Learning lessons in blockchain governance from crypto-foundations, open protocols, and everything in between
- By analyzing previously deployed governance models that have operated both on and off-chain, we can identify patterns that serve as contributing factors to that ecosystem’s governance success (or failure).
- To develop best practice patterns in blockchain governance, we’ve focused on major projects, including Dash, EOS.IO, the Ethereum DAO, MakerDAO, DigixDAO, the Libra Association, Decred, adChain, and the Enterprise Ethereum Alliance.
- After our analysis, we leveraged Greenfield’s Governance Assessment Framework (GGAF) to best capture governance outcomes related to various attributes across different governance models.
- Check out the GGAF short-form deck here.
A History of Blockchain Governance
“Good governance with good intentions is the hallmark of our government. Implementation with integrity is our core passion.” — Narendra Modi
As blockchain consortiums become more and more prevalent in what will certainly become an increasingly poly-chain world, organizations are determining how best to moderate their collaborative efforts in an engaging, efficient, and minimally bureaucratic manner. However, human nature often finds a way to insert corporate, national, and/or personal politics into a typically privileged experience — all at the expense of effective governance.
As new smart contract protocols are being conceived, and new off-chain, hybrid, and on-chain governance structures instantiated, I thought it may be prevalent to take a look at some of the more substantial governance systems that have been deployed in the wild across the blockchain ecosystem to better understand what has worked well, and what has worked….not-so-well.
Throughout this brief focusing on the history of blockchain governance and its learnings, I will identify the use case model’s via Greenfield’s Governance Assessment Framework (because, as Steven McKie says, ‘why the hell not name it after me?’). Greenfield’s Governance Assessment Framework (GGAF) organizes governance models by several core factors and associates each factor with a level of risk aversion. The level of risk associated with each factor is based on historical data analyzing in-production governance models that have already been deployed with varying levels of community dissent. The framework assess governance models across three, overarching factors: Governance Type, Governance Vehicle, and Voter Type. Each consist of the following, sub-categories:
- Governance Types indicate whether the governance model’s votes (or actions) are processed on a blockchain as part of voting process. Governance Type options include the following: “On-Chain,” which indicates that the governance model has its voting process facilitated on a blockchain; “Off-Chain,” which indicates that the governance model does not conduct any of its voting processes on a blockchain; and “Both On-Chain and Off-Chain,” which indicates that the governance model leverages a hybrid approach in which some voting processes are facilitated on a blockchain, and others aren’t.
- Governance Vehicles will indicate which organizations and or entities control the governance system and resulting ecosystem development. Governance Vehicle options include the following: “Organization Controlled,” which describes governance models that are controlled by an organization (private or public) focused on ecosystem growth; “Organization Assisted and Open,” which describes governance models that are open to community voting but, are assisted by an organization focused on ecosystem growth; “Organization Assisted and Closed,” which describes governance models that have designated ecosystem members vote and are assisted by an organization focused on ecosystem growth; and “Open Community,” which indicates that the governance model is completely decentralized and controlled by the public. A good litmus test to use to see if a governance model is “Organization Controlled” is to ask, “Would the governance model functionally exist if its initial creator suddenly didn’t exist?” If your answer is “Yes,” then the governance model is Organization Controlled. If your answer is “No,” then the governance model is not Organization Controlled, and may be Organization Assisted (Closed or Open).
- Voter Types will indicate who is allowed to vote within the governance model. Voter Type options include “Open Community Voting,” in which anyone can participate in the governance model given they have followed publicly documented steps to do so, and “Member Voting,” in which only approved members can participate in the governance model after staking some capital amount.
As governance models continue to evolve, performance patterns associated with each sub-category begin to emerge and fluctuate over time, helping us determine which combination of high level governance factors help maximize the level of success a blockchain-enabled ecosystem can achieve.
In this brief, we’ll take a look through the governance timeline of the blockchain ecosystem and analyze Dash, Ethereum’s DAO, the Ethereum Enterprise Alliance (EEA), adChain, the Maker ecosystem, the DigixDao ecosystem, EOSio, Decred, and the Libra ecosystem using GGAF to determine if model-oriented performance patterns occur.
September 2015 — Dash & The First DAO
- Governance Type: On-Chain
- Governance Vehicle: Open Community (Organization Integrated)
- Voter Type: Open Community Voting
Based on the Bitcoin project, Dash is a privacy centric digital currency that was launched on January 18, 2014 by founder Evan Duffield. Dash is based on a decentralized peer-to-peer network, and secured by strong cryptography, and offers a safe and user-friendly payment method without barriers and boasts claim of developing the first Decentralized Autonomous Organization (DAO) based governance model in the blockchain ecosystem (Dash).
Central Organizations to the Dash Ecosystem
Dash is an open source project and, as such, anybody can contribute and make changes. There seems to be two influential and organizing bodies in the Dash ecosystem — The Dash Foundation, and the Dash Core Group.
The Dash Foundation, a 501(c)(6) corporation domiciled in Arizona, USA, supports the Dash ecosystem in the following ways:
- Help the Dash community establish ecosystem goals
- Fund a core team of developers so they can keep advancing the vision of Dash and maintaining the code secure.
- Provide the ecosystem with infrastructure and tools.
- Educate the public and promote the virtues of Dash and how it is an important tool for the defense of privacy by creating content and interacting with journalists and influencers so the message can spread to the widest possible audience.
- Defend the interests of the Dash Community and Developers in those places where an organized voice is needed and they can’t be present directly, or a legal entity is required.
The Foundation has two classes of members: Individual Members and Industry Members:
- Industry Members are entities or natural persons that do business in, service or support Dash or another privacy-centric cryptocurrency. Industry members pay an annual fee of 500 Dash (~$45K).
- Individual Members are natural persons that transact in, promote or otherwise contribute to Dash or another privacy-centric cryptocurrency. Individual members can pay either an annual fee of 10 Dash ($910) or a lifetime membership fee of 100 Dash (~$9.1K).
The foundation does not control Dash’s on-chain governance, but rather facilitates votes to determine how the foundation should best allocate its funding toward ecosystem development initiatives and operational needs. An example of such ecosystem bolstering initiatives include the Foundation’s announcement in in May 2019, indicating launch of the The Dash Investment Foundation (i.e. “Dash Ventures”). Dash Ventures is registered and incorporated in the Cayman Islands, and is described as the first member-less and ownerless investment fund that fulfills the principles of blockchain decentralization investment (i.e. like an Ethereum DAO 2.0).
Early on after the Dash Foundation was instantiated, community members voiced concerns about its overall effectiveness, citing that its rather inactive and would be needed for better site maintenance, governmental lobbying, and ecosystem brand protection. The Foundation was rather transparent about its membership meetings, until November 2016, when the last meeting minutes were posted. It seems, outside of its joint press release on launching Dash Ventures, that the organization is, currently, much less prevalent in the ecosystem.
The Dash Core Group Inc. (DCG), is one of the organizations that work for the Dash network (via funding from Dash’s Decentralized governance budget). Every month, it is funded directly from the Dash blockchain conditional to network approval. Currently, DGC seems to operate as the near-Ethereum Foundation equivalent within the Dash ecosystem as the Dash Foundation’s primary role in ecosystem development is phased out. DGC maintains Dash’s central ecosystem site, dash.org, which houses Dash’s community discussion forums, social media channels, developer documentation, design guidelines, roadmap, ecosystem tools, and business solution resources. DGC’s product development team works on the Dash blockchain and provides all the methods of support that the Dash Foundation outlined earlier in the ecosystem’s existence.
