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Governance capital is a value-driven governance right

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The owner of governance capital does not necessarily have governance authority, but the owner of governance authority will weigh the interests of the owner of governance capital to modify the rules of the agreement

Authors: Rhythm Institute

"Capital is the ability to mobilize the economic resources of a social system, and its value is reflected in how much benefit it can bring to the holders of capital." ", which is an idea put forward by Joel Monegro, the author of the "fat Agreement" theory, in early 2019, which defines capital again.

In an economy, productive capital and human capital determine its economic composition and income distribution, financial capital determines the distribution of purchasing power, and the equity capital of a company determines how its resources should be distributed.

Those intangible assets share the same attributes, such as political capital that governs the rules of the market, and social capital that determines where people have the resources they can deploy.

The governance right of the agreement also belongs to the capital, and the owner of the governance right can directly or indirectly utilize the resources in the agreement to maximize his own interests. And the value of the resources in the agreement also determines the value of the agreement governance right. If the agreement governance right is subdivided, it can be divided into governance authority and governance capital in essence.

The governance authority represents the right to modify the rules of the agreement, and the governance capital owner allocates the resources within the agreement according to the rules. The owner of governance authority hopes to enlarge the value of the authority by maximizing the value of the agreement, and the owner of governance capital will choose to provide its own value to the agreement that maximizes its own interests. The owner of governance capital does not necessarily have governance authority. However, in order to maximize the value of the agreement, the owner of governance authority will weigh the rights and interests of the owner of governance capital to modify the rules of the agreement.

The value provided by each group in the Bitcoin protocol

If we want to see the value of an encrypted network, we need to know the roles involved in an encrypted network and understand the roles they play in the network, the value they offer, and the flow of value between them. Using Placeholder's proposed trilateral market relationship for encrypted networks, we can see that traditional encrypted networks are composed of miners (supply side), users (demand side) and investors (capital side).

As the first decentralized encryption application, Bitcoin is not funded by the protocol itself, and its model is the most direct and the most reference.

Miners provide services to the network through protocols, users use services in the network, and investors provide liquidity for the value carrier of the network and help capitalization the network.

Miners and users interact through the Bitcoin protocol, and bitcoin, as the value carrier of the protocol, is distributed in the form of block rewards to miners who contribute to network security. Investors buy bitcoins from miners, providing them with a constant flow of cash to cover their day-to-day operations. Users buy Bitcoins from investors in order to use them as a store of value and as a medium of exchange. Miners to provide users with safe billing services, users pay the corresponding fees.

Miners provide the necessary support to the supply side for the cold start of the agreement to ensure the normal operation in the early stage without a large number of users' demand for transfer at the end, while the mining cost of miners is maintained by the bitcoin in the block reward. Since the bitcoin network was not very secure in the early stage and the bitcoin itself was not very liquid, the value of bitcoin was not fully discovered, so there was no strong competition among miners.

There are two types of investors, short-term investors and long-term holders.

Short-term investors provide long-term liquidity for Bitcoin and serve as a hub between miners and users. Short-term investors add value to bitcoin in terms of liquidity, which also allows more users to interact directly with the bitcoin protocol.

Long-term holders support the price of bitcoins by buying and holding on to them. The stability of the price ensures the purchasing power of bitcoin in the hands of miners, thus promoting the development of the mining market. The increase in the price of Bitcoin makes mining profitable, and miners compete for the right to carve out blocks to constantly improve computing power, ultimately improving network security.

Users support the Bitcoin protocol from the demand side. Users have to pay a transaction fee for each transfer, and in a future where block rewards are dwindling, user transfers will be the only force driving this online economy.

As the Bitcoin network becomes more and more secure, the value storage property of Bitcoin highlights its value. Long-term holders also become users. A period in which long-term investors assume the risk of holding assets in exchange for a steady currency price and consensus. As people gradually reach a consensus on network security and bitcoin value storage properties, the number of users on the network will gradually increase, and people's demand for Bitcoin will also increase. While creating value for the network, it also achieves the original purpose of long-term investors (capital gains).

From this we can see that the value of the bitcoin agreement is maintained by miners, users and investors.

The governance capital of each group in the Bitcoin protocol

Since anyone can bifurcate a bitcoin, anyone has jurisdiction over the bitcoin network. From the perspective of governance capital, miners have absolute governance capital in the Bitcoin agreement, since they have provided huge value for the agreement in the early, middle and late stages, whether it is the cold start of the agreement in the early stage, the distribution of tokens, or the security of the network in the later stage. When anyone wants to fork bitcoin, the first thing to consider is the interests of the miners. Without the support of miners in every aspect of a forked chain, the network cannot carry any value.

Investors indirectly provide value to the agreement at the level of value carrier. As the value carrier of the protocol, bitcoin has a high demand for liquidity due to its asset attribute. If an asset loses its liquidity, its value will be greatly reduced, and short-term investors provide liquidity support for Bitcoin. Long-term investors helped the network grow and capitalize laterally by holding tokens. The investor community ACTS as a catalyst for the increase in the value of the agreement, so they also have some governance capital, and the fork will take investor demand into account. For example, the use of community funds to open up the central exchange currency channel.

