Decentralized Autonomous Governance

Introduction

In the words of Balaji Srivasan, blockchains allow for “internet scale capitalization tables” with thousands of owners and stakeholders spread across the globe. Massively distributed ownership can mobilize large communities behind common goals. However, there is no free lunch - internet-scale cap tables pose their own challenges. One of the central challenges of these distributed organizations is that of governance. Anyone that has tried to make mission critical business decisions within even a small group knows how difficult it is to find consensus. How then will we effectively scale this kind of decision-making across thousands or even millions of stakeholders?

To date, much of the focus has been on the technical architecture of blockchains - protocol development, scalability solutions etc. As people begin to interact atop these digital foundations, we need to focus more on the social architectures of blockchains. In Blockchain Governance: Programming Our Future, Fred Ehrsam highlights that governance is “the most vital problem in the space” and laments that “little research has gone into governance and it feels poorly understood.” In this paper, we will explore the topic of governance with a focus on “on-chain” governance protocols and organizations like Aragon, DAOstack, Colony, etc. that are building suites of governance tools that help large groups of people coordinate decision-making.

Industry overview

The primary customers for on-chain governance tools to date are mostly other blockchain and crypto-communities. Among these communities, you’ve seen a variety of approaches with most projects (i.e., Bitcoin, Ethereum) opting for more informal off-chain governance processes. However, some projects such as DASH and Tezos have opted to build their own on-chain governance protocols. More recently, we’ve seen the rise of governance protocols such as Aragon, DAOstack, and others that want to help other projects more easily incorporate on-chain governance. Eventually, it is possible the more traditional corporations will also seek out blockchain-based tools to facilitate decision-making. We’ve already seen some movement here as organizations like Zappos and Tesla try to reduce middle management.

The key value proposition for crypto projects is supporting better decision-making and coordination amongst its network stakeholders. In the words of Fred Ehrsam, “over a long enough timeline, the mechanisms for evolving blockchain ecosystems are most important.” We’ve seen in the recent past that the most important ingredients for crypto project success has been the scale and productivity of their community. There are two primary needs that robust governance protocols can address: 1) choosing strategy and operational priorities to focus on, 2) determining how resources are matched to those priorities. Typically, failing to find consensus in these areas can result in fragmentation of the community (i.e., in the form of a hard fork) which can be hugely detrimental to the value of a project.

Today, Aragon, DAOstack, Colony, and others are developing libraries that will allow groups to easily customize governance protocols that will work for them. If these products did not exist, new and existing blockchain projects have two options 1) relying on more informal off-chain governance mechanisms, or 2) building their own governance mechanisms. It is an open question as to how these solutions compare to each other because we simply don’t have enough data at this point. On the one hand, you can imagine that it may make sense of projects like Aragon to specialize in governance and learn from applying different protocols across different communities. On the other hand, due to the idiosyncrasies of governance, it may actually make more sense for projects to develop their own protocols and incorporate them into the broader architecture of their blockchain. Right now, it looks like governance projects are using a type of freemium model to price their services allowing basic tools to be used to free but then charge for more advanced features.

Product Description / Crypto Application

Role of crypto:

On-chain governance is a system for managing and implementing changes to cryptocurrency blockchains. In this type of governance, rules for instituting changes are encoded into the blockchain protocol. Developers propose changes through code updates and each node votes on whether to accept or reject the proposed change. Current governance systems are informal, let’s start by looking at Bitcoin and Ethereum.

Bitcoin incentivizes developers by increasing the value of their existing tokens, increasing their social recognition, and allowing them to maintain control over future direction. The miners expect future rewards and transaction fees. Developers largely coordinate off-chain. Miners can coordinate on-chain in the sense that they are creating the chain itself. This system created is not very different from how the check and balances work in the US government because there is misaligned incentives. For e.g.: Miners would push for increases in transaction fees but developers won’t really care as long as the value of Bitcoin goes up. For developers, there is no direct way to earn money so the earliest developers end up becoming the seniors who are most knowledgeable and experienced. Miners stay concentrated because of economies of scale. Ethereum’s incentives and mechanisms are similar. However, with proof of stake coming, dynamics will change. The power of miners will be replaced by anyone who holds a sufficient amount of Ether. Coordination around challenging issues has been swifter and smoother than in Bitcoin to date because the culture is more open to change. It however, has limited incentives for developer, so projects end up creating tokens to support themselves.

On-chain governance:

On-chain governance emerged as an alternative to informal systems of governance. It solves the problem of centralization by incorporating all nodes within a blockchain

network into the decision-making process. Stakeholders are provided economic incentives to participate. For example, each node can earn a cut of overall transaction fees for voting, while developers are rewarded through alternate funding mechanisms. Each node’s vote is proportional to the amount of cryptocurrency it holds. Unlike informal governance systems, which use a combination of offline coordination and online code modifications to effect changes, on-chain governance systems solely work online. Changes to a blockchain are proposed through code updates. Subsequently, nodes can vote to accept or decline the change. Nodes with greater holdings of coins have more votes as compared to nodes that have lesser number of holdings. If the change is accepted, it is included in the blockchain and baselined.

