On Governance: Coordination, Layers, and Structural Integrity

“Bosh! Stephen said rudely. A man of genius makes no mistakes. His errors are volitional and are the portals of discovery.” ~James Joyce, Ulysses

TLDR:

  • Governance is a game of identity, legitimacy, technology, and realities.
  • Understanding a blockchain’s governance structure is as important as understanding how it operates.
  • Token governance relies on base protocol governance.
  • MakerDAO, 0x, Aragon, and Melonport have been all throwing their hat into the governance ring.
  • Token governance suffers from plutocracy, bad distribution, and speculator issues.
  • Weak base protocol governance will lead to weak token governance.
  • Governance really just boils down to an interesting fruit.

The Earworm

“Governance” has recently been echoed quite frequently, as more individuals realize how large a role process plays in upgrading ‘decentralized’ protocols. Vlad Zamfir, for example, has written plenty of primers over time on governance and what it means to stakeholders (encapsulating all users) in the control, hopefully, of a public good. Steven McKie recently wrote his own primer on blockchain governance in order to align users on a network in terms of placing a blockchain’s narrative on equal footing with its “low-level technical semantics,” as speculative sentiment is still what controls most decisionmaking in this space. It’s quite important to continually beat the drum of governance simply because knowing how a protocol operates is as imperative as knowing how its operators can operate. A ‘decentralized’ protocol is only as good as the process by which it can update or upgrade itself.

On the human side, we have the concept of “legitimacy” which has a large role in the swaying of social consensus. Zamfir defines his scope of legitimacy as

…how people collectively coordinate (in common knowledge) on what decisions to implement, what processes to use, what norms to have, and what other mechanisms for coordination to adopt.

This effectively boils down to the “politics” of a blockchain, and how the mechanisms are decided upon for collectively making updates to said chain. I’d also argue that legitimacy can be used as a weapon in subjective situations where malicious actors attempt to claim it through various signals that we normally interpret as legitimate in ‘normal’ settings. It could be forms of academic credentials (Nobel laureates, P.hD flaunting) and even in the forms of wide capital accumulation (capital as a signal of knowledge — “I’m rich, therefore I’m smart”). With legitimacy comes user confidence, which means that legitimacy is quite the dangerous game to play in both the political sphere with credential politicking and the establishment of the mechanisms by which blockchains are governed.

Blockchain Identities

The identity of a particular protocol is also a factor of governance, as it allows a collective body of stakeholders to pinpoint a particular ideological mode that the protocol should be identified with. In describing Bitcoin’s Existential Crisis, Nic Carter speaks of leaving governance as a naturally leaderless process, which I am in complete agreement with, and subject to “intersubjective consensus.” While alluding to The Ship of Theseus, a paradox on the identity of an object, he establishes the idea that permissionless blockchains establish their identity through “messy processes of social-consensus formation,” and as particular ideals established grab hold of a blockchain’s participants, its governance only becomes stronger in continuing to preserve those ideals. The battles held over these ideals will also only become more frequent over time, as ‘decentralized’ systems are dynamic objects and participants may not always agree on how to preserve particular ideals. These participants may also wish to reestablish ideals on the basis of a plethora of factors.

On the technical side of governance, we have our own forms of flag-following with the developers we choose to follow. These are the individuals that non-technical users choose to listen to when thinking about the potential upgrades and modifications that can be made to a protocol. Information asymmetry will always be a problem with blockchain technology, as even those that trade and use these systems may not always know how they operate at a low-level. Faith is then placed in developers to both elucidate difficult concepts and choose the “right” directions for a protocol. While forming our ‘tribes’ and identities that we choose with blockchain protocols comes the formation of hierarchies and ‘leaders’ that individuals naturally flock to. Harking back to “legitimacy” — this is a clear illustration of how it plays out in the form of leaders leading the leaderless.

The Realities of Governance

The beauty of “governance” comes from its subjectivity, while still retaining qualities of objectivity. Any codebase can be evaluated and any upgrade can be scrutinized, but the ways in which actors in a ‘decentralized’ system coordinate to achieve any goals becomes quite difficult to both measure and implement. It encapsulates all conversations and deliberation on the subjectivity side, while the actual software implementations and voting mechanisms that are developed are directly related to the objectivity side. Where the two sides collide is in the process of forking which deals with both an objective cost on the development side and a social coordination cost on the subjective side.