The block rewards of a successful cold start network can cover most of the mining costs, so the value contributed by users in the early stage cannot be fully reflected. However, in the absence of a block incentive at a later stage, transaction fees will become the miners' only source of income. Users' money transfers will also be the only driving force in this networked economy. So in network late user will have more and more strong management capital.

The value provided by the groups in the DeFi protocol

Let's also take a look at the value flow and composition of the DeFi protocol deployed on the public chain in the form of intelligent contracts.

The MINERS in the DeFi protocol provide ongoing availability support for the protocol in the form of liquidity. The liquidity of THE DeFi protocol, like the security of the Bitcoin protocol, is the backbone of the protocol and determines the value it can carry. If the bitcoin protocol is not secure, then no one is willing to use Bitcoin as a medium for value exchange, let alone as a tool for value storage. If there are not enough assets in the DeFi protocol liquidity pool, the protocol will not function properly (lack of trading pairs) or give users a very poor user experience (severe slippage). Miners provide the most basic value for the DeFi protocol in its early, middle and late stages.

Usually DeFi agreement, short-term investors will be the period to buy at the beginning of the project head, from a pool (single currency) mining and dig out the governance tokens, due to the use of project management with the dig two pools (dual-currency mining) mining rewards far over pool, short-term investors expect prices to due to the heat and the second mining market demand and rising rapidly, which provides support for currency. From the value perspective of middle and late stage, short-term investors provide liquidity of governance tokens for those users who have governance requirements for the project. When a project governance proposal affects the interests of users or miners, stakeholders can buy governance tokens from short-term investors and vote on them.

Long-term investors in the DeFi protocol governing tokens are usually users and investors who have a long-term view of the project, or miners who hold many tokens. Since the most important thing in governing tokens is their voting property, rather than the scarcity of assets, generally speaking, governance tokens will be issued to continuously stimulate the liquidity supply side and try to maintain the decentralization of governance authority. For miners who already held many tokens, continued mining would allow them to maintain a relative share of the total amount of tokens in order to maintain a say in the modification of the parameters of the agreement. Therefore, long-term investors help the subsequent development of the agreement by holding currency, stabilizing currency price and continuously providing liquidity for the agreement.

From the user's perspective, as with Bitcoin, user fees are the main reason to keep miners providing liquidity at a later stage when incentives are less and less. Therefore, the value of users will become more prominent in the later period.

The security of the DeFi protocol also has a significant impact on the value of the protocol. The security of the protocol is affected by many factors. First, the underlying chain records every transaction and state change along the chain. This means that everything that happens in the DeFi protocol is also recorded by the underlying common chain, so its security depends largely on the security of the underlying common chain. Applications deployed on a secure intelligent contract chain will have greater value potential. Second, the security of the application depends on the developer of the contract, and the assets in the contract are at high risk if an attacker discovers a flaw in the logic of the contract, or if the developer leaves a backdoor open. So smart contract auditing will add value to the application. Of course, the security of other middleware protocols invoked and combined by the DeFi application is also directly related to the security of assets in the DeFi protocol.

DeFi protocol's governance capital for each group

The DeFi protocol's governance token quantifies the protocol's governance authority, while governance capital remains unquantifiable.

Miners provide the greatest value as the supply side of the main resource of the agreement. This is also why many people judge the value of a DeFi protocol by its total lock count. Since liquid mining does not have a large amount of operation and maintenance costs like PoW mining and does not require operation nodes, the cost of liquid mining is approximately equal to the risk-free return of the total amount of scrip in the lock warehouse plus the contract risk premium, so miners do not need to sell a large amount of scrip to maintain the mining costs. From the perspective of governance authority, theoretically, if the miners are bullish on the project for a long time, the miners will become the main group mastering the governance authority and have the absolute initiative to modify the agreement parameters. From the perspective of governance capital, miners also occupy an absolute dominant position in the short term, which is why most of the incentive for mobile mining is allocated to miners. But in the long run, its value is easily replaced by a low threshold to provide liquidity without the backing of specific production capital.

For DeFi investors, they provide liquidity and price support for the governance tokens of the AGREEMENT. Investors could become miners to provide liquidity support for the deal if the mine yields well. Although investors have certain powers of governance and capital, the agreement itself makes it difficult to control the value of investors except for turning them into miners.

As the demand end of the resources, the user ensures that the agreement can maintain the balance between supply and demand without the incentive of the liquidity mining. From the point of view of governance permissions, users do not have governance permissions since users using protocol services alone cannot get the governance token directly. However, from the perspective of governance capital, similar to the Bitcoin protocol, users' use will ultimately support the value of the protocol, so users hold considerable governance capital in the long run. If the agreement wants to retain the value of users, the owner of governance authority needs to guarantee the rights and interests of users at all times, and cannot seek rent at will.

Therefore, we can see that whether it is the Bitcoin protocol or the DeFi protocol, the governance authority is not the same as the governance capital. The governance authority can be quantified with the governance token, but the governance capital determined by the different values provided by different groups is difficult to quantify.