Governance Adjustments

Governance adjustments refer to the process by which a decentralized protocol updates its risk parameters, such as collateral risk weights or liquidation thresholds, through a community-led voting process. This allows the protocol to adapt to changing market conditions, such as increased volatility or the introduction of new assets.

Governance participants, often token holders, review data and expert analysis to decide on the best course of action to maintain the protocol's security and efficiency. These adjustments are a key feature of decentralized governance, ensuring that the system is not static and can evolve.

However, they also introduce a layer of human-in-the-loop risk, as governance decisions can be slow or influenced by competing interests. Understanding the governance process is important for traders, as changes to risk parameters can directly impact their existing positions and the overall cost of trading on the platform.