Learning lessons in blockchain governance from crypto-foundations, open protocols, and everything in between
In a much longer post, I dived into the details of how governance models have evolved throughout the blockchain ecosystem since the first DAO developed in 2015. The analysis reviews the Ethereum DAO, Decred, adChain, EOSio, DigixDAO, the Enterprise Ethereum Alliance (EEA), the Libra Association, MakerDAO, and Dash, and resulted in the development of Greenfield’s Governance Assessment Framework (GGAF), which organizes governance models by several high-level factors (Governance Type, Governance Vehicle, and Voter Type) and sub-factors as shown below.
GGAF looks to support ecosystem developers to identify governance model patterns that serve as contributing factors to varying levels of governance success, and thus help them in their decision when developing their own governance models. The GGAF is an iterative framework that, as more governance models deploy into the wild, supports the development of best practice guidelines in blockchain governance.
This brief serves the purpose of providing an abridged history of blockchain governance that, hopefully, won’t take 43 minutes to read! However, just in case, you can find an even shorter summary of the findings and framework here.
Blockchain Ecosystem’s Timeline of Governance
Over the course of 4 years, a great deal of governance model evolution has taken place within the blockchain ecosystem. Interestingly enough, some of the more financially sustainable and community appreciated models were deployed earlier in this time span (Dash and Decred in 2015 and 2016 respectively) with partial implementations of their envisioned governance models that were soon completed over the next 3 years or so. The diversity of efforts ranges from Bitcoin-forked cryptocurrencies and smart contract enabled governance protocols to ecosystem growth foundation and association models. The following summarizes each initiative represented in the timeline:
September 2016 — Dash Cryptocurrency & Blockchain
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). Dash leverages a decentralized management system based on their masternode voting mechanism, in which full node operators have the ability to vote on proposals to be funded by the Dash network’s Decentralized Governance Fund. The fund is incorporated in the the Dash blockchain’s reward system (and was also developed via a voted on proposal) and it accrues 10% of each block reward.
- Dash leverages a decentralized management system based on their masternode voting mechanism;
- To have a Masternode, one must commit 1,000 Dash (~$100K as of time of writing);
- Masternodes solely can vote on proposals presented for potential support from the Decentralized Governance Fund;
- Anyone can serve as a contractor to a proposal;
- Dash budget system uses 10% of all block rewards to fund ecosystem DAO where proposals are submitted and voted;
- Dash Central offers exceptional governance UI/UX.
- Plutocratic governance voids ecosystem decentralization and fairness;
- Low governance participation and lopsided ecosystem influence can undermine governance democracy;
- Low proposal implementation accountability will waste ecosystem resources.
February 2016 — Decred Cryptocurrency & Blockchain
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 leverages both Proof of Work and Proof of Stake in a succinct, secure way;
- Decred has two governance GUIs, Off-Chain via Politeia and On-Chain via Decred’s core developer GUI;
- Decred leverages a DAO to manage its ecosystem treasury, which is funded by 10% of every network block;
- Decred has, arguably, the best ecosystem website in the blockchain ecosystem in terms of UX and user on-boarding into their governance model.
- Good UX and UI on a central ecosystem website is crucial;
- Treasury and roadmap transparency is mandatory to maintain community trust;
- Policy oriented, DAO maintained community funds is the fairest, most sustainable route for ecosystem development in the blockchain community.
May 2016 — Ethereum DAO
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).
- 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.
- 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).
- 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.
October 2016 — Enterprise Ethereum Alliance (EEA)
The Enterprise Ethereum Alliance (EEA) is a member-driven standards organization whose charter is to develop open, blockchain specifications that drive harmonization and interoperability for businesses and consumers worldwide. The organization was the fourth, major blockchain ecosystem non-profit behind the the Ethereum Foundation, a Swiss non-profit founded in July 2013. The EEA is organized as a DE 501.6(c) (a nonprofit business league).
- The continued growth, success, and stability of the EEA speaks toward its professionalism and ability to produce, which is a rare combination to come by in contrast to most governance entities in the blockchain ecosystem.
- Governance transparency is a gradient that can influence an organization’s reputation.
- Governance is strengthened by diversity in representation and open collaboration.
- Governance members need simplified and unified communication channels to ensure consistent participation.
July 2017 — AdChain & Token Curated Registries
AdChain 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, hoping to leverage the best of decentralized networks. The protocol motivated multiple stakeholders to align themselves around a common goal: to create a high quality registry of domains to ensure that advertisers can avoid digital marketing fraud caused by sites using bots to fake their online impressions.
