(Mis)adventures of Crypto Governance

• Lessons from the past. Dash. EOS.
• The Good, the Bad, and the Ugly in Polkadot and Ethereum.
• How to mitigate asymmetries.
• Are you missing out on being part of something big?

(9 min read)

Cathedrals in Bazaars — Rhythm of re-decentralization

In the crypto, we find the order of cathedrals and the chaos of bazaars.

• Cathedrals: Top-down and centralized, carefully coordinated tasks performed by a select few.

• Bazaars: noisy, bustling decentralized marketplace. Everyone contributes, thrives on openness, and transparency. Embodies the chaos.

Yet, chaos has a price of anarchy — coordination fails, inefficiency, and disorder occur without guiding hands and catalysts. Leads to city traffic with no traffic lights, and the supply roads turning into jams.

Human is human -> attempts to organize these decentralized spaces often lead to the emergence of new, unspoken hierarchies, subtly crafting cathedrals within bazaars, keeping the market fair. Each step away from centralized power leads a turn towards new centralities, then a leap back into the embrace of decentralization, and on it goes. The rhythm of re-decentralization.

Why not adapt our blockchain tech for consensus to dictate not just what happens on the chain but also what happens with the chain itself? Aka using same decentralized decision-making processes that secure and validate transactions to also provide the evaluation and governance of the network.

Fat tail risk: emerges when a chain has disproportionate initial token distribution, when its governance structure and mechanisms enable a specific group to maintain power. By attempting to govern, they might inadvertently nuke their network. And it happened so.

DashDAO and EOS incidents:

Dash with Instamine and Masternodes

A substantial portion of Dash was mined rapidly post-launch. Insiders and early adopters accumulated governance power.

Masternodes: They grant voting rights for treasury funding and decision-making. A significant Dash investment is required. Early instaminers began operating multiple masternodes. Subpar proposals were favored over more deserving ones due to nepotism, preserving power.

EOS: The consensus mechanism have 21 block producers (BPs). Delegated Proof-of-Stake, a PoS variant, has tokenholder votes select validators instead of random selection.

Scandals surfaced about BPs offering incentives for votes. Basically, they built a cathedral in the bazaar.

An EOS arbitrator reversed confirmed txs. Allegations of collusion and mutual voting amongst BPs surfaced, with Huobi CEX implicated. The claim was that major CEX’s EOS nodes were complicit in maintaining chain dominance. BPs frontrunned and frozed accounts linked to phishing before the EOS Core Arbitration forum could intervene.

For the final hit, Whiteblock research framed EOS not as a blockchain but a vast, centralized database lacking cryptographic proofs. A database that is monopolized by a few BPs.

EOS's reputation suffered, and the once raised $4B with ICO, the so-called Ethereum-killer, is dead.

Similar patterns:

• Bitshares -> Whales’ retaining power.

• Steem -> Justin Sun's Steemit Inc. acquisition led to a hard fork.

• Tron -> Similar issues but remains operational.

• Tezos -> Delegating voting power to block producers, Bakers, is a default feature.

• Cosmos -> Similar. Delegation of voting power is default. Bundling staking and voting. Therefore, the voting turn-out obviously seems high. But Chains’ governance control are at the hand of validators. The same validators occupy the same roles on other Cosmos chains. That leads validators to be pretty much politicized rather than their main job.

A scenario which someone proposes paying validators less for producing empty blocks while the majority of the voting power is on validators. NGMI.

To reduce such risks, Tezos and Cosmos:
• encourage delegation to smaller validators or bakers.

• implement slashing penalties.

• allow direct voting.

Still, the average Cosmos user stakes primarily for airdrops, without caring much about governance. That’s also the human nature and the reality of the majority of current crypto users.

If you are eager to get more into these misadventures, check this out.

Polkadot and Ethereum: Divergent paths to governance diIlemma:

Ethereum: Once, supposed to be the DAO.

At the moment, conservative against coin-based voting mechanisms, thereby relying on informal social consensus for network upgrades.

Why? Read from Vitalik himself.

While it is committed to decentralization, it operates within a framework that ironically, centralizes certain decision-making processes.

The journey of Ethereum Improvement Proposals (EIPs) from conception to implementation takes a long but vibrant community engagement. They finalize with reaching of rough consensus among those selected group. And then implements into client nodes.

Argument againts centralization critics is that if there is big disagreement within the rest of the community, there is always exit by forking the network. Seeing the risks being a DAO — having a on-chain governance on protocol level, is higher due to plutocracy.

As a result all these critical decision processes are handled informally and the significant influence retains by core developers and the pivotal figures in the final decision-making stages, bringing a subtle centralization of power.

Polkadot’s Governance: The Good. The Bad. The Ugly.

The Good:

It's truly ambitious and forward-looking. A killer app for Polkadot power users. Everything is on-chain, with consensus reached through formal decentralized mechanisms, resulting in forkless updates.

All the processes ensure transparency, autonomy, and agility. Especially at the moment, it’s fire. Raw and thrilling. The network’s power rests entirely in the hands of tokenholders, no middleman. This power, being leaderless, brings inclusiveness, dynamism and birth of ecosystem agents.