Dash’s Masternode Voting Mechanism & Ecosystem DAO
Dash leverages a decentralized management system based on their masternode voting mechanism. A masternode is a server with a full copy of the Dash blockchain, which guarantees a certain minimum level of performance and functionality to perform certain tasks related to block validation, as well as PrivateSend and InstantSend, as the anonymity and instant transaction features in Dash are called. The masternodes are paid for this service, using a concept known as Proof of Service. This is in addition to the Proof of Work done by miners to secure the blockchain. Masternodes are also allowed to vote on governance and funding proposals, with each masternode receiving one vote (yes/no/abstain) on each proposal submitted to the system (Dash Governance).
Anyone can run a masternode. The objective is to have enough decentralization to ensure that no single person controls a significant fraction of the masternodes. However, to avoid bloating the network with unnecessary masternodes or encouraging reckless operators, there is one condition that needs to be fulfilled: proof of ownership of 1000 Dash. The coins don’t need to be in the masternode, but they need to be kept in a certain way that is transparent to the entire network. If the owner moves or spends those coins, the masternode stops working and payment ceases. As of November 2018, the Dash network has over 5000 masternodes located in over 45 countries and hosted on over 140 ISPs. The block reward is approximately 3.34 Dash, so the selected masternode receives 1.67 Dash per payment or approximately 6 Dash per month (Dash Governance).
In the Dash network’s budget system, a portion of the block reward is held in escrow by the network itself, in the name of the operators, to be executed in the development and expansion of the ecosystem according to the vote of the masternodes in different budget proposals. These funds are directed to supporting development and promotion of the coin. Masternode operators vote on specific budgets and projects to be funded, thus defining the direction the coin is taking. This is done in a completely transparent way through a public portal where new initiatives are proposed and masternodes can vote on them. Functioning like a decentralized Kickstarter or Lighthouse, the budget can be used for anything that creates value within the ecosystem (Dash Governance). Much of this budget system and proposal process is visualized via Dash Central, a simple UX for vested Dash community members to comfortably submit their masternode budget votes and monitor their masternode status, masternode details, earnings and historic earnings (as shown in the screenshot above).
Dash’s masternode voting mechanism and ecosystem budget system is an extremely unique and effective model, in which the governance mechanism is Open Community, and the ‘organization’ assisting ecosystem growth is effectively a DAO facilitating the democratic selection and funding of community proposals. The Dash ‘Budget DAO’ will never run out of funding as long as the Dash community exists, given that it absorbs 10% of each block reward (recognized as the “Decentralized governance budget”). I’ll refer to such an embedded ecosystem growth model as an “Organization Integrated” implementation that exists under the Open Community governance vehicle scope.
Dash Proposal System
Contractors of the Dash blockchain can be developers, outreach professionals, team leaders, attorneys or even people appointed to do specific tasks. Proposals generally begin life as simple pre-proposal forum posts on the Dash Forum, where feedback and suggestions are solicited from the general community. Once the proposal owner decides they have a reasonable chance of passing their proposal, it is created as a governance object on the blockchain. A fee of 5 DASH is associated with this action to prevent spam and ensure only serious proposals make it to this stage. Several tools exist to allow masternode operators to comfortably review and vote on proposals. The net total of yes votes must exceed 10% of the total masternode count at the time votes are tallied in order to pass. If there are more passing proposals than the available block reward can provide for, the proposals with the most yes votes will pass first, creating a cut-off point for less popular proposals. The same process is then repeated every month, and the total amount of Dash available for proposals decreases by approximately 7.14% per year, together with the overall block reward (Dash Governance).
Dash Community & Governance Sentiments
Although the masternode and budget system mechanisms that the Dash network utilizes are certainly novel, there do seem to be drawbacks with regards to the actuality of Dash’s crypto-economic ‘democracy.’ Such issues include:
- Plutocratic governance voids ecosystem decentralization and fiarness. Given the 1,000 Dash requirement to become a masternode (i.e $91K at the time of this reading), plutocracy is a major issue within the Dash ecosystem (as it is in many blockchain systems). Unless community members can pay the near $100K price-point, they have absolutely ZERO rights to vote no matter if you hold 1 or 999 DASH. Unless you have the money, your voice is non-existent. Moreover, if you have $10,000,000.00 for one hundred (100) masternodes you, one sole person, have 100x more votes than a poor beggar with only $100,000.00 and one (1) meager vote (Jabba-q). Evan Duffield, has been told, alone controls 200–300 MN; Edward Moncada a quiet director of the DASH Foundation controls over 500–600 masternodes. It is safe to say that, out of ~5,000 active masternodes, the key guys, so-called “DASH core” control well over 33% if not more, of all the votes (Jabba-q).
- Low governance participation and lopsided ecosystem influence can undermine governance democracy. Moreover, as DASH’s price rises, most of the people do not give a damn about voting, so only about 25% — 40% of the all available votes are being cast. Most of the proposals came from the “Core” Dash group, so the “Core” has the greatest ecosystem influence. Moncada & Duffield votes combined account for more than 50% of the usual number of the votes cast (Jabba-q). The following screenshot visualizes the regularly low voter turnout:
- Low proposal implementation accountability will waste ecosystem resources. Certain, well funded proposals in the Dash ecosystem have not be held accountable for not delivering. Two in particular, the blocksize limitation increase proposal and the Dash-Lamassu ATM integration proposal, raised over a current value of $665K, have yielded greatly delayed results at best (Sammons).
Dash Governance Takeaways
The following constitutes helpful, governance takeaways based on what the Dash ecosystem has accomplished:
- The decentralized governance fund is a more sustainable way to support blockchain protocol development and Open Community enabled governance models. However, its implementation must be one untied to plutocratic voting. Ensuring there’s a formal and transparent process for community proposal development builds trust and better activates potential governors.
- Core groups or contributors should not hold undue influence within the protocols and governance structures they develop. For example, in Libra’s ecosystem, even Facebook does not have more heavily weighted votes than the rest of the Libra Association. Such a constraint applied to initiative founders as well.
- Voter trends should analyzed to determine ecosystem influencers. Doing so helps identify if there are biases being integrated into how the ecosystem is evolving.
The Dash community also has excellent communication channel, documentation, and brand management. It’s governance user interfaces are simple and approachable, making on-chain governance a reasonable and accessible experience.
February 2016 — Decred
- Governance Type: On-Chain and Off-Chain
- Governance Vehicle: Open Community* (though partly reliant on Decred Holdings Group LLC for treasury management until full transition to DAO treasury management)
- Voter Type: Open Community Voting
Decred is a cryptocurrency that uses hybrid Proof of Work/Proof of Stake consensus in an effort to foster decentralization and enable stakeholder governance. In Decred, miners propose new blocks by solving PoW hash puzzles, and stakeholders are responsible for approving the miners’ work. Both parties are rewarded for their help in securing the network via the block reward, of which 60% goes to PoW (Proof of Work) miners, 30% goes to PoS (Proof of Stake) voters, and 10% goes to the network’s treasury. Decred’s treasury supports protocol development by creating a monetary incentive for stakeholders to actively contribute to the network. Because of these features, the Decred community has recently dubbed the asset a ‘secure, adaptable, and self-sustaining cryptocurrency’ (Bronstein).
