Over the past year, the blockchain space has witnessed a notable shift from a primary focus on Decentralized Finance (DeFi) to a growing interest in Decentralized Governance (DeGov). As DeFi protocols have grown more complex, the need for robust governance mechanisms to manage this complexity has become increasingly apparent. In Ethereum alone, projects like YFI, Compound, Synthetix, UNI, and Gitcoin have either launched or are preparing to launch Decentralized Autonomous Organizations (DAOs). Similar trends are visible beyond Ethereum, such as the debates around infrastructure funding in Bitcoin Cash and governance voting in Zcash.
This movement toward formalized on-chain governance is driven by necessity, but it also introduces significant risks, as demonstrated by events like the hostile takeover attempt of Steem, which led to a community fork creating Hive. This article argues that while some form of decentralized governance is essential, we must look beyond token voting to mitigate its inherent vulnerabilities.
The Necessity of Decentralized Governance
Since the advent of the cypherpunk movement, a core tension has existed between the ideals of minimizing centralized control and the practical challenges of funding public goods and maintaining protocols. Two critical issues arise in decentralized environments:
- Funding Public Goods: Projects that benefit a broad community—such as layer-1 and layer-2 protocol research, client development, and documentation—often lack viable business models.
- Protocol Maintenance and Upgrades: Communities must coordinate on upgrades and maintenance tasks, like adjusting security parameters or oracle sources, which require ongoing governance.
Early blockchain projects largely overlooked these challenges, assuming that network security alone could be sustained through fixed algorithms and rewards. However, as ecosystems mature, the need for structured governance becomes unavoidable.
DeGov Is Essential for Funding Public Goods
Consider the current funding disparity in major ecosystems. Ethereum, for example, spends billions annually on mining rewards and transaction fees but allocates only a fraction of that to development through entities like the Ethereum Foundation. This imbalance is even more pronounced in smaller ecosystems.
Decentralized Autonomous Organizations (DAOs) offer a promising solution by combining adequate funding with credible neutrality. Projects launched as "pure" DAOs can fund development through community-managed treasuries, reducing reliance on centralized entities and enhancing fairness.
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DeGov Is Necessary for Protocol Maintenance and Upgrades
While minimizing governance is desirable—exemplified by projects like RAI that aim for "governance minimization"—some decisions cannot be automated. Oracles must source data from somewhere, and that source may need to change. Off-chain governance can work for base-layer protocols, but application-layer projects, especially in DeFi, often require on-chain mechanisms because they control external assets directly. Forking a smart contract system does not recover lost assets, making on-chain governance inevitable for many applications.
The Risks of Decentralized Governance
Despite its necessity, decentralized governance in its current form carries significant risks, primarily centered around token voting. These risks fall into two categories: (i) inequities and misaligned incentives even without malicious actors, and (ii) vulnerabilities to explicit and implicit forms of vote buying.
Problems with Token Voting Without Attackers
Token voting inherently prioritizes token holders, particularly wealthy "whales," over other community members. This leads to:
- Low Voter Participation: Small holders have little incentive to vote thoughtfully due to the minimal impact of their individual votes.
- Narrow Focus on Token Price: Governance decisions may prioritize short-term gains over long-term health, harming broader community interests.
- Conflict of Interest: Large holders often have investments in multiple projects, creating conflicts that can skew decision-making.
Delegation can mitigate some issues by allowing small holders to entrust their votes to knowledgeable representatives. However, it does not address the fundamental concentration of power among token holders.
The Threat of Vote Buying
The most severe risk arises when attackers seek to exploit governance through vote buying. Token voting combines two rights: economic interest in the protocol and governance participation. These can be separated through mechanisms like:
- Wrapping Contracts: Users deposit tokens into a contract that auctions governance rights, distributing profits to depositors.
- Borrowing Mechanisms: Users borrow tokens to vote without economic exposure, as seen in lending platforms like Compound.
- Exchange Custody: Centralized exchanges may use custodied tokens to vote on behalf of users, as occurred in the Steem incident.
Time-lock mechanisms, which require tokens to be locked for voting, offer limited protection. They can be circumvented through wrapping contracts or centralized intermediaries, making them ineffective against determined attackers.
So why haven't more attacks occurred? Current security relies on three fragile factors:
- Community Spirit: Close-knit communities with shared values.
- Wealth Concentration: Large holders can coordinate to resist attacks.
