Agency Problems in DeFi

Agency problems in DeFi arise from the structural separation between the beneficial owners of a protocol, such as token holders, and the agents tasked with its management, such as delegates or core developers. This conflict of interest occurs when agents prioritize their own incentives, like short-term profit or reputation, over the long-term stability and security of the protocol.

In a decentralized environment, this is complicated by the anonymity and pseudonymity of participants, making it difficult to enforce contractual obligations or hold agents accountable. For instance, delegates might support risky protocol changes that generate high immediate fees but expose the protocol to long-term insolvency risks.

These conflicts can lead to inefficient resource allocation and degraded security postures. Solving these problems requires designing incentive structures that align the agents' financial outcomes with the protocol's success.