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In-depth exploration of Lido governance: checks and balances in power structure.

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Lido's dual governance scheme may be the first DAO attempting to set a veto gate in its institutional design, but it remains uncertain whether the scheme can successfully achieve its stated goals.

Original Title: "Ambition Made to Counteract Ambition: DAO Governance and Bicameralism"

Original Source: Stanford Blockchain Review

Original Author: Michael Li

Original Translation: Kxp, BlockBeats

Introduction

The innovative governance proposal on Lido, which is an excellent liquidity staking protocol, has not received enough attention. The core idea of this proposal is to support a "dual governance scheme", which means that in addition to LDO holders, stETH holders will also be given governance rights over the Lido protocol.

When we delve into the details of this proposal, we will find that although DAO has novel features such as "self-executing smart contracts" and "governance tokens based on permissionless blockchain", the core issue of governance will ultimately come down to the construction of effective mechanisms.

Just like the exquisite art of national construction, DAO also requires a shared sense of purpose, cooperation, and a strong decision-making framework. These all involve dealing with complex power relationships and balancing different interests in pursuit of common goals. In this article, we will compare the dual governance model with the two-house structure of the US Congress, analyze their common checks and balances methods, and explore their unique features.

Lido's Dual Governance Proposal

Lido is a decentralized autonomous organization that provides liquidity staking solutions for Ethereum. The Lido ecosystem is currently governed by its protocol token LDO, which gives users the power to vote on activities, upgrades, and changes on the platform. Lido's stETH derivative token maintains a 1:1 redemption ratio with ETH, representing the amount of ETH that users have staked.

Considering the massive amount of ETH (6.17 million ETH, approximately $11.5 billion) controlled by this protocol, Lido's core developers believe that they must change the governance model of Lido DAO to mitigate moral hazards.

Therefore, the dual governance proposal aims to address the delegation agency problem that exists in the current governance state, where LDO holders (agents) may act in their own interests without considering the interests of stETH holders (principals).

In this case, the pledger is more concerned about the interests of the Ethereum network, while the interests of LDO holders are not quite aligned with them. In the worst case, LDO holders may even launch a raid and steal the ETH pledged in the smart contract, abusing their control over the liquidity pledge code. This is because Lido DAO has the ability to upgrade the stETH contract, allowing it to destroy stETH from any address and mint it to other addresses. This means that although the DAO does not directly control the ETH supporting stETH, it can steal funds from users, destroy their stETH, and mint it elsewhere by modifying the code.

The dual governance plan aims to better adjust the incentive mechanisms of both parties to ensure that such events do not occur. Under this plan, LDO holders can still propose protocol changes, but stakers also have veto power and the right to reject proposals deemed "critical governance decisions." This is crucial for protecting the interests of stakers and preventing governance from being controlled or the protocol from becoming unbalanced.

The design of the dual governance mechanism aims to give active stETH community members time to react to controversial decisions. First, all important decisions are time-locked, giving the community the opportunity to express dissent through the Veto Escrow smart contract. If a small portion of the community (e.g. 5%) disagrees, the governance mechanism will enter a temporary veto voting state.

If the majority of the overall stETH supply is included in the upgrade process, governance will enter a veto consultation state, allowing stakers to negotiate with governance. Successful negotiations will restore normal governance operations. However, if negotiations fail or the majority of stETH supply is included in the upgrade process, global settlement will be triggered, dissolving the protocol and returning ETH to stakers.

Veto Lift Voting is a mechanism that allows stETH holders to execute specific governance decisions when there is a disagreement between LDO and stETH holders. When governance is in a veto negotiation state, stETH holders locked in the Veto Escrow can initiate a vote with two possible outcomes: lifting the veto or not lifting the veto.

The voting will last for a fixed period of time. During the initial two-thirds of the time, voting is allowed to choose any result. During the final one-third of the time, voting is only allowed to choose to lift the veto. A successful vote requires reaching the minimum legal number of voters, and more voting rights to lift the veto are supported. If successful, the veto will be lifted and the decision can be executed. Otherwise, the decision will remain unenforceable. This two-stage mechanism will ensure fairness and prevent situations where a sudden vote overturns without the opportunity to react.