- Immature Financial Markets: Tools for vote buying are not yet widespread.
As ecosystems grow and decentralize, these factors will weaken, increasing vulnerability.
Solution 1: Limited Governance
One approach to mitigating risks is to constrain the scope of token-based governance. Strategies include:
- Restricting On-Chain Governance to Applications: Base-layer protocols like Ethereum use off-chain governance, while applications may use on-chain mechanisms selectively.
- Constraining Governance to Specific Parameters: Uniswap, for example, only allows governance over token distribution and fee changes.
- Implementing Time Delays: Decisions take effect after a delay, allowing users to exit or fork if they disagree.
- Fostering Forkability: Making it easier to fork reduces the capturable value of governance attacks.
While limited governance reduces risks, it is insufficient for areas like public goods funding, which remain highly vulnerable.
Solution 2: Non-Token-Driven Governance
Alternative governance models avoid reliance on token holdings altogether. Promising approaches include:
- Proof of Personhood: Systems like ProofOfHumanity and BrightID verify unique human identities to enable one-person-one-vote governance.
- Proof of Participation: Protocols like POAP issue tokens for community contributions, granting voting rights based on participation rather than wealth.
- Hybrid Models: Quadratic voting, used by Gitcoin for funding, weights votes by the square root of resources committed, balancing equality and influence.
These systems require anti-collusion mechanisms, such as MACI, to prevent vote selling and ensure integrity.
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Solution 3: Skin in the Game
Another strategy is to align individual incentives with collective outcomes by ensuring voters bear personal responsibility for their decisions. This can be achieved through:
- Fork-Based Accountability: In a fork, tokens that voted for harmful decisions can be destroyed, while dissenting tokens remain intact. This creates direct accountability.
Futarchy: voters bet on outcomes, gaining or losing based on the results of their decisions. Hybrid forms include:
- Votes as Buy Orders: Voting for a proposal requires committing to buy tokens at a discount if the proposal fails.
- Retroactive Funding: Public goods are funded based on later assessment of their impact.
- Adjudication Games: Systems like Augur and Kleros reward accurate voting in dispute resolution.
These mechanisms encourage thoughtful participation and reduce the likelihood of reckless decisions.
Hybrid Solutions
Combining elements from multiple approaches can enhance robustness. Examples include:
- Time Delays + Expert Governance: Token voting elects oracle providers, but replacements are slow, allowing users to exit if quality declines.
- Futarchy + Anti-Collusion = Reputation: Non-transferable reputation tokens reward good decisions and penalize poor ones.
- Advisory Token Voting: Token votes signal community sentiment but do not automatically execute changes, preserving flexibility.
Conclusion
Token voting is often seen as the default for decentralized governance due to its perceived credible neutrality. However, its current security relies on imperfect conditions—wealth concentration and immature markets—that are unlikely to persist. To build sustainable and resilient governance, we must experiment with alternative models that incorporate proof of personhood, participation, and skin-in-the-game mechanisms. The future of DeGov lies not in abandoning governance but in evolving beyond token voting.
Frequently Asked Questions
What is decentralized governance (DeGov)?
Decentralized governance refers to systems where decision-making power is distributed among community members rather than centralized authorities. In blockchain, this often involves token holders voting on protocol changes, funding allocations, and other key decisions.
Why is token voting problematic?
Token voting tends to concentrate power among wealthy holders, discourages participation from small holders, and is vulnerable to vote buying and other attacks. It also prioritizes token price over broader community interests.
What are alternatives to token voting?
Alternatives include proof of personhood (one-person-one-vote), proof of participation (voting based on contributions), and futarchy (betting on outcomes). Hybrid models, such as quadratic voting, combine elements of multiple approaches.
How can governance attacks be prevented?
Strategies include limiting governance scope, implementing time delays, fostering forkability, and using anti-collusion mechanisms. Skin-in-the-game approaches, where voters bear personal responsibility, also reduce risks.
What is the role of DAOs in governance?
DAOs enable community-led management of resources and decisions. They can fund public goods, coordinate upgrades, and reduce reliance on centralized entities, but they require careful design to avoid vulnerabilities.
Can off-chain governance work for DeFi?
Off-chain governance is viable for base-layer protocols but less so for DeFi applications that control external assets. On-chain mechanisms are often necessary to avoid asset loss during disputes.