Auto.gov: Learning-based Governance for Decentralized Finance (DeFi)

Jiahua Xu, Yebo Feng, Daniel Perez and Benjamin Livshits

Papers from arXiv.org

Abstract: Decentralized finance (DeFi) is an integral component of the blockchain ecosystem, enabling a range of financial activities through smart-contract-based protocols. Traditional DeFi governance typically involves manual parameter adjustments by protocol teams or token holder votes, and is thus prone to human bias and financial risks, undermining the system's integrity and security. While existing efforts aim to establish more adaptive parameter adjustment schemes, there remains a need for a governance model that is both more efficient and resilient to significant market manipulations. In this paper, we introduce "Auto.gov", a learning-based governance framework that employs a deep Q-network (DQN) reinforcement learning (RL) strategy to perform semi-automated, data-driven parameter adjustments. We create a DeFi environment with an encoded action-state space akin to the Aave lending protocol for simulation and testing purposes, where Auto.gov has demonstrated the capability to retain funds that would have otherwise been lost to price oracle attacks. In tests with real-world data, Auto.gov outperforms the benchmark approaches by at least 14% and the static baseline model by tenfold, in terms of the preset performance metric-protocol profitability. Overall, the comprehensive evaluations confirm that Auto.gov is more efficient and effective than traditional governance methods, thereby enhancing the security, profitability, and ultimately, the sustainability of DeFi protocols.

Date: 2023-02, Revised 2025-02
New Economics Papers: this item is included in nep-ban, nep-cmp and nep-pay
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