Governance Rights in Crypto: A Complex Debate
Builders face critical questions regarding whether to grant governance rights to tokenholders and the timing of such decisions. Policymakers, on the other hand, are keen to understand the intricacies of crypto governance, especially concerning network tokens, and to ascertain whether the blockchain systems they govern are under the control of any specific individual or collective entity. This discussion aims to clarify the fundamental roles of governance in the crypto space and delineate which types of tokens should possess governance authority based on these roles. It seeks to provide insights to both developers and regulatory bodies about governance, decentralization, and control.
Understanding Governance: Its Importance
Governance refers to the framework through which a community or organization formulates its rules and makes decisions. Effective governance is crucial as it fosters trust among key stakeholders, which in turn encourages more investment, collaboration, innovation, and overall growth. It also promotes decentralization by preventing the undue concentration of power and enhances decision-making by utilizing collective insights. Even when there are disagreements, good governance helps communities feel more satisfied with the decision-making process. Governance outlines who is responsible for making various decisions and the methods employed to do so. In a digital context, governance might encompass how community standards are established, enforced, and challenged; how fees are managed; how ranking algorithms operate; and when user data can be leveraged for targeted advertising, among other considerations.
The Role of Tokens in Governance
Governance is a significant concern in the crypto realm, akin to its importance in traditional institutions like corporations and non-profits. However, the unique nature of crypto introduces key distinctions. Tokens not only facilitate genuine digital ownership but may also bestow governance rights upon holders, granting them direct influence over the protocol’s operations. Certain decisions may be permanently encoded in smart contracts on the blockchain, while others might be determined by the founding team, developers, validators, or through democratic processes involving tokenholders. The specific rights of tokenholders and the mechanisms for exercising those rights are integrated into the blockchain’s design from the outset. This leads to the crucial question of when a token should offer governance rights and the rationale behind such decisions. Two primary motivations for implementing token voting in crypto are to sustain network decentralization and to enable decisions that reflect community input.
The Necessity of Decentralization in Governance
The foremost reason for integrating token governance is to uphold decentralization and mitigate human control in scenarios where future decisions cannot be predetermined. This is particularly relevant for network tokens, which are essential for maintaining the blockchain ecosystem by funding security, transactions, and voting processes. Evading centralized control is a foundational principle of blockchain technology and is critical for assessing whether a token falls under regulatory securities laws. The more a network token operates based on programmable rules—defined by smart contracts or its protocol—the less opportunity exists for individuals or groups to exert control over the system and its token. In certain instances, this programmability may result in a token that is entirely decentralized and beyond human oversight, a state known as “ossification.” However, unforeseen changes may necessitate decisions that were not anticipated during the initial blockchain development, thereby requiring decentralized governance to empower tokenholders to collectively address these emerging issues.
Voting Mechanisms for Decentralized Networks
In the context of core network tokens such as AAVE or UNI, the imperative for decentralization is significant when it comes to decisions about protocol fees, upgrades, and other strategic matters that must adapt to evolving conditions. Token voting can be an effective mechanism to ensure that human involvement does not lead to a re-concentration of control within the founding team. Consequently, network tokens may choose to provide governance rights whenever ongoing decisions need to be made that cannot be pre-coded. Moreover, these tokens often serve ecosystems populated by diverse builders and users. Giving proposal and voting power to these stakeholders can enhance the protocol’s credibility and alleviate concerns about possible exploitations, thereby fostering greater investment and participation.
The Diversity of Governance Approaches
While on-chain token voting is one approach to decentralized governance, it is not the only method available. For instance, Ethereum operates without granting voting rights to ETH token holders; instead, it employs a democratic deliberative process aimed at achieving a “rough consensus.” Final proposals are voted on by staked validators during consensus protocols, but this does not involve traditional token voting. Similarly, Solana enables validators to cast token-based votes on non-binding recommendations, akin to informal “temperature checks” in other decentralized autonomous organizations (DAOs). Thus, while network tokens may provide voting rights, it is not a necessity. The decision to do so hinges on factors like the need for explicit governance, community deliberation effectiveness, concerns about potential governance vulnerabilities, and other related considerations.
Engaging the Community through Crowdsourced Governance
A further motivation for token governance, applicable across various token types, is to foster community-informed decisions that promote ownership and engagement. Granting governance rights through tokens can lead to improved decision-making, independent of the need for decentralization. Historical insights from philosophers like Condorcet suggest that under specific conditions, majority voting can harness collective wisdom, potentially surpassing the insights of experts. In the crypto domain, numerous instances illustrate this approach. DeFi protocols often utilize community votes to determine critical parameters, such as risk assessments or new token listings, as seen in platforms like Aave and MakerDAO. These votes not only facilitate decentralization but also tap into the collective knowledge of tokenholders, who may possess more relevant insights than centralized authorities.
Fostering Community Engagement and Investment
Even when voting doesn’t necessarily lead to better-informed decisions, it can still play a significant role in cultivating a sense of community involvement and enhancing user engagement. Outside the crypto landscape, such strategies are commonplace—consider fan votes for selecting K-pop contestants or Major League Baseball All-Star team members. Numerous innovative experiments in the crypto sector have demonstrated this concept. For example, NounsDAO sold NFTs with the promise that each holder could vote on the DAO’s future initiatives. Additionally, other DAOs have conducted whimsical votes on decisions that may not carry substantial financial implications, such as ApeCoin holders voting on artistic collaborations or LinksDAO members pooling funds to acquire a golf course. This voting dynamic can extend beyond network tokens; arcade tokens might let users vote on game mechanics or loyalty program features, while collectible tokens could allow fans to influence artistic direction, reminiscent of how fantasy author Brandon Sanderson engages his readers in selecting which questions to address based on popularity.
Conclusion: The Evolving Landscape of Crypto Governance
As crypto tokens continue to grow and develop, so too does the surrounding policy and regulatory framework. With the maturation of the industry and the increasing clarity of the policy landscape, understanding the dual motivations for governance in crypto—sustaining decentralization where programmability falls short and fostering community engagement—becomes crucial. These motivations can guide the assignment of governance rights across various token types and serve as a valuable reference for developers and policymakers navigating the complexities of governance in the crypto space.
