Parameter Adjustment Proposal

A Parameter Adjustment Proposal is a smart contract-based governance action where token holders vote directly on-chain to change a protocol's variables. Upon successful vote execution, the change is automatically implemented by the protocol's code, eliminating the need for manual intervention by a core development team. This ensures transparency and immutability of the governance outcome.

These proposals target specific, pre-defined variables within a protocol's smart contracts. Common examples include:

• Fee Parameters: Transaction fees, gas limits, or validator/staking rewards.
• Economic Parameters: Inflation rates, token supply caps, or slashing penalties.
• Consensus Parameters: Block time targets, validator set sizes, or finality thresholds.
• Risk Parameters: Collateralization ratios, loan-to-value (LTV) limits, or liquidation penalties in DeFi protocols.

The process follows a structured path from ideation to execution:

1. Discussion: Informal debate in community forums (e.g., governance forums, Discord).
2. Temperature Check: A non-binding snapshot vote to gauge initial sentiment.
3. Formal Proposal Submission: The proposal, with precise parameter changes, is submitted on-chain.
4. Voting Period: Token holders cast votes, often weighted by their stake.
5. Execution/Implementation: If the proposal passes the required quorum and approval threshold, the changes are autonomously executed.

Proposals require specific conditions to pass, defined by the protocol's governance module.

• Quorum: The minimum percentage of the total voting power that must participate for the vote to be valid.
• Approval Threshold: The minimum percentage of participating votes that must be "Yes" for the proposal to pass. Some protocols use a supermajority (e.g., >66.6%) for significant changes. These safeguards prevent a small, active minority from making unilateral decisions.

Parameter changes require alignment on two levels. Technical consensus is achieved through the on-chain vote, which is binary and final. Social consensus is the broader community agreement reached through off-chain discussion, which is crucial for ensuring the proposal is well-understood, has sound reasoning, and will not be contentious post-implementation. A lack of social consensus can lead to governance attacks or forks.

A landmark Parameter Adjustment Proposal for Uniswap involved activating the protocol fee switch. This would allow the treasury to collect a fraction (e.g., 1/6) of the pool fees generated by the protocol.

• Core Parameter: The fee switch is a binary parameter (on/off) and a numerical parameter (the fee fraction).
• Governance Impact: Such a change directly affects liquidity provider (LP) rewards and treasury revenue, requiring careful economic analysis and broad consensus.

The Compound protocol uses Parameter Adjustment Proposals to tune key economic levers:

• Reserve Factor: The percentage of interest revenue diverted to the protocol's reserve pool for risk management.
• Collateral Factor: The loan-to-value (LTV) ratio for each asset, determining borrowing power.
• Example: A proposal to increase the USDC collateral factor from 75% to 80% to improve capital efficiency for borrowers, accompanied by a risk assessment from the Compound Risk Team.

In Curve Finance, each stablecoin pool has a tunable Amplification Coefficient (A) that controls the curvature of the bonding curve and thus the slippage profile.

• Purpose: A higher A value makes the pool behave more like a constant sum market maker (low slippage), ideal for like-assets. A lower A allows for more price movement.
• Governance Action: CRV token holders (via veCRV vote) can propose adjusting A to optimize pool efficiency and trading fees as market conditions change.

Lido DAO governs parameters that control the decentralization and security of its Ethereum staking pool. A key parameter is the staking limit per node operator.

• Objective: To prevent any single operator from controlling too large a share of the total stake, mitigating single-point-of-failure risk.
• Adjustment: Proposals can increase this limit to allow the protocol to scale total stake, or decrease it to enforce stricter decentralization, balancing growth with security.

A Parameter Adjustment Proposal is a governance mechanism for changing a pre-defined, numerical variable in a protocol's smart contracts, such as interest rates, collateral factors, fee percentages, or voting periods. Unlike a protocol upgrade, it does not alter the underlying code logic but adjusts the knobs that control its economic and operational behavior. Its primary purposes are:

• Risk Management: Adjusting parameters like loan-to-value ratios to mitigate systemic risk.
• Economic Optimization: Tuning incentives, rewards, or fees to align with market conditions.
• Operational Efficiency: Modifying time delays or gas parameters to improve user experience.

