystems. Governance that prioritizes only LP fee capture misaligns with the protocol's broader utility and growth.
The result is protocol stagnation. LP-dominated governance often votes for higher fees, creating arbitrage opportunities for competitors like 1inch or CoW Swap. This shortsightedness cedes market share to intent-based aggregators.
Evidence: The Fee Switch Debate. Uniswap's prolonged governance deadlock over fee distribution highlights the conflict between LP profits and protocol treasury needs for long-term development and security.
takeaways
BEYOND LP DOMINANCE
The Path to Multi-Stakeholder Governance
Current AMM governance is a plutocracy of capital, ignoring the needs of traders, integrators, and the protocol's long-term viability.
01
The Problem: LP Incentives Create Perverse Alignment
Governance is dominated by mercenary capital chasing highest APR, not protocol health. This leads to:
- Vote-buying and governance attacks (see: Curve Wars).
- Short-termism that neglects core infrastructure upgrades.
- Misaligned fee structures that prioritize LP yield over trader experience.
>80%
Voter Apathy
$10B+
Vote-Locked Capital
02
The Solution: Stakeholder-Specific Voting Power
Separate governance tracks for distinct constituencies, weighted by their contribution to network effects.
- Traders/DApps: Voting power based on cumulative volume or fees paid.
- Integrators/Devs: Power based on integration usage (e.g., SDK calls).
- LPs: Power based on time-locked, diversified deposits, not just raw TVL.
3-Track
Governance Model
50%+
More Voter Diversity
03
The Mechanism: Delegated Expertise via Sub-DAOs
Move granular decisions (e.g., fee tiers, oracle selection, grant funding) to specialized sub-committees.
- Technical Sub-DAO: Core devs and auditors manage security upgrades.
- Ecosystem Sub-DAO: Integrators and builders allocate grants and partnerships.
- Treasury Sub-DAO: Diversified council manages protocol-owned liquidity and investments.
~10x
Faster Decisions
-70%
Main DAO Bloat
04
The Precedent: Uniswap's Failed Fee Switch Debate
The $UNI fee switch saga proves single-stakeholder governance is broken. LPs blocked fee redistribution for 3+ years, starving the protocol treasury and core development.
- Result: Protocol value captured entirely by mercenary LPs.
- Lesson: Treasury sustainability requires governance that represents the protocol itself as a stakeholder.
$0
Protocol Revenue
3+ Years
Decision Paralysis
05
The Metric: Protocol Utility Over TVL
Shift governance incentives from Total Value Locked to Total Value Facilitated.
- Weight votes by metrics like volume/fee efficiency, unique integrators, and cross-chain transactions.
- Penalize single-sided, mercenary LP deposits in voting power calculations.
- Creates natural alignment with long-term, sustainable growth.
TVF > TVL
New Primitive
Aligns Growth
With Utility
06
The Implementation: Gradual Sovereignty Transfer
A phased transition to avoid governance capture during the migration.
- Phase 1: Introduce non-binding stakeholder polls alongside LP votes.
- Phase 2: Implement dual governance with veto powers (inspired by MakerDAO).
- Phase 3: Full multi-stakeholder model after 2+ years of proven stability and participation.
3-Phase
Rollout
24+ Months
Transition Period
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