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Blockchain protocols with minimal governance will obtain higher value capture and usher in the most widespread use.
Written by: Fred Ehrsam and Dan Robinson, the former is the co-founder of Paradigm, a well-known crypto investment fund, and the latter is a Paradigm analyst. Compiled by: Perry Wang
The author authorized Lianwen to translate and publish the Chinese version of the article
The best government is the government that controls the least.
why? Because governance allows stakeholders to minimize reliance on a protocol. This forms a virtuous circle of adoption, enabling expansion that is difficult to achieve in other ways.
The best example is the successful traditional Internet protocols, such as HTTP and SMTP . Look at the tremendous power these protocols have today. Governance minimize makes them dependent on everyone’s standard, which uses far more than any enterprise level achieved.
On the premise that governance is still important, this article explains governance minimization and speculates on its impact.
What is “minimization of governance”
Governance means to minimize as much as possible to reduce the reliance on power and governance.
Minimization of governance is important because it supports the main value proposition of the agreement: credible neutrality . Minimizing governance tends to increase the credible neutrality of the agreement.
In current practice, the governance minimize the most directly applicable to management to minimize the chain. If a protocol wants to maximize adoption and avoid governance of protocol functions, it should do so, that is, minimize on-chain governance.
What is credible neutrality?
Credible neutrality means reliability, which means that stakeholders (such as users or developers) can use or build agreement, and believes that the agreement will not betray their interests change. The agreement maintains credible neutrality by avoiding becoming a ” puppet ” of any particular group.
Why is credible neutrality important?
Credible neutrality is the main value proposition of today’s encryption field. It opens the door to a new open and predictable form of currency, creating a platform where anyone can publicly create and access new applications.
The lack of credible neutrality of existing platforms further highlights its importance. As the central bank does not have a credible currency platform neutrality, as part of stakeholders can decide freely print money. Facebook and Twitter are not credible neutrals as application platforms, because some stakeholders can make changes and kill the entire developer ecosystem .
Credible neutrality as a platform to create value in a locked safe environment, to prevent the value of the theft, closures and restrictions. These values are both physical (for example, funds) and abstract (for example, development time, users).
If credible neutrality fails completely, it is a scam ready to go. Some stakeholders of the platform can run away partially or as a whole, taking away the value owned or created by other stakeholders. For example, suppose a centralized encrypted exchange operators swept away by the user funds. You can also give an abstract example: Suppose Twitter third-party developers to close the interface, making Twitter’s own interface becomes the only choice.
What’s not to minimize governance?
Minimizing governance is not the idea that governance can or should disappear completely. Actually this is impossible! Without governance (“essential governance”, which will be explained in detail later), some protocol functions are difficult or impossible to execute. At least, always through social governance coordination ( “unofficial”) and the ability to hard bifurcation exists.
Minimizing governance creates more neutral agreements
Creating a sound governance system is like a perpetual motion device design. The well-known game theory results show that all governance systems are inherently unstable and cannot satisfy all ideal attributes at the same time. Formalizing the governance system tends to amplify these inherent problems by reducing the capacity of informal governance to resolve marginal cases.
Thus, the more formal governance system, the easier it is turned into a puppet of certain interest groups in a sufficiently long period of time. This is mainly because the formalization of the governance system requires the formalization of stakeholders (who has a say, and how much they should have). Formalizing stakeholders is difficult to implement in practice at a single point in time, and it is almost impossible over time.
Normalization of governance interest on a chain stakeholders, often confirmed by a simple token ownership and governance itself be achieved by holding money people vote. Unfortunately, for many reasons, token holdings cannot accurately reflect the value of stakeholders in the agreement, including:
- Not all stakeholders are necessarily token holders, in particular users and developers.
- Token ownership may not accurately reflect the agreement of stakeholders on the importance of current or future. When the next application that reaches the scale of Facebook or Google appears, it may be strangled by those with more tokens.