There is a sexy on-chain treasury with +$300M. Whales in it. Laymen in it. Nerds in it. Has weekly live show, Attempts at Governance(AAG), over 100 episodes. Dozens of debate groups. Already +610 proposals processed.

Conviction and delegation try to balance the stakes. Skin in the game matters. There exist delegated sub-DAOs with their own internal, automated, anonymous voting systems. Making collective decisions by open-source InternalGov tools from ChaosDAO.

On-chain collectives can be formed, each with their own internal governances and treasuries. A yoga collective in the future. Even possible. Composed of experts with skin in the game, open to yoga proposals.

The first collective is the Fellowship, with Gavin Wood among its members. Similarly to Ethereum’s dev calls, they hold monthly public live meetings—OpenDev. Only signal and whitelist technical updates, fastening the processes, but holding no voting power.

The treasury handles their payrolls. It can hold various assets, from stables to NFTs. To avoid selling pressure or being reaped by whales, they utilize a parachain, hydra_dx, doing DCA trustlessly diversifying from DOT to USDT.

The end game is to achieve complete autonomy, no longer needing even Parity or any centralized entity to advance at the protocol level. Becoming resilient and starfish organization. A true unstoppable network, even in the face of doomsdays—crypto regulation scenarios.

Although, it will continue to explore, subject to iteration and improvement and be prototype governance mechanisms aiming for a system that is both effective and reflective of the community’s will.

The Bad:

Over-governing with a relatively small group of active participants -> already overwhelmed to manage the flood of proposals, dealing with funding requests ranging from $1K to $1M from the treasury.

See the misadventures above — What can happen when the decision-making influenced mostly by a relatively small group of active participants.

To prevent such catastrophic outcomes, Polkadot has mechanisms that incentivizes good decision-making over malicious actions. It utilizes conviction voting(coin locking), allowing voters to lock their DOT for extended periods, with their voting power reflecting their commitment to their decision. Introduces economic stakes into governance decisions.

Problem with the volume of incoming proposals:

There have been over 600 proposals and counting, seriously overwhelms even the most dedicated community members. Indeed, it makes an electrifying bazaar rich in diversity and debate is appealing but risks becoming a cacophony where significant voices are lost amid those with the least skin in the game or short-term interest in Polkadot.

It's understandable that there is a sexy treasury that everyone wants a piece of. Due to having the processes on-chain, permissionless and transparent, even a smallest funding request become a noise and gets a reaction amongst community. The need for broad consensus on even minor decisions, coupled with handling some proposers repeatedly spamming the treasury requests even after multiple rejections, results in governance and cultural fatigue.

The energy and focus of the community are spread thin over too many debates. Poor decisions and outcomes gradually lead to a more conservative decision-makers.

The Ugly:
The risk of over-structuring. To address these fatigue, there are proposals emerging that want to introduce a maze of procedures, which may kill the inclusivity and agility meant to drive innovation. Over-structuring could also inadvertently steer towards centralization, with the same active figures often proposed to shoulder major governance responsibilities by being curators of bounties. — Polkadot indeed needs more ecosystem agents.

To date, no malicious proposal has passed. While there have been contentious proposals with whale dominance, such instances have also seen the emergence of counteracting whales. In retrospect majority of the votings processed in Polkadot's governance still tends to favor sound decision-making.

With Parity's shift to place marketing and BD in the open market, Polkadot governance finds itself in a frenetic phase, tossing ideas to see what works and striving to elevate quality through competition.

It comes with high price and drama. Nonetheless, since the inception of this expensive experiment, the treasury remains robust, and Polkadot cannot afford to be too conservative in the dynamic, narrative-driven space of crypto.

What can be done?

1) Kickstart Kusama's heart back:

( Read the rest by listening this.)

Kusama is encountering challenges that hinder its role in fostering innovation and experimentation atm, with a notable shift of these kind of proposals towards Polkadot for its fat treasury and inclusivity. Normally, the fast decision-making, chaos, small and high-risk proposals suited to Kusama’s ethos.

What happened?

• having significantly smaller treasury.

• past misadventures with the spendings leaded to conservatism.

• a small group of people dominating decisions now, often driven by their own interests and politics.

The anticipated KSM <> DOT bridge possibly will lead significant DOT to Kusama's treasury to incentivize governance actions back in there. Source: Gav.

The Web3 Foundation's (W3F) planned voting delegation from their bag to select candidates on the Polkadot forum could be a turning point for Kusama's future to re-balance the power games. The decision of those selections might be the catalyst factor for the future of Kusama or worse.

2) Moving away from one central treasury model:

Similar to previous council models, but without any voting power in Polkadot's openGov. Instead, having many councils, or more accurately, many collectives.

The Fellowship Collective is already established for directing Polkadot's technical developments. Ambassador collective will be implemented sooner or later. Next? Marketing collective?

Instead of spamming entire ecosystem with lots of small funding requests, it's much more practical and efficient if a team that got funded many times over the years and actually delivered just goes through one of the collective funding ways because of their track record and reliability.