The only action that seems to directly capture both subjectivity and objectivity in a blockchain system is the act of forking. Although forks sometimes happen on a regular basis for simple upgrades on various chains, the forking I’m referring to here that incurs the greatest costs on both reality planes is that of a contentious fork, where the protocol undergoes a completely new direction under new leadership. The implementation needs to be both developed, and a significant social body must be convinced to follow this new path — with both leaders and flag following included. An example of this would be the contentious fork including both Ethereum and Ethereum Classic, which required both developer capital on the software implementation and social capital in the form of exchange support and coordination.

Some of the greatest pressures facing blockchain governance are typically collective action problems. Collective action problems deal with individuals that share a common goal, the “betterment” of a blockchain protocol, while having conflicting micro-interests. The “prisoner’s dilemma” is often used to explain this concept as both prisoners involved share the same desire of serving the least amount of time, but fear the decision of the other players due to information inefficiencies. Instead of both prisoners staying silent and having the optimal outcome of only serving a few months, the typical outcome involves both self-interested parties confessing on the other and serving an immense amount of time. In the case of blockchains, self-interested parties may compromise the greatest outcome for a protocol’s future by taking actions with longer negative consequences. Examples of this can be seen across various hard forks like Bitcoin Cash. Now the care of a financial asset and community become the cost of the issues, which isn’t always a bad thing and can even sometimes lead to longer-term positive outcomes.

On-Chain, Off-Chain

To briefly review “on-chain” versus “off-chain” governance, on-chain seeks to avoid forking through automatic upgrades while off-chain allows flexibility in user control, coupled with a higher degree social coordination costs. On-chain governance is the process by which upgrading is forced and deploys in the form of a deciding voting mechanism, while off-chain is a process by which nodes signal their decisions by installing their preferred software. One places full decisionmaking in the hands of “stakeholders” as determined by the protocol (asset holders, delegates, ticket holders), while the other places full responsibility in those operating full nodes.

On-chain governance has been critiqued in the past by Vlad Zamfir in particular for its ability to “disenfranchise node operators (and users),” which tends to question the idea and semantics of being a “stakeholder” in a network. In the case of on-chain governance, those simply using the chain may be barred from the governance process due to a lack of the asset, while off-chain allows any user even without the chain’s asset to participate. However, the counterargument is that the asset-holders can effectively govern the chain for all participants and forms a less nebulous pool of decisionmakers to keep upgrades moving in an efficient fashion.

Participating in governance comes in a variety of flavors. Some of the various ways in which a user can participate in governance include the following:

  • Running a full node in an off-chain system
  • Contributing code to a particular implementation of a blockchain
  • Voting in an on-chain system either through coin voting or delegating to a proxy
  • Participating in the consensus of a blockchain (mining, staking)
  • Engaging in arguments on twitter about the direction of a protocol

Level Two: Token Governance

One topic on governance that has become a bit more prevalent recently is token-based governance systems. There are plenty of platforms and protocols built on top of base chains that wish to hand their governance over to stakeholders rather than centrally manage it to keep the ‘decentralization’ ethos alive. This then creates a layer of governance above either a platform or protocol that is already adhering to a base protocol and its own governance. For example, if a project on Ethereum wished to upgrade a smart contract, they would have the token associated with their project be representative of the “stakeholders” and allow them to vote on the direction in the project either in the form of new contracts to deploy and point to, or how an inflation mechanism is allocated in the case of treasury-based incentives.

Along with their own governance, they will also take note of Ethereum’s governance to ensure that nothing on the base protocol will potentially affect both the process and stakeholders using the project’s decision-making mechanism. What makes token voting on Ethereum interesting is that it is naturally a hybrid process bolted on top of a system using off-chain governance. A new contract may be deployed to replace the old one, but the old contract can still be followed by various participants, recreating a sort-of ‘fork’ in a way. The second cost being incurred would, of course, be that of social consensus. Various projects have implemented or are implementing their flavor of governance on a second layer. The following are examples of token projects on Ethereum implementing various styles of governance. It’s important to also note that although some protocols may have a token, not all of them use it directly for their governance processes.

A Second-Layer Retrospective

Melon — Council Authority

Looking at an investment fund as a system of smart contracts, Melonport recently released their governance proposals to effectively leave decisions in the hands of stakeholders using the protocol. Their first iteration of the protocol is expected to release in February, along with the launch of its governance process. This will come along with many projects that come to fruition — now that they’re delivering on a decentralized protocol, decisionmaking can’t rest with a centralized team. It also leads to liability and legal risk, when say, you might still have authoritative control over a protocol that may have assassination markets. This leads projects to either develop formal governance structures or delete the big red button.

