Gauges: The Foundational Governance Innovation of DeFi

Gauges are an innovative governance mechanism that allows token holders to directly allocate incentive budgets for activities that support ecosystem growth. From providing liquidity incentives to enabling lending rewards, gauges give token communities control over key economic decisions.

What are Gauges in DeFi?

Gauges are a mechanism that allows token governance to directly allocate incentive budgets. They are typically used to provide incentives for AMM liquidity providers, but the idea is generalizable. Gauges are a significant innovation because they decentralize community development, make it easier to participate, and drive token value.

How do Gauges Improve Governance in DeFi?

Gauges decentralize community development by allowing the community to self-direct the growth of the ecosystem. They make it easier to participate by giving each token holder the power to allocate their share, which means you don’t need to gather a majority to effect a change. Gauges also drive token value by handing key economic decision making to token holders, which translates to economic value in holding and staking tokens.

How do Gauges Drive Real Economic Value in DeFi?

Gauges drive real economic value in DeFi by allowing token holders to allocate incentive budgets directly, which encourages participation and liquidity provision. This, in turn, drives the growth of the ecosystem and increases the demand for the token, leading to price appreciation. Gauges also enable token holders to make key economic decisions, which further increases the value of holding and staking tokens.

What are some Examples of Gauges in DeFi?

Curve Finance, Frax Finance, Balancer, and Euler are some examples of DeFi protocols that use gauges to incentivize liquidity provision and drive ecosystem growth. Curve originated the gauge mechanism and controls the flow of incentives to AMM liquidity providers. Frax was one of the first projects to realize the power of gauges and extended the idea by allowing liquidity providers to form long term commitments for additional rewards. Balancer also extended Curve’s mechanisms in different ways, including creating different types of gauges that weren’t just about incentivizing liquidity. Euler was the first major lending market to implement gauges, showing that the idea can be applied to more than swapping AMMs. Sushi’s “Menu of the week” was a similar liquidity incentive scheme that successfully drove early community adoption.

What are the Challenges of Gauges in DeFi?

One key challenge of gauges in DeFi is deciding which types of activities can be incentivized. If a DAO votes in a liquidity pool for a bad token, gauge allocations can end up hurting the DAO in the long term. Gauge creation is DAO-controlled, but decision making still involves risk.

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