These proposals target specific, quantifiable settings within DeFi and blockchain protocols. Key categories include:

• Financial Parameters: Collateral factor (e.g., from 75% to 70%), stability fee, liquidation penalty, reserve factor.
• Reward & Emission Parameters: Staking APY, liquidity mining rewards, token emission rate.
• Governance Parameters: Voting delay, voting period, proposal threshold, quorum requirement.
• Network Parameters: Block gas limit, validator commission bounds, slashing penalties.

Example: MakerDAO's Stability Fee adjustments for DAI are classic parameter proposals.

The lifecycle typically follows a standardized on-chain governance workflow:

1. Submission: A proposal is submitted, often requiring a stake of governance tokens.
2. Timelock & Review: A mandatory delay period allows for community analysis and reaction.
3. Voting: Token holders vote on the change, with weight based on stake.
4. Execution: If passed, the change is executed autonomously via the protocol's governance module, calling a function like setParameter(uint newValue). This process ensures changes are transparent, deliberate, and resistant to sudden, malicious alterations.

While less invasive than code upgrades, parameter changes carry significant risks:

• Systemic Risk: An overly aggressive adjustment (e.g., lowering collateral ratios) can trigger cascading liquidations.
• Governance Attacks: A malicious actor with sufficient voting power could set parameters to extract value or destabilize the system.
• Oracle Manipulation: Parameters tied to oracle prices can be gamed.

Key mitigations include:

• Timelocks: Enforce a mandatory waiting period between vote conclusion and execution.
• Bounds & Limits: Smart contracts can enforce hard minimum/maximum values for parameters.
• Guardian or Pause Mechanisms: Multi-sig controlled emergency stops can halt faulty parameter changes.

It is crucial to distinguish a Parameter Adjustment from a full Protocol Upgrade or Hard Fork.

MakerDAO's governance is a canonical example of frequent parameter adjustments to manage the DAI stablecoin.

Process: MKR token holders vote on Executive Votes to change parameters in the Maker Protocol.

Common Adjustments:

• Debt Ceiling: The maximum DAI that can be minted against a specific collateral type (e.g., USDC-A).
• Stability Fee: The interest rate paid on DAI debt, used to control peg pressure.
• Liquidation Ratio: The minimum collateralization ratio before a vault is liquidated.

These granular controls allow the DAO to respond dynamically to market conditions without altering core smart contract code.

A system where protocol changes are proposed, voted on, and executed directly via blockchain transactions. This is the foundational framework within which a Parameter Adjustment Proposal operates. Key components include:

• Governance Tokens: Used to signal voting power.
• Voting Periods: Fixed timeframes for proposal deliberation.
• Execution Delay: A safety period between vote conclusion and implementation.

A native cryptocurrency that confers voting rights within a protocol's decentralized governance system. Holding these tokens is typically a prerequisite for submitting or voting on a Parameter Adjustment Proposal. Their design is critical:

• Vote-escrowed models (e.g., veCRV) lock tokens to weight voting power.
• Delegation allows token holders to assign voting power to representatives.
• The distribution and concentration of tokens directly impact governance outcomes.

The process of overseeing and allocating a protocol's community-controlled treasury of assets. While a Parameter Adjustment Proposal often deals with protocol mechanics, treasury proposals focus on financial decisions. Common proposal types include:

• Grants and Funding: Allocating funds to development teams or initiatives.
• Token Buybacks and Burns: Managing token supply and treasury composition.
• Investment Strategies: Deciding on asset allocation (e.g., staking, DeFi yield).

A governance proposal to modify the core smart contract code of a protocol, as opposed to adjusting a configurable parameter. This is a more fundamental change than a Parameter Adjustment Proposal.

• Key Difference: An upgrade changes the protocol's logic, while a parameter adjustment changes a variable within existing logic.
• Higher Risk: Often requires rigorous auditing and multi-sig execution.
• Examples: Migrating to a new contract version, adding a new module, or changing fee calculation logic.

The methodologies and mechanisms used to tally votes and determine proposal outcomes. The chosen strategy influences the dynamics of a Parameter Adjustment Proposal.

• Simple Majority: Proposal passes if votes For > votes Against.
• Quorum Requirements: A minimum percentage of total voting power must participate for validity.
• Quadratic Voting: Voting power increases with the square root of tokens committed, reducing whale dominance.
• Time-weighted Voting: Voting power is based on the duration tokens are locked.