Editor's Note: This article comes fromChain News ChainNews (ID: chainnewscom), published with permission.

Chain News ChainNews (ID: chainnewscom)

Compiler: Perry Wang

Chain News ChainNews (ID: chainnewscom)

, published with permission.

Written by: Fred Ehrsam, co-founder of well-known crypto investment fund Paradigm, and Dan Robinson, analyst at Paradigm

Compiler: Perry Wang

The best government is the one that governs the least.

——Anonymous

Why? Because governance is minimized allowing stakeholders to depend on a certain protocol. This creates a virtuous cycle of adoption, enabling scaling that would otherwise be difficult to achieve.

There are no better examples than the successful legacy Internet protocols such as HTTP and SMTP, and look at the enormous power these protocols have today. It's the minimal governance that makes them the standard everyone relies on, with adoption far greater than any enterprise has ever achieved.

On the premise that governance still matters, this paper explains governance minimization and speculates on its impact.

What is "governance minimization"

Minimizing governance means reducing power and reliance on governance as much as possible.

Governance minimization is important because it underpins the main value proposition of the protocol: trusted neutrality. Minimizing governance tends to improve the protocol's credible neutrality.

In current practice, governance minimization is most directly applicable to on-chain governance minimization. If a protocol wants to maximize adoption and avoid governance of protocol functions, it should do so by minimizing on-chain governance.

What is credible neutrality?

Credible neutrality implies reliability, which means that stakeholders (such as users or developers) can use or build on the protocol in the confidence that it will not change to betray their interests. The protocol maintains credible neutrality by avoiding becoming a "puppet" of any particular group.

Why is credible neutrality important?

Trusted neutrality is a major value proposition in crypto today. Opening the door to new open and predictable forms of money, creating a platform where anyone can openly create and access new applications.

The lack of credible neutrality of existing platforms further underscores its importance. As a currency platform, the central bank does not have credible neutrality, because some stakeholders can decide to print money at will. Facebook and Twitter as application platforms are not credible neutrals, as a subset of stakeholders can make changes that kill the entire developer ecosystem.

Trusted neutrality creates a safe environment for the value locked in the platform, preventing value from being stolen, closed and restricted. These values ​​are both physical (eg money) and abstract (eg development time, users).

If credible neutrality fails completely, it is a scam ready to run. Some stakeholders of the platform can run away in part or in whole, taking away the value owned or created by other stakeholders. As an example, suppose the operator of a centralized crypto exchange siphoned away user funds. An abstract example can also be given: Suppose Twitter closes the third-party developer interface , making Twitter's own interactive interface the only option.

What isn't governance minimization?

Governance minimization is not the idea that governance can or should disappear entirely. In fact, this is impossible! Without governance ("required governance", more on this later), some protocol functions are difficult or impossible to execute. Governance, at least, always exists through social coordination (“informal”) and the ability to hard fork.

Governance minimization creates more neutral agreements

• Creating a sound governance system is like designing a perpetual motion machine. There are well-known game-theoretic results that show that all governance systems are inherently unstable and cannot simultaneously satisfy all desirable properties. Formalizing governance systems tends to amplify these inherent problems by reducing the ability of informal governance to resolve fringe cases.

• Therefore, the more formal the governance system, the easier it is to become a puppet of certain interest groups over a long enough time frame. This is primarily because formalizing a governance system requires formalizing stakeholders (who has a say, and how much they should have). Formalizing stakeholders is difficult in practice at a single point in time, and nearly impossible over time.

• currency holder dislocation

• Formalization of on-chain governance stakeholders is often confirmed through simple token ownership, while governance itself is achieved through token holder voting. Unfortunately, token holdings do not accurately reflect the value of stakeholders in the protocol for a number of reasons, including:

• Not all stakeholders are necessarily token holders, especially users and developers.

• Token ownership may not accurately reflect stakeholder importance to the protocol, current or future. When the next app at the scale of Facebook or Google appears, it may be killed in the bud by those with more tokens.

• Stakeholders change over time. This is especially evident when considering future stakeholders that do not yet exist. Consider the benefits of a giant application that has not yet been created.

• As a result, long-term use of the protocol by token holders voting on it creates a series of misalignment issues, including:

external pressure. Facebook, for example, is under pressure to block outside developers from accessing the world's most detailed social graph. Whether this is true or false, it does kill many applications, and an incalculable number of future applications that have not yet been created.

value capture. Coin holders may wish to capture value for themselves at the expense of others. Twitter, for example, has monopolized the interface to its protocol at the expense of third-party developers.

The time ranges do not match . Unlike protocols, the timeframes in which token holders hold tokens vary widely. This may drive them to capture short-term value at the expense of long-term usability of the protocol. For example, Maker holders eyeing the prospect of short-term appreciation may increase the stability fee to create value in the short-term, regardless of long-term effects. Ironically, Facebook is a good example, its founder Mark Zuckerberg's decision to refuse to display ads (capturing value) at a time when its network effect was still growing was an Internet sensation. momentary event.

external economic interests. A token holder could also be a whale of another token and vote with that interest in mind rather than an interest in bringing changes to the protocol. Yield mining projects in DeFi are particularly vulnerable to this form of dislocation.