Decred’s Governance & Proposal System
Decred’s governance system attempts to iterate on Bitcoin’s by creating a system with more checks and balances between users, developers, and miners. Not only do stakeholders ensure that miners are acting in the network’s best interest, they also get to vote in consensus rule changes and participate in off-chain governance through Politeia. Politeia is a GUI + backend system developed by the Decred developers to allow stakeholders to submit and vote on contributor proposals. To date, a number of proposals have been enacted through Politeia, and the developers are working towards further decentralizing Decred’s power structure by relinquishing funding to a community-controlled DAO (Bronstein). Today, the treasury is centrally controlled by Decred Holdings Group LLC, a corporate entity which owns the keys to the multi-sig treasury address. For security purposes, the trustees to the address are not disclosed.
The Decred governance model leverages ticket-holder voting. Tickets can be thought of as the atomic unit of account in Decred governance — they are the only way to participate in decision making and votes are tallied in tickets, not DCR. To acquire tickets, DCR holders have to time-lock their funds for an average of 28 days. Once holders have acquired tickets, they can use them to vote in on-chain and off-chain decisions. On-chain voting is comprised of validating blocks and consensus rule changes, while off-chain voting is centered on Politeia proposals (Bronstein).
Perhaps the most important aspect of Decred’s governance system is that it requires voters to have skin-in-the-game when making decisions. Since funds are time-locked, stakeholders are incentivized to exercise their vote and deal with the repercussions of every outcome. Similarly, acquiring influence is costly because the price of tickets get more expensive the more they’re purchased. This makes it more costly to subvert the governance system as buying more voting power becomes prohibitively expensive. A malicious attacker would only carry out an attack if they stand to gain more value than the capital they lock up (Bronstein).
Decred’s Community Sentiments
Decred’s community doesn’t seem to have many negative sentiments about the project. Rather, many contributors and community members cite that “the biggest ‘con’ of Decred is that the more ambitious parts of the project are still Work In Progress.” In addition, Decred’s reliance on the Decred Holding Group to protect the ecosystem’s treasury as the project transitions toward a fully operable DAO (much like Dash’s budget system) caused cautionary concern, but Decred’s ecosystem leader’s maintained a high level of transparency about the transitionary process.
Decred’s Governance Learnings
The following constitutes helpful, governance takeaways based on what the Decred ecosystem has accomplished:
- Good UX and UI on a central ecosystem website is crucial. Decred has, arguably, the best ecosystem website in the blockchain ecosystem. All aspects of the ecosystem can be quickly discovered, including developer documentation, governance platforms, communication channels, and how new community members can get started.
- Treasury and roadmap transparency is mandatory to maintain community trust. The fact is, many core developer groups and central ecosystem organizations will maintain a high amount of influence early in a project’s lifespan. Decred’s core team has done an exceptional job at minimizing spending and communicating their roadmap.
- Policy oriented, DAO maintained community funds is the fairest, most sustainable route for ecosystem development. By overcoming governance platform UX obstacles, Decred has increased governance participation and made participating in ecosystem development a simpler process. Systems should have some mechanism in which vested community stakeholders (not just crypto whales) have a voice and mechanism to propose network improvements.
May 2016 — Ethereum DAO
- Governance Type: On-Chain
- Governance Vehicle: Organization Assisted and Open
- Voter Type: Open Community Voting
Ethereum’s DAO, which had the objective of providing a new decentralized business model for organizing both commercial and non-profit enterprises, initiated the beginnings of on-chain governance, and, through the project’s misgivings ($150M in misgivings mind you), provided insight as to how technical (and not technical) decisive factors may be when making a significant decision that will have ecosystem wide implications (i.e. changing transaction history or not).
The Ethereum DAO was meant to operate like a venture capital fund for the crypto and decentralized space. The lack of a centralized authority reduced costs and in theory provides more control and access to the investors. The DAO had a creation period during which anyone was allowed to send Ether to a unique wallet address in exchange for DAO tokens on a 1–100 scale. The creation period was an unexpected success as it managed to gather 12.7M Ether (worth around $150M at the time), making it the biggest crowdfund ever at the time. At some point, when Ether was trading at $20, the total Ether from The DAO was worth over $250 million (Falkon).
In essence, the platform would allow anyone with a project to pitch their idea to the community and potentially receive funding from The DAO. Anyone with DAO tokens could vote on plans, and would then receive rewards if the projects turned a profit. With the financing in place, things were looking up (Falkon).
However, on June 17, 2016, a hacker found a loophole in the coding that allowed him to drain funds from The DAO. In the first few hours of the attack, 3.6 million ETH were stolen, the equivalent of $70 million at the time. Once the hacker had done the damage he intended, he withdrew the attack. The Ethereum community and team quickly took control of the situation and presented multiple proposals to deal with the exploit. To refund the lost money, Ethereum hard forked to send the hacked funds to an account available to the original owners (Falkon).
Unsurprisingly, the hack was the beginning of the end for the DAO. The hack itself was contested by many Ethereum users, who argued that the hard fork violated the basic tenets of blockchain technology (Falkon).
Ethereum DAO Governance Learnings
The Ethereum DAO experience provided the greater ecosystem is first less in on-chain governance: Carefully consider which governance decisions, if any, need to be on-chain, and, if decisions are put on-chain, audit the hell out of your smart contracts and test deploy said contracts before main-net deployment.
As time passed, on-chain and off-chain governance is becoming more complex and the need for transparent and ‘fair’ governance models is becoming more prevalent as organizations hope to realize technocratic democracy through the use of voter tokens, validator node instantiation, and consortium membership. The Ethereum DAO’s failure set in motion both the hard fork that created (and separated) the ETH and ETC ecosystems and triggered the broader crypto-community to more deeply consider how blockchain governance should be constituted to sustainably function in the real world.
October 2016 — Enterprise Ethereum Alliance
- Governance Type: Off-Chain
- Governance Vehicle: Organization Controlled
- Voter Type: Member Voting
Shortly after the DAO incident, the creation of the Enterprise Ethereum Alliance (EEA) was announced at Devcon2 in October 2016. The Enterprise Ethereum Alliance is a member-driven standards organization whose charter is to develop open, blockchain specifications that drive harmonization and interoperability for businesses and consumers worldwide (EEA). The organization was the fourth, major blockchain ecosystem non-profit behind the the Ethereum Foundation, a Swiss non-profit founded in July 2013 shortly after the Ethereum token sale, the Stellar Development Foundation, founded in 2014, and the Maker Foundation, founded in 2015. The EEA is organized as a DE 501(c)(6) (a nonprofit business league).
The creation and growth of the EEA to an over 500 member organization fundamentally transformed the crypto-community’s understanding (and realization) that the Ethereum Foundation could simply be one of many ‘foundation-bodies’ built to influence the direction in which the ecosystem developed. Quick to follow were the creation of the Blockchain for Social Impact Coalition (BSIC — co-founded by yours truly 😉) and the Decentralized Identity Foundation in May 2017, the Accounting Blockchain Coalition (ABC) in April 2018, and the Maker Community Foundation in January 2019 among many others (including the many ICO ‘foundations’ developed in the token sale boom of 2017 dedicated to ‘dApp ecosystem development’).