Melon has divided its governance process into three sections:

How the Protocol Will Be Upgraded

  • This includes what assets will be added to Melon, future improvements and bug fixes to smart contracts, integrations, and so on.

How Inflation Will Be Allocated

  • This will determine how their inflation will be handled, along with where it’s allocated. This typically turns into a form of treasury system.

How Network Parameters Will Be Determined

  • This is along the lines of their own internal gas-system pricing; microeconomics within Melon essentially.

What’s nice about Melon is that they’ve successfully identified the risk with pure token-voting, which will eventually lead to the fund managers on their protocol with excessive amounts of capital buying their voting power and eliminating their competition quicker. What they’ve done instead is create both a technical council and a user-representative council to enact decisions. The members will be publically identifiable and will first be appointed by Melon’s centrally controlling entity, Melonport AG (to be wound down in February 2019).

Although there are problems with this model, at least the team is dispersing power to a representative-based system. However, with many small-form representative bodies, cartelization is a likely outcome — especially with an inflationary reward going to council members. Along with this comes “MEB Representatives” — or Melon Exposed Businesses — who have a sway in these appointees, which need to both apply for membership to their council, and need to have at least 1% of total AUM on Melon measured in Ether. Many issues, but at least some creativity in not using the asset directly for voting.

0x — When Governance?

When 0x initially released their white paper for their ‘decentralized exchange protocol’, their largest selling-point became a deeper look and possible execution on protocol governance. Although projects like MakerDAO promoted governance from their inception, 0x’s unique timing among the many payment tokens surfacing during the 2017 ICO boom allowed them to distinguish their value proposition from many others. Their paper outlined three ways in which the token was to be used, namely as a payment mechanism for relayers facilitating transactions, “decentralized governance” for the lifecycle of the protocol, and a form of TCR that assessed the validity of tokens that can be used as a reference for participants.

What slowly surfaced from the payments side was that relayers typically didn’t have users trade against ZRX (0x’s native asset) or forced a fee collection of ZRX because it added a roadblock in any UX. This leads to there being limited to no correlation with an increase of relayers and an increase in the token value because any relayers actually taking the token at the moment run the risk of suffering from the token’s volatility on the markets — they’re quite incentivized to keep selling it down. It would make more sense in their case to collect fees in ETH (which they have been doing) and then use that to buy ZRX openly if they wished to participate in 0x’s governance. This provides a frictionless experience for users, and allows relayers their sway in governance participation.

Now, onto the second utility which is driving this article — the token’s usage in governance. The main goal for the token is to provide “stakeholders to securely upgrade the 0x protocol” in order to relinquish control from the project team itself. As everything routing through 0x goes through its contracts in a ‘decentralized’ system, it’s only natural for the upgrade process to be facilitated through the stakeholders in the network. The team eventually settled conceptually on an on-chain token voting process by which actors (relayers, market makers, developers, and traders — as per Will Warren’s post) would have control, as they have the most to lose based on particular upgrades. Their rationale for the payments aspect, namely requiring ZRX to be acquired to trade and to be taken by relayers, was their ideal distribution mechanism. Every major participant would ultimately have ZRX, leading them to continually govern the protocol. However, based on what was mentioned above, this ended up not being the case — leaving the ZRX token mostly in the hands of speculators.

Hindering the governance valuation model comes from the value associated with controlling a vote versus simply forking the contracts. As Phil Bonello of Ikigai so eloquently put it:

The maximum price a network participant (maybe a relayer) will pay for 51% of governance tokens is bound by the cost associated with a network fork. Cost is equal to the difference between the net present value of the pre-fork and post-fork business.

Basically, it is typically less costly to fork the protocol than to accumulate the asset in an effort to control the vote if it is meaningful to one’s relayer or business built above 0x. As it is also difficult to continually acquire the token, as well as some relayers may choose to collude and control the vote regardless, most governance “valuation” models have simply become moot especially in the case of pure token voting. If 0x deploys a delegation scheme to implement a form of liquid democracy, it may complicate this model, but as it stands, there currently is no governance mechanism currently in place. Adding a bit of flavor to the model may, in fact, increase the costs associated with a fork, but even a delegation scheme still renders that an unlikely outcome in the face of a wealthy adversary. As of their recent Devcon 4 presentation, the 0x project will most likely ask token holders to elect a committee to delegate their votes to, who will then control grant funds and work their way into the overall protocol governance.