Two-Chamber System - Bicameral Legislative Body

The design of Lido's dual governance scheme follows the principle of bicameralism, which refers to the authoritative legislative body composed of two chambers or two institutions.

The United States Congress is a typical example, consisting of the House of Representatives and the Senate. When designing the structure of Congress, the framers also faced the problem of delegation-agency, that is, the problem between elected officials (agents) and citizens (principals). The design of the bicameral system aims to prevent authority from being controlled by populist "mob rule" through the Senate, while also preventing authority from being alienated from the general opinion of voters.

Of course, such a constitutional arrangement is both a deliberate design and a historical inevitability, because it is deeply rooted in the political reality and the tug-of-war between populous and less populous states. However, the great compromise of 1787 ultimately allowed representatives of the lower house to be allocated according to population, and representatives of the upper house to be allocated according to equal representation of each state.

During the process of drafting the United States Constitution, the framers intentionally designed the membership and governance scope of the two houses, and incorporated the principle of checks and balances to prevent the abuse of power and protect citizens' freedom.

For example, the number of representatives in the House of Representatives is directly related to the population of each state, and representatives are elected every two years. In contrast, members of the Senate are appointed by state legislatures for six-year terms, staggered so that one-third of the senators are up for reelection every two years. In addition, each state has equal representation in the Senate, with two senators per state regardless of population.

The Constitution grants unique scopes of functions and powers to the House of Representatives and the Senate respectively. The Senate has the power to approve treaties and presidential appointments, while the House of Representatives enjoys the exclusive power to formulate financial bills (tax laws). Ultimately, the enactment of laws requires the approval of each legislative body.

Dual Governance and Bicameral System

We can observe that there are many similarities between the dual governance mechanism and the bicameral system. From a higher level perspective, they both alleviate the principal-agent problem through the coordination of interests and limit the power of the governing body by introducing checks and balances. Further research reveals that the bicameral system and dual governance schemes share four main design features: 1) representation diversity, 2) reasonable delay, 3) expertise, and 4) predictability.

1. Represents diversity: In the US Congress, the Senate can limit the public's crazy behavior and balance the majority tyranny of the House of Representatives. In Lido, dual governance combines the interests of stETH holders and LDO holders to expand representation diversity. Here, stETH holders act as a preventive mechanism to ensure that large LDO holders cannot control governance, thus ensuring a more balanced decision-making process.

2. Reasonable Delay: The bicameral system and dual governance scheme increase the complexity of the governance process. In Congress, the two houses often need to negotiate a bill; while in the case of Lido, the introduction of a time-locking mechanism reduces the possibility of arbitrary changes, thus curbing the ruling party's impulse to adopt quick solutions when dealing with complex issues. Of course, on the other hand, such a design may also lead to more deadlocks, that is, situations where no bill can be passed.

3. Professionalism: Hamilton and Madison put forward the following views in the 62nd article of "The Federalist Papers":"A group of people, mostly gathered from private activities, appointed for a short period of time, and without a lasting motivation to use their free time in public duties to study the laws, affairs, and comprehensive interests of the country. If they rely entirely on themselves, it is difficult to avoid making various important mistakes when exercising legislative responsibilities." (From "The Federalist Papers" No. 62)

On the contrary, senators are more advantageous in accumulating professional knowledge and networking resources related to governance due to their longer terms. In fact, an important responsibility of the Senate is to review and improve affairs originating from the House of Representatives. House members are closer to the voters and can more accurately represent public opinion. For Lido's dual governance scheme, we can reasonably assume that LDO holders are better at deciding protocol parameters and maintenance, while stETH holders are more suitable for evaluating proposals from the perspective of Ethereum network security.

4. Stability and Predictability: In Federalist Paper No. 62, Madison also pointed out that "authority, like an individual, if not respected in some degree, is utterly abolished; but too much stability and order in government is the ruination of good intentions." The bicameral system limits the fickleness of policy makers, while Lido's dual governance enhances the security of stakers, which is crucial for the development of the protocol.

Constitutional Engineering and DAO Design

The bicameral system is not only an exclusive product of the United States. Its historical roots can be traced back to ancient Greek and Roman societies. The modern bicameral system originated in the United Kingdom and has been adopted in many other countries, although their specific designs vary.