EEA Governance & Operations
The EEA introduced a corporate-leaning organizational and governance structure to the advent of a blockchain-focused nonprofit, somewhat formalizing and ‘dressing-up’ Ethereum’s crypto-punk brand in an effort to encourage multinational organization participation within the ecosystem (i.e. helping make Ethereum, and blockchain-at-large legitimate). The organization is comprised of a Board of Directors, an Executive team, and several working groups, and a broad community of multi-sector, organizational members. The EEA’s organizational members are divided into the following ‘membership classes’ based on the type of organization:
- Class B — the general membership level, appropriate for all organizations
- Class C — legal practitioners and legal firms
- Class D — Non Profits, including Government and Regulatory Agencies, NGOs, and Academic Institutions
Class B, C, and D members do not of organization-wide voting rights, while Class A members (not mentioned above as such membership doesn’t indicate any particular type of organization) have voting rights and can designate an Executive Director. Class B and C members may operate in the EEA in the following ways:
- May Chair Working Groups, SIGs, and Task Forces
- May Create & Participate in Working Groups, SIGs, and Task Forces
- May Vote in Working Groups, SIGs, and Task Forces
- Invitation to All Member Meetings
Class D members enjoy the same benefits as Class B and C members, with the exception of voting rights in the Working Groups, SIGs, and Task Forces. Votes are conducted off-chain in a traditional, corporate board format, and meeting notes/recordings are only available to operating members and their respective employees.
The continued growth, success, and stability of the EEA speaks toward its professionalism and ability to produce, which, unfortunately, is a rare combination to come by in contrast to most governance entities in the blockchain ecosystem. Much like the ABC and the Libra Association, the EEA was launched by a multitude of founding members, including Accenture, Banco Santander, BlockApps, BNY Mellon, CME Group, ConsenSys, Intel, JP Morgan, Microsoft, and Nuco among others.
EEA Governance Learnings
The following constitute helpful takeaways based on what the EEA has accomplished:
- Governance transparency is a gradient that can influence an organization’s reputation. The EEA’s contributions are made open source, but its member meetings are kept private. Although external entities may not be up to date on the latest member conversations and considerations (and even, potentially, skirmishes), they are aware of the EEA’s progress updates, membership on-boarding process, and initiatives. This pseudo-transparent model works in favor of the EEA’s strong reputation, indicating that radical transparency may cause more harm than good when it comes to the organizing body’s stability. To keep it simple, no one wants to end up in a CoinDesk article for the wrong reasons.
- Governance is strengthened by diversity in representation and open collaboration. The EEA has done an exceptional job at activating its member organizations by creating focused, goal oriented working groups and maintaining a weekly meeting cadence. Collaborations with the Ethereum Foundation via efforts like its Mainnet Initiative ensure that the organization’s work is well aligned with community partners, and thus supported by the broader ecosystem in which it operates.
- Governance members need simplified and unified communication channels to ensure consistent participation. The EEA empowers employees/individuals of its member organizations to log in to their Collaboration Site, which serves to (1) inform the user about what the EEA does, (2) lists upcoming meeting information, and (3) provides the EEA’s latest updates, discussion topics, and helpful files. By centralizing this information in an approachable way, members can choose how to participate almost immediately after they log in.
July 2017 — AdChain & Token Curated Registries
- Governance Type: On-Chain
- Governance Vehicle: Open Community
- Voter Type: Open Community Voting
adChain, a collaboration between MetaX and ConsenSys led by my good friend Mike Goldin, is a platform that provides advertisers with a list of websites that offer high — quality inventory for serving digital ads. adChain introduced the Token Curated Registry smart contract protocol into the blockchain ecosystem, which is widely seen as a strong foundation for many potential innovations hoping to leverage the best of decentralized networks.
The protocol, after Ethereum’s DAO, is one of the first governance templates within the blockchain ecosystem, motivating multiple stakeholders to align themselves around a common process and goal. In this case, the goal is to create as high quality of a registry (i.e. a list) of domains as possible to ensure that advertisers can avoid digital marketing fraud caused by sites using bots to fake their impressions. The adChain system, from a high level, works like so:
The adChain Registry is known as a token curated registry (TCR) because it relies on a community of token holders to curate it. The token for the adChain Registry is called adToken (ADT), and curation takes place through various stages of applying, challenging and voting. The adChain ecosystem also leverages rewards system to incentivize participants to curate judiciously.
Beyond adChain’s use case, there are many ways to apply the TCR governance format, making the protocol an extremely useful tool to consider when determining your governance needs, particularly given that most functions require developing some type of list (e.g. VCs need to create a list of startups for their portfolio, foundations need to determine a list of grant recipients, etc.). In addition, since the protocol is open source, and all governance is on-chain, there is a high amount of transparency embedded in how a TCR-based system operates, which should carry favor for users of the system.
Token Curated Registry User Experience Obstacles
However, there are technical nuances regarding on-chain governance, mainly, that your governance stakeholders need to be technically savvy enough, in the TCR’s case, to challenge and vote on chain — using tools like MetaMask amongst others. Many dApps have not reconciled good user experience (UX) with good protocol development, and thus, the governance process becomes muddied with functions/options that laymen governors may not understand.
Even as simple as the adChain (and general TCR-based dApp) process is, the underlying UX obstacles presented by the required inputs of the smart contract protocol can be a detriment to effective governance in the following ways:
- On-chain governance, with poor UX (in contrast to traditional application UX), increases the governance learning curve, making governance on-boarding more difficult
- A high learning curve and slow on-boarding process will lead to less engaged governance (and a declining trend of governance participation)
- Low governance participation makes for an unruly (and inefficient) system, as it cannot proactivity or retroactively make decisions quick enough to maintain the betterment of the network
Methods to remediate the UX obstacles that many dApps struggle with, is to insert how-to tooltips throughout the governance experience, which adChain is quick to do as soon as a user visits their website.
It’s important to note, though, that smart contract protocols need to be developed with the user experience in mind in an effort to minimize the explicit guides an application needs to have to better inform its respective governors. The more intuitive the process is, the more simple the user interface becomes, and thus, the easier the governance process is for vested stakeholders.
adChain Governance Learnings
Mechanisms like TCRs serve as the basis for understanding the implications of on-chain governance. The governance learnings of adChain (as published by MetaX), can be summarized as follows:
- Effective open governance needs a guidance framework. MetaX assumed that users would form out of band communication channels to standardize guidelines and best practices for voting. However, without proper guidance, many users did not know what criteria they were voting on and the token holders haven’t yet taken it upon themselves to form any out of band communication channels to form guidelines. In the absence of collective opinion, token holders have turned to personal opinions when making voting decisions.
- Guidance frameworks must be simple, and immediate. In an effort to steer adChain users to a more standardized form of making governance decisions, MetaX drafted a Google doc of Publisher Guidelines that they hoped would be a starting point for the adToken community to come to a consensus about what should qualify (or disqualify) a publisher from being in the registry. But, much to our dismay, the Publisher Guidelines have largely been ignored by the community. Decision making guidelines must be simple and inserted into the governance UX so that users are constantly reminded, passively, which topics to take into consideration.
- On-chain governance that relies on a buy-in economy will seldom be adopted. Many dApps, due to the common UX misstep of forcing users to download wallet extensions and acquire ETH to pay for network transactions, lack meaningful adoption. dApps then must rely on users that have already adopted the technology, which is a relatively small number (~10,000 users in late 2018).
