The age of crypto-governance is upon us. This movement will be one of the most fascinating innovations to emerge from blockchain tech. The revolution has already started with a handful of DAO (decentralized autonomous organization) experiments, but we are just at beginning of a wave of innovation in governance mechanisms on crypto-networks. Where crypto-economics gave us novel funding mechanisms (ICOs), decentralized finance applications (#Defi), and new ways to incentivize actors on distributed networks, crypto-governance will spawn novel ways of achieving social consensus, accelerate the development of crypto-networks, and allow us to leverage the wisdom of the crowd to allocate capital, make network upgrades, and organize online communities.
For the first time, people are starting to work for cybernetic collectives like DAOs as their full-time job. These organizations don’t have traditional business hierarchies. Yes, there is leadership and some semblance of management, but, in a permissionless organization, workers can come and go as they please, and talented workers are incentivized to work for a handful of groups, rather than being loyal to just one. We are entering an era where talent wins. DAO contributors can be remunerated based on their contribution, not on the basis of their position, seniority, or how good they are at political wrangling. The result is that open-source developers will start to earn like professional athletes and rock stars.
Whether it’s nationalistic trends or corporate governance problems, it’s not hard to find reasons to evolve the way we govern. As a result, there is a wave of interest among political scientists in crypto experiments. They see potential of blockchain technologies to breath new life into their field of work and study. However, crypto-networks have hardly fixed our governance problems. The way many existing crypto communities have carried out discussions and decision-making leaves one thinking there must be more efficient ways to evolve these protocols.
There is a growing group of innovators in the crypto space who posit that governance is a great enabler of innovation. Networks that don’t adopt formal binding governance will get left behind. The benefits are too numerous not to be an advantage. Allowing the community to vote on how their network evolves fosters a more inclusive and participatory environment, which will be more valuable over time. The power of wisdom of the crowd is enhanced when the participants have a financial incentive to vote coherently, i.e. when they really care. We can still have community leaders that are technically competent and have referee power to lead the debate. But we don’t have to hand over all the power totally to them. An informed crowd will make good decisions if the correct checks-and-balances are in place.
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Crypto-governance also fosters increased fairness and transparency. If decision-making is defined by a “constitution enshrined in code,” participants can join a system with better information and the community becomes more thoughtful as there is clarity in the process.
Off-chain governance—where a small group of insiders essentially make all the decisions—is what we see in bitcoin and Ethereum today. Binding crypto-governance—where decisions from the community are automatically enforced on-chain—is where we want to go. Many projects today in the Ethereum ecosystem, like MakerDAO and Aragon, use a process of signaling, where core developers listen to the community, but have an ultimate backstop veto. This allows communities to ‘grandfather in’ crypto-governance over time and builds a more participatory community, while testing whether the crowd’s wisdom is really that wise. It allows the core team to have a sanity-check on decisions made by community governance. Note that early results from MakerDAO and Aragon have been encouraging and we expect they will transition to binding crypto-governance in the short term.
We will see more advancement in new governance models in the next few years than we have seen in generations.
I’m nostalgic for one of the early attempts at crypto-governance, The DAO, a decentralized venture capital fund that raised $160 million. It blew up primarily because an early vote didn’t achieve minimum quorum on a very obvious measure that clearly should have passed and thusly we could have prevented the exploit. It demonstrated that we need to test and evolve our governance mechanisms in the wild and make participation as easy as possible for participants. A company named Commonwealth is building an easy-to-use user interface along with a smart contract chain, enabling DAOs to launch and scale. Aragon now has dozens of active communities running DAOs. Polkadot, led by Ethereum co-founder Gavin Wood, has a governance mechanism allowing for community-based sophisticated voting (including fixing the quorum problem that plagued The DAO’s governance).
I suspect we will see new iterations of VC-style capital-allocation DAOs for emerging industries. I call these “Moonshot DAOs” and predict that we see some for future-looking industries such as space exploration, quantum computing, and psychedelics. A Moonshot DAO would incentivize rare-industry experts to find, evaluate, and propose investment opportunities. But the ownership and governance mechanism would allow the DAO to leverage a passionate community to be a backstop to the core expert group and ensure sound decision-making, thereby improving investment returns through the wisdom of a well informed crowd.
A perfect governance model hasn’t yet been discovered and crypto-governance will take on many forms depending on the goals of a given community. However, community-based, transparent and fair governance is a noble pursuit in and of itself and I’m excited to spend time chasing this dream. Because of the rise of crypto-economics, we will see more innovation in the field of economics in the next 24 months than we have seen in the last 24 years. This is even more true of crypto-governance. We will see more advancement in new governance models, self-directed organizations and innovation around voting mechanisms in the next few years than we have seen in generations.
Ryan Zurrer is director at the Web3 Foundation