Exploiting these dislocations for profit is well documented and hard to avoid. Prominent issues include paying to bribe votes, or voting with borrowed tokens, the latter made easier by the invention of flash loans, and has actually happened!

other side effects

Governance can have unintended side effects even if actors do not explicitly puppet the system. For example, a formal governance system may only encourage action rather than inaction, even when inaction is more optimal. Governance can also take a lot of time and effort.

evolution rate

A common argument in defense of on-chain governance is that it allows protocols to evolve more quickly. However, there is little empirical evidence that on-chain governance leads to accelerated protocol evolution.

Still, on-chain governance is in a very nascent state, so it may be premature to judge it too critically.

Past practice has proved the opposite: if the protocol does not have on-chain governance, it can achieve rapid evolution. For example, the early Ethereum and Uniswap were protocols that underwent rapid evolution purely through hard forks. This agility can be attributed to its tight-knit community, low system importance, and high trust in the core development team.

After that, what happened in the evolution of the blockchain protocol? Evolution may be slower with the combined effects of network effects, pointer stickiness (protocols embedded in code of other protocols/applications), risk aversion, etc. However, users and apps can voluntarily opt-in if the change is significant enough. This usually means a "hard fork" of the first layer protocol (public chain) and a "voluntary migration" of the second layer protocol or application, just like the conversion that occurred in the v1 to v2 update transition of protocols such as Uniswap, Maker, Compound and Augur.

Ultimately, if a protocol is absolutely inferior to a new alternative, it will eventually be overtaken and die. This is how evolution works in nature. A single organism does not evolve in the sense of its genetic code. Evolution occurs when copies are brought about by mutations. This approach has also worked before in open source (eg Linux) ecosystems.

Since trusted neutrality is the protocol's primary value proposition, the push toward minimal governance over time, even if it means slower evolution at the individual protocol level, will still lead to maximum adoption.

Minimal governance enables faster evolution of the entire ecosystem

• Most importantly, a solid single protocol supports faster evolution of the entire ecosystem as developers can use these building blocks with confidence. Just imagine how much faster Internet application development would be if every company's code was open source, neutral, and available to anyone.

• When is governance valuable?

Governance is needed when the core mechanism of the protocol requires human input of parameters. Human input is required when the protocol's response to a particular action cannot be known in advance or derived from on-chain data and thus cannot be encoded into the protocol. We call these mechanisms "essential governance".

• Essential areas of governance include:

• The protocol consensus itself (e.g., Bitcoin or Ethereum's first layer consensus mechanism). The consensus is to determine which of the two histories is valid. This governance is strictly limited: Bitcoin miners can double spend, roll back history, but cannot issue unlimited Bitcoins.

oracle. Oracles need some form of human mechanism to decide whether their data is valid.

Areas that may require governance include:

wealth management. Governance may be needed for the foreseeable future: deciding how to allocate funds is a difficult problem to automate.

Complex parameter setting: As an example, Maker currently requires governance to approve new collateral types and set corresponding collateral requirements. New collateral (some of which may not even exist today!) has applicability issues, its risk profile is difficult to assess in advance, and these functions are inherently difficult to implement in code.

Some governance can be eliminated over time. For example, Maker could build a mechanism to programmatically set interest rates without requiring governance to set interest rates.

Governance is often a complex trade-off. For example, the Maker system has chosen to allow many different collateral types in order to increase capital efficiency. This of course has the downside that the ability to handle new collateral types requires governance, with all the systemic risk, community energy, and complexity associated with that governance. It is possible to construct a governance-minimized Maker alternative by using only one type of collateral; evaluating whether this system is "better" is challenging.

Finally, governance may be a feature in some cases. For example, people can change the rules of the game (governance), which may be a core mechanism for certain games or social applications to attract users.

Governance minimization is not a cure-all

While protocols with minimal governance are more reliable, they can still have undesirable consequences for certain stakeholder groups.

For example, a majority of participants in a governance-minimized protocol can still choose a hard fork that benefits them, at the expense of others. The cost is high though: a flagrant violation of trusted neutrality can lead to a loss of trust among potential future stakeholders, and stakeholder exit tends to reduce network effects and usage of the protocol. Of course, forking can also be a function: two different stakeholder groups can use forking to get the protocol life they want.

Most importantly, removing governance in some places does not mean it can or will be removed everywhere. It may even result in: Governance becomes more important in fewer areas where governance is concentrated.

Crypto Governance Still Matters, Ripe for Innovation

Well-functioning governance remains critical, especially in areas where governance is essential (e.g. layer-1 consensus, oracles). If the essence of a blockchain is to provide a generally accepted ledger of truth, then its integrity is paramount.

Innovation in on-chain governance systems remains an important area. Improvements (e.g. quadratic voting, decision market futarchy) on top of the current naive "one coin one vote" standard are possible and important to create.

I’m still excited to see these experiments in action and believe: we’ll see more innovation in governance systems via the blockchain than in the “real world” over the next few decades.

value capture

Value Capture = Use x Conversion Rate. The central claim of this paper is that protocols that use minimal governance will achieve higher value capture (left side of the equation). Conversion rate (the right side of the equation) remains a question with no definitive answer.

in conclusion

Governance-minimized protocols may have higher usage but lower conversion rates than traditional businesses. This is the relationship to discover economically.

Also, there are many who love to hear about "value capture" but consider it "evil"! Value capture serves several important purposes. First it incentivizes protocol creation. Second, if governance is required, governance value capture is necessary to incentivize contributions to governance and security (making 51% attacks on governance more costly). In the end it can help fund further development.

Ultimately only "essential governance" is defensible. Anything that is not indispensable is likely to be outcompeted over time.