- Token-weighted voting is a two-sided coin. Token-weighted voting is the principle of one token having the same value as one vote. When token-weighted voting is introduced to a TCR that hasn’t yet defined standards or guidelines, whales can wield a lot of arbitrary influence. If a whale uses the power of their token-weight to vote something into the TCR that falls under the umbrella of “questionable” for the quality of the overall TCR, and there is no court for the community to rely on for a ruling or standards to reference, then the community is at the mercy of the whales broadcasting signal being louder and more powerful than theirs. Vitalik’s great blog post about token voting and blockchain governance addresses many of these concerns.
- Distribute tokens to your target governance audience. Token distribution of governance tokens is critical, as an ecosystem wants to ensure that the holders of governance tokens consist of that ecosystem’s target audience (i.e. adToken is ideally distributed to marketing and advertising experts vested in curating a high quality domain registry). A consideration for would-be TCR pioneers is to think about how to get your tokens into the hands of the people who have an additional incentive to contribute to your TCR. Either because they are professionally qualified, or otherwise, to curate effectively.
Ultimately, TCRs via the introduction of adChain progressed the blockchain ecosystem’s understanding of how to best facilitate on-chain governance, advancing the crypto-community’s wisdom from our first learnings after the DAO incident.
December 2017 —The Maker Foundation & MKR Governance
- Governance Type: On-Chain
- Governance Vehicle: Organization Assisted and Open
- Voter Type: Open Community Voting
The Maker Foundation, more commonly known as ‘MakerDao,’ is one of the oldest projects in the Ethereum ecosystem. MakerDAO is a protocol behind the stablecoin DAI, an Ethereum-based (ERC20) cryptocurrency that maintains a 1:1 peg to the United States Dollar (USD). Think of 1 DAI as $1. Each DAI, in Maker’s Beta ecosystem, is over-collateralized (i.e. over-backed) by Ether (ETH)to maintain its peg to the USD. Because cryptocurrencies like ETH are notoriously volatile, over-collateralizing ensures that DAI can still maintain its 1:1 peg even if ETH’s price slips (however, this is not true in a scenario in which ETH instantaneously loses all market value).
Such a crypto-collateralized model makes MakerDao one of the only completely transparent stablecoins in the market. However, the operational cost of maintaining such on-chain transparency is having to manage increased crypto-economic complexity that the Maker community needs to overcome to ensure that DAI maintains its peg. I delve more into Maker and other stablecoins extensively here.
In an effort to adequately govern the Maker ecosystem and ensure that DAI does indeed stick to its 1:1 peg, and advancing the MakerDao ecosystem to become multi-collateral (so that backing DAI with just ETH isn’t the only option), MakerDAO leverages a governance token called MKR (also an ERC20). Anyone can buy MKR, and thus, much like adChain’s TCR protocol, the Maker ecosystem is one based on completely open-governance.
MakerDao Governance & Operations
The goal of MKR governance is to establish the most effective way to protect the integrity and stability of the Maker system (i.e. keeping DAI stable). Maker does this by introducing the novel system of decentralized risk management — where vested MKR holders will make clear arguments and apply competing models to assess and manage the risks underlying the system. The community will initially be guided by the Maker Foundation, but eventually be lead by a multitude of risk teams that are formally elected by a MKR vote, and independent risk researchers contributing on a volunteer basis (MakerDao).
The governance mechanism will have two groups of functionality.
- Proactive governance, which includes debate, resolution and automated implementation. The consideration of a new token as collateral, its acceptance and inclusion in the portfolio along with the deployment of its risk parameters is an example of proactive governance.
- Reactive governance, which consists of procedural intervention. The need to potentially increase exposure to that collateral because it has grown in size and liquidity is an example of reactive governance.
Voting within the Maker ecosystem has two forms (MakerDao):
- Vote where resolution is required. The first type of vote is called a Governance Vote, and its objective is to represent resolution on a matter or collection of matters. As an example, that matter could be the inclusion of new Oracles or a new risk team.
- Vote to enact that resolution into the system. The second type of vote is called an Executive Vote, and its objective is to change the state of the system. An example of this would be to vote in risk parameters for a newly accepted collateral type.
Although Governance votes and Executive votes are the higher level categories of voting within the Maker ecosystem, there are also three sub-types of votes that are tied to process and timing:
- Once-off or initialization votes start the process for something.
- Intermittent votes will be irregular and generally will not be expected to have much of a pattern.
- Regular votes will be votes for matters that are expected.
As you can see, Maker’s governance system is very reliant on active contributions from a well-learned community, and the Maker Foundation has done a reasonable job informing and engaging said community to the extent possible. Maker leverages a four-pronged approach to attempt to maximize governance participation:
- Provide channels of communication. Maker hosts open governance discussions on Reddit and, most recently, the Maker Forum. The format of communication is best suited for reddit-familiar and or internet discussion board oriented users and can be somewhat intimidating if a new governor to be is looking to participate in the Maker ecosystem.
- Provide a strong, on-chain governance user experience. Maker’s governance dashboard is certainly a step up in on-chain governance user interfaces. Though it does require users to be familiar with browser wallets (e.g. MetaMask), user education is peppered through the UX.
- Be as hyper transparent as possible. All governance recordings are made available to the public, and the Maker Foundation has tried its best to maintain transparency. However, Maker’s governance conflicts, due to it’s decentralized risk management model, are frequently made public (e.g. fractions disagreeing, transparency issues, and infighting). It seems that the hyper-transparency required of a decentralized governance model carries considerable reputation and governance moral risk if there isn’t a standardized format for debate, information sharing, and foundation decision making (and public validation), but Maker has done the best job in the ecosystem so far in facilitating open, on-chain governance and community management.
- Provide strong documentation to educate community members. Maker’s documentation for its technical libraries, ecosystem education, and governance routine is second only to Ethereum’s web3.js and solidity documentation. This strength, within the aggressively evolving market of stablecoins, has proven to be a competitive advantage which makes DAI the stablecoin of choice for decentralized finance (DeFi) applications — maximizing the number of use cases the Maker Foundation can reference as it matures with ever-changing crypto-asset policies.
Maker Governance Learnings
Overall, Maker leverages one of the most operable and open governance models in the entire blockchain ecosystem. Despite occasional PR missteps, the Foundation has done a good job at engaging and educating community members and executing the continual delivery of technical components evolving the DAI market. The governance learnings of the MakerDao protocol can be summarized as follows:
- Non-combative, open community governance requires an organizational transparency protocol faithfully executed by the ecosystem’s foundation. The Foundation should never attempt to make ecosystem changing decisions behind the community’s back, and there needs to be formal methodology that is used for aggressive debate or disagreement. A public agreement, in the form of documented governance policy, should be determined to minimize potential ecosystem brand risk and deflating community (and foundation) morale.
- On-Chain governance requires an exceptionally designed governance dashboard user experience. Governance interfaces need to both educate community members how to govern and minimize the technical learning curve associated with facilitating transactions on the blockchain. The simpler the governance UX, the lower the chance the community experience governance exhaustion (i.e. decreased participation).
- Communication channels should not default to common crypto-community discussion boards (i.e. Reddit) if the governance community hopes to grow. All communication (education, governance documentation, community boards) should ideally be in one unified place to make participation in each one of the former avenues as effortless as possible.
- A Foundation Assisted governance vehicle requires flawlessly transparent channels of communication between the foundation itself and the governing community. Communication policies should be collaboratively determined and community leaders should ideally be afforded a formal position within the foundation as the ecosystem developers (or, at the least, on-boarded onto advisory boards and committees).