Basically building many artisan guilds within the bazaar. Is it a worthy compromise for efficiency?

3) Adapting different mechanism for public good fundings:

Learning good and bad from Optimism's Retroactive Public Goods Funding (retroPGF) experiment.

Primarily because of its retroactive nature in public funding, issuing these rewards in a campaign style enhances visibility and marketing for both the ecosystem and the projects. Luring more and more projects and involvement with each iteration.

RetroPGF is based on the idea that it’s easier to agree on what was useful in the past than what might be useful in the future. They're doing a system like bicameral governance structure.

Currently, the Token House --tokenholders, handles proposals, while the Citizen House, determined by identity and reputation, makes decisions on public good funding allocation. Facilitated through badges, non-transferable NFTs, which can be reset every round.

So perhaps Polkadot use a system where each area of public funding and goods has its own dedicated collective. Initially, members are chosen through openGov. As retroactive funding cycles continue, more members join through various means: nominations by initial members, selections by teams who've received funding, W3F involvement, and additional picks from openGov. Both internal and open governance-selected members can be removed, ensuring the system remains dynamic and inclusive.

Although, some lessons to learn from Optimism's retroPGF:

• An average badge holder voted for 200 out of 600 projects without providing any feedback.

• Even the number of badge holders increases with each iteration, it remains a challenge for them to thoroughly review and make informed decisions about 600+ projects. The only incentive for their participation is reputation.

• Well-known projects with least haters tend to receive the highest rewards, becoming a system that inadvertently favors nepotism and popularity. Less popular projects go unnoticed.

• To address potential conflicts of interest, the centralized entity, OP Foundation, is still required to perform random audits of badge holders' actions.

They began with a quadratic voting algorithm in the first retroPGF, switched to a simple average in the second, and used a median with a simple quorum in the third. Each algorithm had its pros and cons, requiring extensive research and brainstorming to evaluate effectiveness.

They try to find the optimal approach through a process of try, see and learn, "via negativa." So, nothing is perfect elsewhere, but their approach to the matter is adaptive and proactive in refining the voting and decision-making processes.

Ultimately, they are experimenting and creating significant buzz with each round of retroactive public good funding across social media, Twitter/X, forums, and blogs.

Polkadot's openGov has superior tools for implementing such to mitigate asymmetries. The only question is whether there are enough reputable people to manage such a task force efficiently.

4) Increasing the cap for conviction voting (coin locking) for longer lock-up periods, enabling smaller tokenholders, dolphins and fishes, to have influence more comparable to whales if they are willing to put a strong commitment.

5) Bringing futarchy into Polkadot’s governance through the use of ZeitgeistPM prediction markets:

Futarchy is simply; vote values, but bet beliefs, literally allowing voters to put their money where their mouth is. Organizations governed by market, not by politics. By utilizing decision markets, active participation can increase by enabling stakeholders to stake their tokens on predicted outcomes, transforming passive voters into engaged participants. Financial incentives ensure diverse stakeholder involvement in debates, representing varied interests. It tries to fix voter apathy and rational irrationality, shifting focus to the merits of proposals rather than the identities of proposers.

Economist Robin Hanson initially proposed the concept, which gained attention in crypto from VitalikButerin's 2014 post.

It has seen various implementations in GnosisDAO, Tezos, and most recently MetaDAOProject on Solana, showcasing its experimental yet pragmatic appeal for DAO governance. Still no definitive success stories afaik, its potential effectiveness is something I am eager to see. Zeitgeist has proposed implementing this concept in Polkadot's Opengov.

Towards to the future

Essentially it's all just a tango between the order of cathedrals and the freedom of bazaars. Centralization and decentralization. Starfish and Spider model organizations.

People often mix up state governance with crypto governance, searching for fairness and democracy.

Instead, the main focus should be on creating tools and mechanisms that drive effective, optimal decision-making outcomes, ensuring the resilience of leaderless organizations, reducing the risks associated with power concentration and single points of failures.

The openness and permissionless nature of the system leads us go through a lot of noise from those who are loudest but may have the least skin in the game or knowledge.

Emerging over-governing structures, along with a growing culture and praise for these methods, are the hidden asymmetries within Polkadot’s governance. Yet, these growing pains are an inevitable part of finding equilibrium.

Drawing lessons from DashDAO and EOS, we should continue embracing Polkadot-like real and bold governances while having Ethereum's conservative consciousness.

IFs:

• If you want to be the next-gen governor, learn by experiencing real high stakes and consequences firsthand. You can start being a part of the process while lying down on your bed. The only thing you need to do is having the NovaWalletApp on your phone, open up the governance section, and enter the cyber bazaar.
• If you are a researcher, focusing on DAOs, interested in the human outcomes of digital infras, blockchain community culture, and algorithmic governances, it’s the perfect case study for your PhD.
• If you are a tinkerer or a builder, it’s the place to create something. The Polkadot treasury is very very generous if you show genuine, serious intent behind your idea, prototype, demo, or work.