The comparison of the dual governance proposals for the US Congress and Lido is conducted at a micro level. From a broader perspective, designing a DAO is no different from drafting a constitution. Essentially, they are institutional arrangements consisting of systems, processes, and policies aimed at efficiently coordinating activities to achieve common goals. The study of constitutional engineering has a long history and can serve as an important reference for the design of emerging DAOs.

One of the perspectives for comparing constitutional structures is to evaluate veto gates and veto players. Veto gates refer to formal institutions that can block proposals during the legislative process, while veto players refer to any individuals or groups with the ability to block proposals.

For example, the United States' presidential system and bicameral legislative body have three veto gates: presidential veto power, the two houses, and the Supreme Court. However, the number of vetoers depends on the ruling party's position, and a party's relative dominance may lead to one vetoer controlling all three veto gates.

Lido's dual governance plan may be the first DAO to attempt to set a veto gate in its institutional design. However, it is uncertain whether the plan can successfully achieve its goals and will depend on the interaction between vetoers. For example, it remains to be seen whether stETH holders will act as a unified group with a common interest. As Lido also provides liquidity staking on multiple other chains such as Polygon, Solana, and Avalanche, the inclusion (or exclusion) of non-ETH stakers in Lido DAO governance will further complicate the relationship between LDO holders and stakers.

Optimism Collective: Token House and Citizens' House

After a detailed discussion of Lido's dual governance approach, it is worth noting that other projects are also exploring innovative governance structures. One typical example is Optimism, which is an Optimistic Layer 2 Rollup on Ethereum that adopts a unique bicameral approach to meet the diverse needs of its community members.

Optimism Collective consists of two parts: Token House and Citizens' House. Token House is composed of OP Token holders who vote on various governance proposals, while Citizens' House is responsible for retroactive public goods funding support (RetroPGF).

RetroPGF contains a series of experiments. Members of Citizens' House allocate a portion of protocol profits or token reserves to projects that have made significant contributions in public goods based on specific criteria. The basic concept of RetroPGF is to retrospectively identify and reward projects that have proven their value, which is more effective than allocating pre-allocated funds for potential future benefits.

During each round of RetroPGF, Citizens vote to allocate funds to deserving projects based on their contributions within the designated time frame. This approach establishes a strong incentive mechanism for community development of public goods that have a positive impact on Optimism Collective. As a result, the ecosystem becomes more conducive to building, learning, and connecting, ultimately driving an increase in block space usage and demand.

The identity-based Citizen House membership system will promote diversity, prevent oligarchy, and encourage long-term commitment, which is consistent with the goal of Optimism Collective to support public goods. By separating member identity from token ownership, Citizen House can maintain a more inclusive and balanced decision-making process, reducing the risk of manipulation and collusion. This approach ensures that public product funding governance prioritizes the well-being and sustainable growth of the entire community, rather than just focusing on the growth of token value.

Conclusion - Checks and Balances in Power Structure

In his book "Post-Capitalist Society" (1993), Peter Drucker, the father of modern management theory, proposed a hypothesis for a self-governing community organization that exists between the private and public sectors.

Every developed country needs a self-governing community organization department that provides necessary community services. Most importantly, it will establish community connections and revive civic consciousness. Historically, people's fate is closely related to the community they belong to. In post-capitalist society and politics, individuals must take responsibility for the community and actively contribute to its development and prosperity.

The core innovation of blockchain lies in governance - a new model for distributing trust. DAOs driven by blockchain have become the foundation of many organic communities, undoubtedly with the potential to realize Drucker's vision of nurturing a "new citizen center". However, the road to achieving this goal is complex and full of challenges.

"Ambition must be made to counteract ambition." - Federalist Papers No. 51

James Madison's spirit of checks and balances is not only an eternal political principle, but also a principle that any community organization with a large population should follow when balancing various interests. Therefore, it is inspiring to see organizations like Lido DAO and Optimism Collective actively adopting more complex institutional arrangements in their governance processes.

In order to achieve the vision of DAO for new forms of social organizations and get rid of the intervention of centralized institutions, innovation must be achieved not only at the technical level, but also at the level of institutional design. In order to truly unleash its potential, DAO should be brave enough to explore the diverse fields of constitutional engineering and draw valuable experience from the rise and fall of past political structures.