The Maker team also commented on a few learnings themselves:
- Token distribution is important. n the mad rush to raise funds via an ICO in the past year, most projects completely ignored the importance of who the token holders are in the early days. Especially in the case of governance tokens that give token holders the right to vote on critical changes to a network on chain, as a founding team you want your token holders to be well-informed contributors rather than speculators looking to make a quick profit without contributing. Even if your token is not a governance token, sophisticated contributors are generally better community members than pure speculators; leading a community of speculators can be distracting at best and devastating at worst (MakerDao).
- Token-based projects work best as distributed internet tribes rather than traditional companies. The most impactful projects will think deeply about how to use the token mechanism not to raise funds in a centralized manner but rather to create fundamentally new organizational structures that bring people together to achieve a common goal in new ways.
April 2018 — DigixDao
- Governance Type: On-Chain
- Governance Vehicle: Organization Controlled
- Voter Type: Open Community Voting
DigixDAO, created in Singapore in December 2014, is a Decentralized Autonomous Organization creating a cryptocurrency backed by bars of gold. Digix held a token sale on March 30, 2016, raising over $5,500,000 worth of ETH was raised by selling 1,700,000 DGD (Crypto Briefing).
The Digix ecosystem has two tokens (Crypto Briefing):
- DGD is the native Ethereum-based ERC-20 cryptocurrency token governing the Digix network. DGD tokens are security tokens whose value depends on stability of the DigixDAO, while DGX tokens are commodity tokens meant to represent a physical store of gold. Commodity tokens for other precious metals are planned.
- DGX is the second Digix token, with its value tied to one gram of gold. The supply of DGX is directly proportional to the amount of gold in its physical vault. The first Digix vault can reportedly hold 30 tons of gold. As mentioned above, there are two fees associated with storing gold in Digix vaults. To cash out a DGX token, you must have at least 100 DGX and can either claim your 100g gold bar in person or have it shipped to you.
Within Digix’s governance model, Founders, Badge Holders (385 badges) and DGD Holders (2mio tokens) are decision makers of DigixDAO:
- Badge Holders. DigixDAO Badges (DGB) were made available to strong supporters of the Digix vision during the March 2016 token sale.
- DGD Holders. DGD Holders consist of anyone from the Digix community that owns the DGD token. Thus, DGD is Digix’s governance token.
- Founders. Founders consist of Digix’s Founder-team.
In order to participate in DigixDAO governance, the Badge Holders and DGD Holders would need to lock-up more than a minimum threshold of DGD tokens in that quarter and become Badge holding participants and participants respectively (Digix).
Participants’ power in decision making would be proportional to the number of DGD tokens locked-in. A proposal can be proposed by any Badge holding participant or participant. Every proposal has to go through a number of phases over the timeline, which are explained below. Participant votes during any kind of voting activity in any phase would be weighted by the Locked DGD Stake (or one-badge-one-vote in the Draft Phase), and marginally bumped by the Reputation Points (to be elaborated upon in the next update) (Digix).
Digix open community governance is metered by certain organizations within their ecosystem:
- At any stage in the lifetime of a proposal, the Policy and Regulatory Legal Department (PRL Department) can mark the proposal as illegal or invalid (on the legal front) and stop any further funding
- Only the Founders can set/unset certain addresses to be the PRL Department
- The decision /opinion of the PRL Department must be updated at least once before the first funding and in-between consecutive fundings
- Founders can make special proposals used for (1) changing significant parameters of DigixDAO as needed in order to maintain fairness in governance, and (2) calling an Emergency Dissolution vote
The Digix governance model also leverages a novel community participatory reward system that disburses points to participants for their contribution to the functioning of the DAO. These points are non-transferrable and tied to the address of the participant. There are two classes of points in the Digix DAO, namely, Quarter Points and Reputation Points (Digix).
- Quarter Points are a direct measure of the participation of a DAO participant in a specific quarter. These points will be awarded when participants do certain actions that contribute towards governance. Quarter points will be reset to 0 at the beginning of a new quarter
- Reputation Points are a cumulative measure of how actively a participant has contributed to the governance across quarters
At the end of each quarter, participants gain or lose Reputation based on an algorithmic formula that correlates the number of a community member’s reputation points.
At the end of a quarter, participants are rewarded from the pool of collected DGX transaction fees, based on their Locked DGD Stake, Quarter Point and Reputation Point. The exact formula for this would be discussed in subsequent updates.
Digix also leverages a governance user experience that operates much like Makerdao’s (as shown below).
Unfortunately, Digix is not without its governance flaws, as it seems community members (DGD and DGX holders) are becoming increasingly frustrated by the lack of transparency and ecosystem growth on part of the Digix company. On Digix’s Reddit community channel, one large DGD Holder commented:
“I am a large DGD holder and have supported this project since before the ICO. I have stressed patience to disgruntled holders or people who want to use DGX as a stablecoin or as collateral for other DeFi projects. I have bought DGX and tried to create demand for it at a loss.
But after taking in the last 3 years and reviewing yesterday’s depressing AMA, the Digix team has made it clear that they are too afraid of securities laws to do almost anything.
…Please start creating the structure that would allow any DGD holder to redeem his or her DGD for the underlying ETH it represents.”
Frustrations originating from the team’s inaction and unwillingness to create a buy-back mechanism of the ecosystem’s tokens even extend to the governance model’s reward system, as explained by another community member,
“The most frustrating thing is that the convoluted reward design actively disincentivizes a person from buying DGD and is causing further value destruction for DGD holders. Digix’s current design actively discourages the main interest that DGD had ever attracted: DGD’s main selling point has been that its a claim on DGX rewards.
What was simple, is now a complex claim on DGX rewards that is zero unless a claimant actively participates in voting on 100 ETH MAX proposals to earn “Quarter Points” (which don’t create DGX demand or DGD demand and are just make work) and more importantly a claimant has to seek to earn “Reputation points” — another poorly thought out construct that rewards insiders in certain jurisdictions rather than actual value creation for DGD.
“Buy DGD — it’s a way that you can get DGX rewards, provided that you have good Quarter Points, have access to earn Reputation points, and put all of your DGD into a Smart Contract for long periods of time!”
…The A1 focus should be on getting DGX minted and used. Instead, a convoluted claims reward that zeros out all passive investors and advantages active insiders was put in place. But the structure will likely lower the amount of people who care about DGD and thus are willing to take the economic risks of holding DGD or helping build out the ecosystem for DGX and everything and forestall the ability to ever grow the amount of DGX in circulation. It’s bad for all DGD.
Digix Governance Learnings
The governance learnings of the Digix ecosystem can be summarized as follows:
- Don’t intermix the crypto-economics of on-chain governance with additional participation reward models. Though Digix point system seems novel from glossing over the idea on paper, the system did not result in ecosystem effects that inspires community growth, and, because the process is facilitated on chain algorithmically, the UX of the points system became a contributing factor to governance community exhaustion.
- If leveraging an Open Community Voter model, always provide a manner in which token holders can exit the system. Everyone knows that the tell-tale sign of a crypto-scam is an inability to exit that system. I am not accusing Digix of remotely being felonious, but their unwillingness to prioritize developing an exist mechanism is very concerning.