Although the project continually makes arguments for blockchain governance, once you factor a token in as an abstracted form of value to represent the governance of a protocol above a protocol, it’s quite hard to create a compelling case for a valuation model. At the moment, 0x is much ado about governance with no implemented governance mechanisms at all.

Would providing voters with an “I Voted” NFT encourage participation?

Maker — Advanced Finance for Dummies

Most individuals know about DAI the crypto-collateralized stablecoin, but are typically unaware of the fact that it is both overcollateralized, and the rate at which DAI is collateralized is governed by the holders of MKR, the ‘base’ token. As one of the earliest, if not the earliest renditions of a ‘governance token,’ MKR’s original purpose in the MakerDAO system was to pay for transaction fees in the system, and vote on changes to the system — namely the percentage by which DAI is collateralized — and any other governance decisions such as the system’s foundational votes. As a Maker holder and voter, you’re also the ‘buyer of last resort’ in case the entire system becomes insolvent, at which point MKR is created and sold down to cover the collateral. If you’re not voting to keep the collateralization rate at a healthy level, then you may end up diluting your value in a black-swan event.

MakerDAO never held an ICO, as it was simply sold off from the central team over time to various groups. Polychain Capital, for example, was sold MKR quite early from the team, in conjunction with their participation in building out the ecosystem. Other notable sales of the asset include Maker’s sale of $12M MKR to a group of “partners” in 2017 with a minimum one-year lockup (which is set to expire soon) and another $15M round that went straight to notable investment fund a16z which represented 6% of the entire supply. The latter sale noted no lockup period. Although transparent, this may alert token holders to the concentration in which voting decisions are held, as funds having high control over the asset along with a pure token vote (1 token:1 vote) system leaves them with most of the decision-making power.

Back on September 12th, MakerDAO had their first official governance vote. Before this was simply an “executive” vote to raise the governance fee to 2.5% in the system, carried out by a single actor. This new governance vote allowed MKR holders to actually participate in the process. Along with the actual vote came Maker’s upgraded UI for the voting process, which included a tool that optimized for security. The first vote was on the principles of Maker’s governance, which came with a large explanation in a medium post from the team. The end result came with around 15% of tokens being used, with nearly 75% of that being from only four entities. I guess this comes with a form of “gradual decentralization” outlined in their principles.

However, MKR’s token does, in fact, have a unique value proposition against other ‘governance tokens’ as there’s a monetary floor locked into the entire system. Unlike other systems where the token isn’t directly responsible for value collateralization such as 0x, MKR’s floor becomes the entire base of Ether locked up in collateralized debt positions. If the system is also governed inefficiently, holders become diluted through the inflation and subsequent automatic sell-off of MKR on the open market. Simply put, it’s “just code” versus “locked-up ETH” (thanks Ryan Yi).

Aragon — DAOs on DAOs

Lastly, there’s Aragon which acts more in a DAO as a service model. The project’s aim is to allow anyone to create their own decentralized organization, and for the project owners to eventually operate in the same style to effectively ‘decentralize’ the project. Included with it are an identity management system, many ‘HR’ components such as onboarding procedures, and the ability for anyone to add their own custom modules to upgrade the system.

The ANT token operates similarly to 0x’s ZRX token, in that it’s a governance asset meant to control the upgrade process for the Aragon platform. The other usage of the token is for the sake of a “reserve collateral” in order to create enforceable agreements which require agents to lock assets up. Eventually the project will seek to add a stability mechanism and possibly a participation threshold similar to Livepeer, but for now, it’s simply used as a governance token. As with any pure governance token, it’s value is mainly predicated on the value of forking the protocol against controlling the decisionmaking process.

Recently Aragon held their “AGP-1” vote, which was on creating a formal proposal process for governance decisions associated with the platform. The proposal was initially announced on October 16th, followed by a vote on November 15th just one month later. Deliberation occurred mostly on the Aragon forum, discussing any updates to the proposal along with a general feeling of community sentiment. Although there wasn’t much deliberation, the vote still occurred and was open to all token holders in a pure token vote format. The proposal was approved with around 1MM ANT tokens voting yes, and 359 ANT tokens voting no with what seemed to be a near-unanimous approval. The minimum threshold for approval on the vote is 67%. However, what this doesn’t account for is that it simply represents 2.63% of all circulating ANT, along with a poor 0.22% turnout rate. Apparently, the team will provide a description of details in the near future.

