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a16z: On the governance of cryptocurrency

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Through governance, decentralized protocols can surpass native developers and reach the ultimate goal of sustainable development.

Original source: a16z

Original translation: 0x26

(Most of the time) cryptocurrency protocols are governed by a decentralized community of stakeholders. This is not done because it is more efficient or for ideological reasons, but because it unlocks the core value proposition of the community: the underlying protocol will continue to operate as designed, and will continue to be open to anyone who wants to use or build on it, without having the rules changed at their feet.

Bitcoin was the original embodiment of these concepts, creating the first scaled Internet native currency. But they also apply to other types of (valuable) open financial native currencies, including mortgages, lending, trading, etc. (MakerDAO, Compound, Uniswap). Although the specific applications may be different, the need for decentralized governance remains the same.

For crypto startups, the transition to community governance is complex and can create issues around continued development, voter engagement, and incentive alignment among stakeholders. However, they are ultimately necessary to coordinate and overcome in order for protocols to transcend their initial developers and provide lasting open financial infrastructure value.

As strong supporters of many of these protocols and stakeholders, we wanted to briefly explain how we at a16z think about crypto project governance and how we view our role in their development.

In short, our primary goal in governance is to create the necessary conditions for protocols to achieve long-term adoption and self-balancing of the protocol. As a general principle, we believe that protocols that achieve greater decentralization in certain key aspects - voting rights, development work, economic upside, etc. - are more likely to reach their ultimate goals than protocols that do not. Therefore, we focus our governance efforts on initiatives that have the potential to improve decentralized governance in key areas. We believe this is our most effective way to participate and is more likely to accelerate the transition of the underlying protocol to long-term sustainability than any other approach.

What are some examples of this?

1. Delegated Voting

Over the past year or so, we have seen significant innovation in token-based governance models across prominent cryptocurrency projects. One of the most important new features is delegated voting, which allows token holders to transfer their voting power to others so that these delegates can participate more actively in governance.

We are strong supporters of delegation and see it as an important tool to increase the overall diversity of perspectives in governance, to reduce the concentration of voting power across the network, and to increase overall participation of the entire community. This is why we have committed to delegating the majority of voting power in networks like Compound, Uniswap, etc. to a broad range of qualified participants.

Given that these decisions have far-reaching consequences, we take this responsibility seriously and seek candidates who not only bring diverse perspectives, but also meet other key criteria. These criteria include:

Coordination. Are they aligned with the overall success of the protocol, or are there potential sources of conflict?

Commitment. Are they committed to the long-term health and sustainability of the protocol, or do they take a more short-term approach?

Independence. Are they completely independent and at arm’s length from a16z? This allows them to freely vote in a way they believe is in the best interest of the protocol.

Professionalism. Do they have sufficient expertise, or are they still learning the core topics?

Governance. Are they generally good stewards and representatives of the protocol and its fundamental tasks?

For participants who meet these criteria, we will grant them certain voting rights and ensure that they have full freedom to participate in governance as they see fit.

What are some examples of representatives we have currently selected so far? This includes student-run organizations (such as the Stanford Blockchain Club, Harvard Law School Blockchain and Fintech Initiative, Blockchain at UCLA, and the Blockchain Association at Berkeley) who are passionate about cryptocurrency and represent the next generation of crypto leaders; existing crypto companies (such as Argent and Dharma) who have experience in underlying protocols and engage with their communities; and industry experts (such as Gauntlet) who specialize in protocol governance and bring quantitative rigor to the discipline. These are just some initial examples, and we look forward to seeing a more diverse ecosystem of representation emerge over time. If you feel like you are one of them, please contact us!

2. Donation Programs

Today, many protocols have significant financial resources in the form of project treasuries (community funds). These treasuries are a powerful tool that can be used to fund the continued development of the community and put the protocol on a path to long-term sustainability.

We support governance initiatives (like endowment programs) that seek to deploy these funds strategically over time, and believe they have many benefits. First, they allow protocols to leverage a vast array of third-party development talent and resources around the world, far greater than any single company or developer team could bring to the table. Second, and relatedly, they create a meaningful economic opportunity for a variety of people around the world who would otherwise be unable to access these jobs, or would work for free. Finally, they reduce the level of dependency on the original development team, which in turn can reduce regulatory risk for the protocol in certain key situations.

As a specific example, Uniswap token holders control over $7 billion worth of community funds. These funds can be used to incentivize things like gas fee optimizations for the underlying protocol, or integrations with other programs, or new front-end interfaces, or even marketing campaigns designed to promote growth. They can even be used to fund protocol representatives to further decentralize the governance process, as described above. We were happy to support the creation of a formal Uniswap funding program last year (Uniswap Proposal 3, the first formally passed proposal), and look forward to supporting similar efforts to incentivize community participation in other protocols.