- Don’t intermix conflicting funding interests between the organization and the governance community. No Foundation, company, or any organization affiliated with co-facilitating ecosystem growth with a governance community should directly control all the ecosystem’s governance funds. Doing so creates great conflicts of interest and maximizes the chance that high-level fraud will take place in the governance model at the hands of the ecosystem’s co-founders.
June 2018 — EOSio
- Governance Type: On-Chain
- Governance Vehicle: Organization Assisted and Open
- Voter Type: Open Community Voting
EOS.IO, founded January 2018 after raising $4B in their June 2017 token sale, is a blockchain protocol powered by the native cryptocurrency EOS. The protocol emulates most of the attributes of a real computer including hardware (CPU(s) & GPU(s) for processing, local/RAM memory, hard-disk storage) with the computing resources distributed equally among EOS cryptocurrency holders.
On March 16, 2018, Block.one released the ‘EOS.IO Technical White Paper v2’, described ‘governance’ as the following:
- Governance is the process by which people in a community (1) Reach consensus on subjective matters of collective action that cannot be captured entirely by software algorithms, (2) Carry out the decisions they reach; and (3) Alter the governance rules themselves via Constitutional amendments.
Point 1 describes the ability to vote and decide on community matters. This means that token holders have the ability to vote on the road EOS (or any blockchain using the EOS.IO software) is taking, the ability to vote on various, sometimes hard, decisions and the ability to take action against non-complying actors in the EOS ecosystem. This also means that EOS has a governing body that rules on disputes, the EOS constitution states that this governing body is EOS Core Arbitration Forum (ECAF), which assigns its own arbitrators to rule on each dispute (Blockgenic).
Point 2 describes the ability of elected block producers to carry out decisions, either the result of a community vote or referendum, or the result of an arbitrator order (Blockgenic).
Point 3 describes the possibility to alter the constitution, possibly even completely replacing the constitution. At the launch of the EOS mainnet all parties agreed on a constitution, naming ECAF (EOS Core Arbitration Forum) as the organization to resolve disputes on the EOS blockchain. You can find the constitution here (Blockgenic).
Currently, the EOS community is overcoming multiple obstacles to ecosystem growth and transparency, including the following:
- Enduring problems of stolen accounts as a result of scams and theft.
- Unilateral account freezes facilitated by EOS’s block producers without an official order from ECAF.
- Increased polarity in a community that is beginnings to question the integrity and level of decentralization of EOS governance.
- Potential block producer voter fraud/manipulation.
Despite rather publicly aired issues, no critical bugs and/or exploits have been found within the EOS architecture. The ecosystem’s developer community is steadily growing, as are the applications being built upon it.
EOS Governance Learnings
The governance learnings of the EOS blockchain can be summarized as follows:
- Foundation Assisted governance models need to facilitate complete transparency with the community, or risk ecosystem brand deflation.
- On-chain delegated voting (and voting in general) within an open community governance structure needs mechanisms to prevent voting manipulation by crypto-whales (i.e. those with a lot of tokens).
- Facilitating ecosystem education is crucial to having productive governing community members.
June 2019 — Libra Association
- Governance Type: On-Chain and Off-Chain
- Governance Vehicle: Organization Controlled (as of 2019)
- Voter Type: Member Voting
Libra, one of the newest additions to the global blockchain ecosystem, is a blockchain developed by Facebook and governed by the Libra Association . Libra’s mission is to create a simple global currency and financial infrastructure that empowers billions of people. The Libra ecosystem is made up of three parts that will work together to create “a more inclusive financial system” (Libra):
- Libra Blockchain. It is built on a secure, scalable, and reliable blockchain;
- Libra Stablecoin (Multi-Asset Collateralized). It is backed by a reserve of assets designed to give it intrinsic value;
- Libra Association. It is governed by the independent Libra Association tasked with evolving the ecosystem.
The Libra Association is an independent, Swiss not-for-profit organization with the mission to empower billions of people through the creation of a simple global currency and financial infrastructure. The association membership is made up of the validator nodes of the Libra network, and thus governs macro-ecosystem decisions such as how the Libra Reserve is managed (i.e. the underlying assets backing the Libra token, and the Libra Association’s buyer of last resort policy), when protocol updates are implemented, and who can join as a member of the association.
The association’s purpose is to coordinate and provide a framework for governance for the network and reserve and lead social impact grant-making in support of financial inclusion. Members of the Libra Association will, reportedly, consist of geographically distributed and diverse businesses, nonprofit and multilateral organizations, and academic institutions. The initial group of organizations that will work together on finalizing the association’s charter and become “Founding Members” include Visa, Mastercard, Facebook, Andreessen Horowitz, Union Square Ventures, and Mercy Corps among others.
The Libra Association’s operating model is visualized as the following:
- Council. The Libra Association Council is constituted of member organization representatives with the authority to elect and remove association board members, appoint the association Managing Director, approve the association budget, and veto or make decisions on behalf of the Libra Association Board. Each council member must operate a validator node on the Libra blockchain, and Founding Members must stake $10 million as a part of their membership.
- Board of Directors. The Libra Association Board is designed to be an oversight body on behalf of the Libra Association Council, providing operational guidance to the association’s executive team. The board consists of no less than five and no more than 19 members, the exact number to be set by the council and can change over time. The responsibilities of the board will be determined by the council. The council can assign/delegate to the board any of its authorities except the authority to make decisions that require a supermajority vote.
- Social Impact Advisory Board. The Libra Social Impact Advisory Board (SIAB) is designed to be an advisory body on behalf of the Libra Association Council led by social impact partners (known as SIPs), which include nonprofit and multilateral organizations and academic institutions. The advisory board consists of five to seven members, consisting of the Managing Director, social impact partners (SIPs), and academic institution representatives, elected by the council. The council can change the number of advisory board members as it sees fit.
- Executive Team. The executive team of the association is responsible for the day-to-day operations of the Libra network, including: Facilitating the development of the Libra network; Operationalizing the Libra Reserve; Distributing funds back to Founding Members (in the form of incentives, rewarding members for producing growth in usage of the Libra network).
Although, at the time of this writing, the Libra blockchain remains un-launched, the Libra Association has taken steps toward fortifying its ecosystem, launching a bug bounty program in August 2019 despite growing concerns amongst the G7 and U.S. Congress. Beyond the bounty program, it seems that the Libra Association, at least publicly, has been more focused on growing its list of corporate members in an effort to reach its 100-member goal in 2020.
Libra Governance Learnings
The Libra blockchain’s governance model is, currently, equivalent to the operating model of the Libra Association, and thus, until its governance becomes more decentralized as organizations host validator nodes, it should be considered ‘Organization Controlled.’ Because the Libra blockchain remains un-launched, and the Libra Association governance structure is largely untested, it is difficult to ascertain comparative learnings to initiatives that have an operating governance structure associated with an in-production project. However, there are some takeaways from Libra’s launch that could assist the development of future governance models:
- Strong branded coalitions bring almost immediate platform legitimacy. Libra and the EEA’s respective launches demonstrate how important it is to have traditional organizations (not blockchain startups) as governance community members. Such ecosystem brand signals force developer communities to activate out of interest and curiosity and helps demonstrate the seriousness of the initiative.
- Token distribution is…important. Multiple cases throughout the blockchain ecosystem’s history of governance have taught us that token distribution to governing members is very important. A yet unsolved issue of token plutocracy in on-chain governance models is one of many considerations protocol developers need to make before deciding to have an operative token.