A whole 44/20,000+ accounts

What is at least hopeful is that the previously linked community forum post addressed all of these pitfalls, along with potential models for the future of voting in Aragon’s proposals. With these models came the recommendations of creating a voting bulletin, notifications, wallet integrations, and even a mobile application to encourage participation. Personally, I agree with the sentiment that pure token votes typically wash out users with a lower amount of holdings, as they understand that at any moment a large holder can control the vote. Some others have even mentioned a quorum requirement to allow votes to actually enact changes, but that may even provide more friction with voter-turnout issues continually being a problem.

Pure Token Votes Are Problematic

Now that strides in token governance have been outlined, it’s quite important to review the pitfalls associated with the types of votes and token mechanics some of these projects have deployed. Each model is looking to implement unique forms of voting and delegation, but most still boils down to forms asset-driven governance (like on-chain governance) rather than placing more decision-making power in the hands of general users. For example, a trader on a relay (0x), a user of DAI (MakerDAO), or even an individual involved in a DAO (Aragon), are all examples of users that are directly affected by these systems and may not even have the means to easily enact any forms of change. Also included is competition among users and speculators — two different classes of participants that drag the protocol in different directions. Speculators may want a vote that favors a short-term increase in the price of the asset in question at the expense of its longevity, while users would favor a calmer price action in favor of longevity. The three glaring issues I see in these systems are as follows:

Plutocracy

Systems that depend on pure token voting can eventually spiral into plutocracies, where the wealthiest holders have the most sway over decisionmaking in a protocol. For example, Although Maker’s vote had a turnout of over 10%, four individuals had a massive sway over the proposal vote. Also seen in their recent asset sell-off to a16z, that 6% can account for a large control of the system in pure token votes when so few entities actually voted to begin with.

This type of voting also opens the door for vote-buying, where voters can simply be bribed or votes can be bought in a Dark DAO style attack as originally outlined by Philip Daian et al. The original party may not even need the asset itself, but enough capital to sway the holders of the asset to follow a particular ideology. With this ideology and voting direction could be plenty of information asymmetries that typical coin holders may be apathetic about at the expense of those using the system that may not have a voting stake.

Systems such as Decred that deploy on-chain governance with a twist have looked to mitigate pure coin-weight governance with a system that involves “stake-based governance.” In their Poleteia system, a ticketing function is deployed to users securing the network through proof of stake (to check on the miners). In order to vote, you must be a ticket holder, and this provides a blurring of the lines between purely a speculator and a contributor. Users in Decred’s system don’t even have to have a full ticket vote, as split ticket systems have been developed to even allow those with a tenth of a ticket to vote.

Providing barriers is helpful, but pure token votes leave these systems quite vulnerable to absolute plutocracy.

ICOs and Private Sales as a means of distribution

The second problem with these types of systems come with their distribution through private sales or ICOs. Private sales typically create extreme pools of asset concentration (as with the case of Maker), and ICOs will usually end up granting advantages to larger buyers. Both distribution mechanisms typically also include token allocations to team members and advisors, both groups, in particular, may or may not even wish to see the longevity of the project they’re working on or advising in favor of profits. Is an ICO advisory shop for hire looking to actively participate in a network? Or are they simply asking for tokens as a form of payment in order to flip them in the near future.

Systems such as Numerai or recent strides by Handshake and Livepeer have become interesting cases for distribution methods that seek to place tokens in the hands of users rather than speculators. For example, Numerai distributed tokens to 19,000 data scientists that would use the platform in order to build data models and participate in its competitions. Handshake has allocated 65% of its supply to developers that would contribute to the protocol, and Livepeer decided to open up a work-based mechanism to acquire tokens calling it a “merkle mine.” Although there were investors in these cases, the majority of tokens weren’t sold in sales or to private entities but rather distributed to a wider range of individuals that may look to participate rather than speculate. None of these systems are perfect, but quite a step in the right direction over “selling” governance rights in an initial coin offering to people that may not even use the system.

Stakeholders as speculators

Lastly — as mentioned before, stakeholders as speculators may not seek the longest-term health of a network. Eliminating speculation is near-impossible in our current sentiment-driven market environment, but taking steps to reduce speculation and turn speculators into users will be an effective means of enacting some forms of change. Although there aren’t too many remedies for this problem at the moment, the overall market trend may lend a hand in washing out those looking to simply trade an asset rather than use it. As mentioned before, when one can’t even properly use an asset (like most futility tokens) there’s simply no way of eliminating speculators.