An example is Tezos, where anyone can submit a change to the governance structure in the form of a code update. An on-chain vote then occurs and the update makes its way on to a test network if passed. After which a confirmation vote occurs and the change goes live. The system takes power away from the centralized group of developers and miners, and give it to users. Contributions are rewarded by the community with newly minted tokens through inflation funding. Another example is DFINITY, in addition to what Tezos can do, this system also allows direct, retroactive changes to the ledger itself. If something happens that token holders do not like (ex: a hack, a marketplace selling drugs), they can roll back or edit the ledger in addition to the rules of governance themselves. Events such as the DAO hack could be solved with a lot less hassle if everyone could just vote to undo them. However, this system allows direct censorship and peoples’ tokens to be forcibly taken.

Advantages of on-chain:

● Decentralized governance - Changes to a blockchain are not routed through a core development community. Instead, each node is allowed to vote on the proposed change and can read about or discuss its benefits and drawbacks.

● Quick turnaround - Consensus regarding changes is achieved in relatively less time. Informal governance systems require time and effort between stakeholders to achieve consensus. Algorithmic voting mechanisms are relatively faster because test results for their implementation can be seen via a code update.

● Possibility of a hard fork reduced significantly - Because each proposed change requires consensus , the possibility of a hard fork is reduced significantly. Through the use of rewards, on-chain governance proposes economic incentives for nodes to participate in the voting process.

Competitive Landscape

Expected Industry Structure and Barriers to Entry:

It’s most likely that there will be two general approaches to blockchain governance namely, specialized governance platforms (e.g., Aragon, DAOstack etc.), and governance tools native to individual projects. In an effort to efficiently allocate resources in order to provide core services, these individual blockchain organizations will most likely prefer to utilize third party governance tools. On the other hand, however, given that organizational needs may differ across blockchain projects and companies, it is also very likely that there may be need for personalized governance solutions. This may be achieved through B2B governance consultation for these companies, or through allowing for sufficient customizability in the provided general governance tools. We may also see more layers and established hierarchies of governance tools. For example, currently District0X tools are built on Aragan.

With a forming hierarchy of governance tools being built on each other, it is possible that certain lower level governance tools may become ‘industry standards’, thereby leaving little space for newer governance approaches and solutions. With the trust that users, clients, and people put into governance (since trusted governance is highly associated with community stability), it is even more likely that there may be a general governance structure that may become accepted, thereby making this governance approach the most accepted form of governance across projects, and consequently creating barriers for new industry players.

Competitive Advantage:

Given that it is highly likely that organizations will chose to utilize third-party services, there will be a strong reliance on these governance tools. Therefore, of the different blockchain ventures, it is easy to see why investing in blockchain governance solutions could lead to long-term gain.

Sustainability:

Governance solutions can be seen as being highly sustainable for two main reasons:

-Necessity of Governance for Stability: Governance tools are absolutely necessary in order to maintain stability in blockchain communities. As these communities increase in members, the need for more sophisticated governance solutions also increases, in order to fairly weigh-in on the increased diversity in opinions, and stake which individuals may hold in the community.

-Autonomy of Governance Tools and Systems: With the mission of Aragan, and other governance projects, being to create entirely autonomous systems that would maintain themselves, it is easy to how self-sustainable these governance solutions are and plan to be.

Evolution of Today’s Competition, Market Share, and Vertical Integration:

A few players in blockchain governance today are DAOStack, Colony.io, District0X.io, and Aragon. As mentioned in the section on industry structure we can see where an industry standard of governance may evolve. Nevertheless, it is highly likely that the market will be fragmented, as there may be no single governance solution for all organizations. Furthermore, with the personalized governance needs of different organizations, we can see where several different governance projects can coexist in the market. Vertical integration could come about in the case that there is a blockchain entity which is able to build its own governance system while providing some other high demand blockchain-based service. This would however, be very costly and demanding on the

company, and could perhaps be best achieved through the acquisition of already successful and widely accepted governance projects and companies.

Risks

Creating governance and incentive mechanisms for increasingly complex projects is difficult. Some major issues/risks include:

1. How does governance work? Who can vote, how much power do they have, and what prevents someone from accumulating enough power to override the network’s democratization?

2. How will the network upgrade itself? Who is responsible for upgrading the network, how are they determined, how much do they get paid, and how does the network determine the value of their contributions?

3. How can you ensure a fair distribution of governance participation? Running an organization requires thousands of micro and macro decisions per day. How do you make sure that each actor in the network can participate in each decision?

4. Allocate the risk of failure — define who absorbs the risk if things don’t work out as intended. Economic activity by definition has uncertain outcomes and this uncertainty has to be taken into account.

5. Distribute rewards — define who reaps the benefits of success? how these benefits are distributed? What does success really mean?

Do you think this business is likely to prosper in the next 5-10 years:

It is difficult to say at this point as we believe that DAO is relatively futuristic concept and its unlikely that it will emerge in next 5-10 years. Implementing DAO not only needs the highly advanced blockchain technology but also the change in conception and acceptance from the society and corporates in general. Nevertheless, we found the topic very interesting and optimistic about its success at least in far future.