- Policy development is critical. Though the Libra Association is looking to hire a Head of Policy, and has set guidelines for membership and reserve management, the association seems to continue its operations of deploying Libra despite U.S. Congress and G7 concerns .It is important to be considerate of internal and external policies needs regarding a platform’s governance structure, particularly if that structure is reliant on a governance token. Regulators should be invited to help craft governance policy to ensure that the ecosystem is legally compliant.
By looking at the DAO, EEA, adChain, Maker, DigixDao, EOSio, and Libra we can organize common governance structures and discern in-production patterns associated with using different Governance Types, Governance Vehicles, and Voter Types. Below visualizes just some of the outcomes associated with each sub-category:
By mapping post-launch outcomes to the several governance model attributes, we begin to see which model attributes are ‘most risk averse,’ indicating the risk of the governance model faltering due to corruption, inaction, or ineffectiveness. The level of risk aversion also takes into account how difficult it is to implement steps required to alleviate the potential for failure if that governance factor is used. Steps for Alleviation indicates what actions can be taken to increase the chance of success given a particular governance factor being leveraged in the ecosystem’s model.
If we read across the framework, after establishing the latest learnings across a multitude of in-production use cases, we can form specific recommendations, such as the following:
For governance model’s leveraging an open community governance vehicle, governors can increase their chance for success (and thus more effective, participatory governance) by unifying governance communication channels and actively maintaining ecosystem documentation in one place.
We can also more easily discern which governance factors make a governance model more effective (i.e. factors like Member Voting, where participants are more formally on-boarded into the governance ecosystem with guiding cues and policies, rather than someone randomly deciding the buy a governance token off of Binance). The analyzed use cases also provide evidence of which combinations of governance factors historically work best.
There seems to be an inverse relationship between how decentralized a governance model is and how effective it can become (of course, this is rather obvious). What is less obvious, however, is determining ways to balance decentralization (which some equate to fairness if votes are well distributed) and governance effectiveness. Governance models that leverage Member Voting and Organization Assisted factors can better focus in on niche community members that are more fit to govern given their real-world experience and interests while providing the guidance necessary to empower on-boarded governors to make good decisions. Member Voting doesn’t necessarily mean a closed ecosystem — it simply means that community members must more formally commit themselves to becoming a governor (by paying some annual fee as a stake and, typically, going through a basic application process). Given the learnings we’ve gleaned from adChain and Maker, making sure that governors are the right people (especially when tokens are involved) is of the utmost importance to ensure consistent governance and participation.
Two unique cases across the governance model analyses are:
- The Maker governance model. MakerDAO is a unique use case as, despite a few instances of publicized drama internal to the Maker Foundation and its governance community, the model is the most decentralized (i.e. open to the public) while maintaining its governance goals (to keep DAI stable). Maker’s success proves that an ecosystem can find balance between maximizing the number of vested community stakeholders and effectively ensuring the success of the ecosystem.
- The Dash budget system. Dash’s Organization Integrated and Open Community approach beautifully merges ecosystem persistence with ecosystem sustainability. Attaching a protocol and or platform’s monetary success to the ability of community members proposing methods to potentially improve its ecosystem is a governance model that can be implemented on or off-chain, but it becomes particularly powerful on-chain as it prevents unilateral and unseen ecosystem influence of corrupt actors.
Overall, we can summarize best practice governance methodologies into the following list of takeaways:
- An ecosystem website central to the community’s education and participation must have exceptional UX for mainstream adoption. The website should include the following: Developer documentation, access to the governance platform, communication channels, how-to-get-started guide, governance participation guide, ecosystem design assets, roadmap updates and action item statuses, core team profiles, the ecosystem white paper, membership guide (if applicable), and ecosystem mission (if applicable).
- Bodies that spend capital on behalf of ecosystem development must be 100% transparent with the state of their organizational (or ecosystem) treasury.
- All governance models do not need to be facilitated on-chain if voting data, meeting notes, and communication policies are well-documented and shared with the broader community.
- Governance should be facilitated on-chain if community funds are being used to operate the ecosystem’s core organization (foundation, association, whichever). On-chain governance must have a flawless governance platform UX/UI that (1) educates governors on how to vote and on what basis, and (2) minimizes the technical learning curve.
- Governance models that employ the use of governance tokens should leverage a Member Voting Voter Type in order to curate a focused, participatory community of governors. To make necessary ecosystem funding more sustainable (if not using an Organization Integrated approach), it’s important to create tiered membership models that capture every type of potential member at an annual fee they’re capable of staking.
- Organization-oriented governance models (associations, coalitions) should launch with brand respected founding members to more quickly cement governance legitimacy.
- Voting cap policies should be implemented to hopefully prevent plutocratic governance, as well as checks and balances to make ‘purchasing votes’ more expensive after every subsequent financial stake.
- Ecosystem organizations assisting governance need to create agreed upon communication and transparency guidelines with their respective communities to avoid fallout and publicized drama.
- Governance communication channels and documentation should remain in a single, unified place online to avoid confusion. Documentation and governance debates/conversation should not be isolated on sites like Reddit.
- Organization controlled governance structures are the most probable to commit fraud, especially if (1) there is no way for governors to reclaim their stake, or (2) the organization controls the ecosystem’s development funds. Regular financial reporting that is distributed to the public should be facilitated to maintain community trust.
- Off-Chain and On-Chain governance models should incorporate systems in which community members can propose ecosystem initiatives to become funded (e.g. Dash’s decentralized governance fund), and such a process should be as democratic as possible.
- Governance models should find ways to appropriate a percentage of ecosystem revenue to ecosystem maintenance and proposal implementation.
- On-Chain escrow methods, or budget transparency policies should be leveraged to help prevent ecosystem manipulation.
- If you’re going to create a Foundation, either domicile in Switzerland as a nonprofit or create a 501(c)(6) corporation in the United States. Developing membership classes will maximize operational funds by increasing the level of inclusivity toward organizations that may not be able to afford higher-priced tiers/membership fees.
- Tying escrowed voting stake to voting increases the seriousness of governors and increases governance participation.
Ultimately, by leveraging frameworks like McKie’s Triangle and Greenfield’s Governance Framework (🤣) across a growing number of governance model use cases, we can iteratively determine which combination of governance factors create the strongest foundation for future ecosystem success.
Additional Note: The Limitations of Organization Assisted Governance Models
Although many blockchain ecosystems and projects leverage Organization Assisted governance models, there are sustainability concerns regarding this approach. Current crypto foundations are not related to the currency itself by any mechanism that is included in the protocol and are not designed to outlive early adopters when they lose interest. The foundation then struggles to maintain funding until it implodes and core development of the protocol is left scrambling for funding or depending on charity that can’t be counted on and does not allow for proper budgeting and planning. Donations are also unfair to donors because there are always free riders that benefit from the effort done by others without contributing. Other projects have financed themselves by pre-mining coins or running prelaunch sales, which is not a great solution either because control of the funds is centralized and at that stage it is impossible to quantify the future needs of the project (Dash Governance). It is of the utmost importance that if your governance model is Organization Assisted, that the financial sustainability of the organization is modeled in a way in which it can maintain operations until the ecosystem or project its supporting becomes self-sustaining and scalable. Organization Integrated models, like that leveraged by Dash and Decred, are probably the most sustainable model to leverage, although very difficult to implement.
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I commonly write about crypto-economics and blockchain technology with a social impact focus, though I often times stray into lower-level, more technical analyses as well!