However, there is a larger underlying issue with token governance that often goes overlooked.

The Structural Integrity of Token Governance

Imagine you live in an apartment in a high-rise with four roommates. You reach a vote on how the place should be decorated, who will buy the appliances, and who will furnish the living room. Once the tasks are complete, you settle in and enjoy the fruits of your labor. However, all of a sudden, the structural integrity of the building gives out, leading to the destruction of the property because it was poorly maintained. Paying attention to the building’s safety and health is just as important as paying attention to one’s living quarters.

These are the rules for any system built above a base blockchain protocol. For example, although extremely unlikely, if Ethereum’s governance decided to modify the nature of a contract or censor a contract in any way, then any governance decisions to a protocol above the base will be rendered useless. Or in the case of EOS, if a similar schema involving tokens to govern a protocol above the base is deployed and the block producers decide to censor that contract, you essentially are left with the same scenario. Token governance is only as good as the governance below it.

This is why participation in base protocol governance is just as important is participating in token governance. In the case of Ethereum, it deals with running one’s desired full node implementation or voting effectively in the case of EOS before building on top of the protocol. Simply participating in token voting isn’t paying enough attention to controlling forces that may have an impact on the system you’re voting on in the future.

But you mentioned something about a fruit?

Rotten, yet sweet

The durian has solicited plenty of mixed reactions from individuals, ranging from an appreciation of its taste to a flight being delayed due to its horrid smell — much like public perceptions of blockchain governance. Participants appreciate how discourse and deliberation manifest, but the ways that items execute can leave involved individuals jaded and with a bad taste in their mouth. Some individuals can be seen observing governance at a distance, but may not want to endure the smell for the fruit’s delectable interior.

The most notable quality of the Durian is its rough, spiky exterior. The way in which a durian is opened is typically with the use of a large knife and plenty of prying force. In 2012, a study was conducted in order to report various ocular injuries caused by the durian fruit, which came to the conclusion that it’s great at causing both penetrating and blunt injuries. In this, the outer shell of the durian seems to be much like off-chain governance — tough, hard to break, requires a lot of prying force, and in some cases, quite fragrant.

Off-chain governance deals with the processes of decisionmaking through individual opt-in by network participants. For example, Bitcoin’s governance is enforced by the full-node software run by individuals and the chains that miners decide to devote hashpower toward. Decisionmaking isn’t made through any form of asset-based voting, but rather through both social and software signaling. Upgrades usually start as proposals that are tested thoroughly and deployed, and a process by which network participants are convinced to change to that flavor of software with the implemented changes. Most of the difficulty comes from convincing the network of the benefits of the upgrade, as the network must eventually be courted for it to be effective if consensus rules are changing.

The difficulties associated with upgrading chains that use this form of governance have been critiqued for slow forms of evolution and inability to upgrade, but it is this toughness that gives the protocol its resiliency. In the case of on-chain governance, nodes automatically upgrade whenever the deciding function is executed. It’s typically quicker to execute upgrades and decisions, but leaves a number of participants out of the process and has a higher centralization risk.

However, as off-chain governance or some on-chain governance systems form the shell of the durian as a rough and difficult to break exterior, token governance built on top of a protocol exists as the soft inside, and is easily broken. This soft inside looks interesting and packs a bit of flavor, but still relies on the hard exterior to keep it safe. If something cracks at the exterior, the interior is meaningless.

An Eternity

Governance will never cease to exist, and as this space continually grows, it’ll just become more complex in a macro-sense. However, it’s important to be aware of how systems are governed, along with what types of mechanisms have been created to facilitate various forms of governance. It’s also important to understand that governance has its own form of depth when it comes to projects being built on top of a particular blockchain. Stakeholders and owners of that project must understand that the liabilities associated with a project’s governance are only amplified by the liabilities associated with the selected base protocol’s governance.

Off-chain governance is a superior way to conduct decisionmaking as it allows any user of a particular blockchain to be a decisionmaker by selecting their desired implementation to run. However, I won’t dismiss the experiments being conducted by the likes of Dash, Decred, EOS, and Tezos in the future that are all looking to thrive with on-chain systems. Second layer governance is a mixed system, but it will be interesting to watch creative developments by the projects conducting it to see how they handle decisionmaking on a micro level.

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Special thanks to Viktor Bunin, Ryan Youngjoon Yi, and the Alpine team for providing feedback on this post.

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Nothing in this article should be taken as legal or investment advice.