- The underlying UX obstacles presented by the required inputs of the smart contract protocol can be a detriment to effective governance by: Poor UX increasing the governance learning curve and slow on-boarding process which led to less engaged governance community.
- Governance UI and UX must be well design or people won’t adopt the platform and govern.
- Effective open governance needs a guidance framework;
- Guidance frameworks must be simple, and immediate;
- On-chain governance that relies on a buy-in economy will seldom be adopted;
- Token-weighted voting is a two-sided coin;
- Distribute tokens to your target governance audience.
December 2017 — The Maker Foundation & MKR Governance
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.
- Maker’s governance system is reliant on active contributions from the community;
- The Maker Foundation has done a good job informing and engaging the community;
- Maker leverages a four-pronged approach to attempt to maximize governance participation: channels of communication, strong on-chain governance user experience, transparency, and full documentation.
- Non-combative, open community governance requires an organizational transparency protocol faithfully executed by the ecosystem’s foundation;
- On-Chain governance requires an exceptionally designed governance dashboard user experience;
- Communication channels should not default to being facilitated solely on common crypto-community discussion boards (i.e. Reddit);
- A Foundation Assisted governance vehicle requires flawlessly transparent channels of communication between the foundation itself and the governing community.
April 2018 — DigixDao
The DigixDAO is a Decentralized Autonomous Organization creating a cryptocurrency backed by bars of gold. Within Digix governance model, Founders, Badge Holders, and DGD Holders are decision makers of DigixDAO. 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 is not without its governance flaws, as it seems community members (DGD and DGX holders) are increasingly frustrated by the lack of transparency and ecosystem growth on part of the Digix company.
- 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.
- Don’t intermix the crypto-economics of on-chain governance with additional participation reward models;
- If leveraging an Open Community Voter model, always provide a manner in which token holders can exit the system;
- Don’t intermix conflicting funding interests between the organization and the governance community.
June 2018 — EOSio
EOS.IO, founded January 2018, is a blockchain protocol powered by the native cryptocurrency EOS. Per the white paper, governance is the process by which people in a community: reach consensus on subjective matters of collective action that cannot be captured entirely by software algorithms, carry out the decisions they reach, and alter the governance rules themselves via Constitutional amendments.
- 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, and potential block producer voter fraud/manipulation.
- Foundation Assisted governance models need to facilitate complete transparency with the community;
- On-chain delegated voting within an open community governance structure needs mechanisms to prevent voting manipulation by large token holders;
- Facilitating ecosystem education is crucial.
June 2019 — Libra Association
Libra 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: Libra Blockchain, Libra Stablecoin, and Libra Association. It is governed by the independent Libra Association tasked with evolving the ecosystem.
- Too early to know. Beyond Libra’s bounty program launched in August 2019, 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.
- Strong branded coalitions bring almost immediate platform legitimacy;
- Token distribution is extremely important to prevent undue ecosystem economic influence and lopsided governance;
- Policy development is critical to address internal and external concerns about the ecosystem;
- Regulators should be invited to help craft governance policy to ensure that the ecosystem is legally compliant.
Ecosystem Governance Analysis & GGAF
If we apply the GGAF to categorize and assess the aforementioned governance models, we generate the following tabular summary:
It seems that governance models that leverage Member Voting structures operate more efficiently, especially in the context that the ‘member’ represents an organization and not just an individual. On-Chain governance models vary greatly in their performance, and contributing factors that may explain such inconsistent performance are the following:
- Quality of ecosystem website user experience and user interface design (including the quality of developer and governance documentation).
- Quality of governance GUI user experience and user interface design.
- Governance smart contract security and auditing (i.e. number of fatal exploits in governance source code).
- Level of transparency demonstrated by the core developer group and/or ecosystem organization influencing the initiative.
Of course, the more centralized a governance model becomes, the innately more efficient the model is — but this defeats the point of leveraging blockchain technology. To better understand the lower level implications of employing different governance sub-factors in any given governance model (and to determine which combination of sub-factors work most effectively), we can leverage GGAF in unison with the insights we’ve gained from analyzing each ecosystem. Doing so results in the following insight board derived from the GGAF, detailing how the different governance sub-factors operate when the governance model is deployed:
By understanding the weaknesses and strengths associated with each governance sub-factor, we can also determine steps to alleviate potential risk in utilizing any factor within a potential governance model.
15 Best Blockchain Governance Practices
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.
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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!