Discussion on Cryptocurrency Governance by a16z

Author: a16z Translator: Zhou Yan

The governance of cryptocurrency protocols should be implemented by decentralized communities of stakeholders. Not only is this more efficient or driven by ideological considerations, but it is necessary to unlock their core value proposition: the underlying protocols will continue to operate as designed and will remain open to anyone who wants to use or build on them, without changing the rules under their feet.

Bitcoin is the first embodiment of these ideas, creating the first large-scale native Internet currency. These ideas also apply to (and have value for) other types of open financial primitives, including lending, borrowing, trading, etc. While specific applications may differ, their need for decentralized governance is the same.

For cryptocurrency startups, transitioning to governance by decentralized communities is complicated and presents challenges in sustainability, voter participation, and stakeholder alignment. But such transitions are ultimately necessary to enable protocols to outlast their initial developers and provide lasting value as open financial infrastructure.

As steadfast stakeholders in many such networks, we wanted to briefly introduce how we (a16z) think about cryptocurrency governance and how we see ourselves playing a role in it going forward.

Simply put, our main goal for governance is to create the necessary conditions for the protocol’s long-term adoption and self-sustainable development. As a general principle, we believe that protocols that achieve greater decentralization on certain key dimensions (e.g., voting rights, development work, economic rewards, etc.) are more likely to achieve the ultimate goal of decentralization than those that do not. Therefore, we focus our governance efforts on initiatives that can strengthen decentralization in these key areas. We believe this is the most effective way for us to participate and is more likely than any other method to accelerate the underlying protocol’s evolution toward long-term sustainability.

What are some examples of this?

1. Delegation voting

In the past year, we have seen leading cryptocurrency applications make significant innovations to the governance models of their tokens. One of the most important new features to emerge is delegation voting, which allows token holders to delegate their voting rights to others (agents), enabling those agents to more actively participate in governance.

We are strong supporters of delegated voting, seeing it as an important tool: from a governance perspective, it can increase overall diversity, reduce centralization of voting power across the entire network, and strengthen overall community engagement. As such, we commit to delegating a significant portion of our voting power in networks such as Compound and Uniswap to qualified participants.

Given the impact of these decisions, we will be responsible in seeking out candidates who not only bring diverse perspectives, but also meet other key criteria. These criteria include:

  • Alignment. Are they aligned with the overall success of the protocol, or are there potential conflicts of interest?

  • Commitment. Are they committed to the long-term health and sustainable growth of the protocol, or are they taking shorter-term strategies?

  • Independence. Are they fully independent, maintaining some distance from 16z, and able to vote freely based on the protocol’s best interests?

  • Expertise. Do they have sufficient expertise, or are they still learning core topics?

  • Management. Are they overall good managers and representatives of the protocol and its underlying mission?

For participants who meet these criteria, we will grant significant voting power and ensure that they participate in governance fully autonomously, acting in the way they deem most appropriate.

So far, what are some of the early cases we have chosen? They include student-led organizations such as the Stanford Blockchain Club, the Harvard Law Blockchain and FinTech Initiative, UCLA’s Blockchain group, and Berkeley Blockchain, who are passionate about cryptocurrencies and represent the next generation of cryptocurrency leaders. They also include existing cryptocurrency companies such as Argent and Dharma, who have experience building and engaging with communities on top of underlying protocols. And they include industry experts such as Gauntlet, who specialize in protocol governance and bring quantitative rigor to the field. These are just a few early examples, and over time we look forward to seeing a more diverse agent ecosystem emerge. If you meet the criteria, please let us know!

2. Sponsorship Program

Today, many protocols have significant financial resources in the form of on-chain funds. These reserves serve as a powerful tool that can be used to fund ongoing development from within the community and propel the protocol towards long-term sustainability.

We support governance initiatives (such as sponsorship programs) that aim to strategically utilize these funds over time, and believe that they have many benefits. First, they enable protocols to tap into the talents and resources of a large network of third-party developers across the globe, far exceeding what any single company or development team could provide. Second, they create valuable economic opportunities for many people around the world who would otherwise be unable to obtain this work or be forced to do it for free. Finally, they reduce the reliance on the efforts of the original development team and may in some critical contexts reduce the regulatory risk of the protocol.

As a concrete example, Uniswap token holders control an on-chain fund worth over $7 billion (vested over the next four years). These funds can be used to incentivize gas optimizations for the underlying protocol, integrate with other applications, develop new front-end interfaces, or even fund protocol agents to further decentralize the governance process, as discussed above. Last year, we were pleased to support the creation of a formal Uniswap sponsorship program. We look forward to supporting similar efforts to incentivize community involvement with other protocols.

3. Early Adopter Rewards

Lastly, we believe that token distribution models that reward true early users and contributors may create more engaged communities and thus more sustainable protocols. Early adopters are those users and developers who contribute value to the protocol before the network effects that truly form the protocol are even in place, and often in situations where the utility of the protocol itself is limited. Examples include early users and liquidity providers on Uniswap or early developers building applications on Compound. We believe that these types of users may be the best long-term stewards of the protocol. While any token distribution model must take regulatory considerations into account, we generally believe that rewarding the efforts of these types of early adopters is likely to lay the foundation for the long-term success of the protocol, and we will support them as much as possible.

Protocols that can effectively achieve decentralization are more likely to gain long-term adoption and sustainability compared to those that fail to do so. Although the potential design space for governance is vast, we always guide our support towards initiatives that we believe embody this principle. Here are some examples to help identify and develop future initiatives that may arise.

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