- Stakeholders will change with time. This is especially evident when considering future stakeholders who do not yet exist. Consider the benefits of giant applications that have not yet been created.
Therefore, the token holders to vote on the long-term agreement will produce a series of dislocation issues, including:
- External pressure . For example, Facebook is facing external pressure to block external developers from accessing Facebook, the most detailed social graph in the world. Whether this is right or wrong, it does kill many applications, as well as incalculable, uncreated future applications.
- Value capture . Coin holders may wish to gain value for themselves at the expense of others. For example, Twitter monopolized the interactive interface of its agreement at the expense of third-party developers.
- The time range does not match . Unlike the agreement, there is a world of difference in the time frame for the holders of the currency. This may drive them to obtain short-term value at the expense of the long-term usability of the agreement. For example, Maker holding cash at hand eyeing short-term appreciation prospects may improve stability fee in order to create value in the short term, regardless of how long-term impact. Ironically, Facebook is a good example. While its network effect is still growing, its founder Mark Zuckerberg’s decision to refuse to display ads (capture value) was once a sensation in the Internet world. Temporary event.
- External economic benefits . The holder of the coin may also be a giant whale of another token, and it must consider this benefit when voting, rather than the benefit of bringing changes to the agreement. Liquid mining projects in DeFi are particularly vulnerable to this type of dislocation.
The use of these misaligned behaviors for profit is well documented and difficult to avoid. Outstanding issues, including bribery money, or using borrowed tokens to vote, the latter since the invention of the lightning loans easier, and has been effectively appeared!
Other side effects
Even if the participants do not explicitly turn the system into a puppet, governance may still produce unexpected side effects. For example, a formal governance system may encourage action rather than inaction, even if inaction is a better solution. Treatment may also spend a lot of time and effort.
A common argument for defending on-chain governance is that it allows protocols to evolve faster. However, there is hardly any empirical evidence to show that on-chain governance will accelerate protocol evolution.
However, on-chain governance is in a very naive embryonic state, so it may be too early to judge it too strictly.
Past practice has proved the opposite: If the protocol does not have on-chain governance, it can achieve rapid evolution. For example, early Ethernet Square and Uniswap simply by agreement bifurcation hard fast evolution. This agility can be attributed to its close community, low system importance, and high trust in the core development team.
After that, what happened in the evolution of blockchain protocols? With the combined effects of network effects, pointer stickiness (the protocol is embedded in the code of other protocols/applications), and risk aversion, evolution may slow down. However, if the change is important enough, users and applications can voluntarily choose to join. This usually means a first protocol layer (well-chain) and a bifurcated second hard layer protocol application migration or voluntary, as appears to excessive update v2 in Uniswap, Maker, Compound v1 protocol conversion and the like Augur.
In the end, if a certain agreement is absolutely inferior to a new alternative, it will eventually be surpassed and die. This is how evolution works in nature. In the sense of the genetic code, a single organism does not evolve. When the copy is brought about by a mutation that occurred in evolution. This approach has also worked in the open source (such as Linux) ecosystem before.
Due to credible neutrality agreement is a major value proposition, so over time, even if the agreement means that a single level of evolution is slow to minimize propulsion control, still will bring the maximum rate of adoption.
Minimizing governance can achieve faster evolution of the entire ecosystem
Most importantly, a reliable single protocol supports faster evolution of the entire ecosystem because developers can use these building blocks with confidence. Just imagine, if every company’s code is open source, neutral, and anyone can use it, then how fast Internet application development will be.
When will governance be valuable?
When the core mechanism of the agreement need to manually enter parameters, governance is needed. When the protocol’s response to a specific operation cannot be known in advance or cannot be derived from the data on the chain, and therefore cannot be encoded into the protocol, manual input is required. We call these mechanisms ” essential governance .”
Areas essential for governance include:
The protocol consensus itself (for example, the first layer consensus mechanism of Bitcoin or Ethereum). Consensus is to determine which of the two histories is valid. This governance is strictly limited: Bitcoin miners can double spend and roll back history, but cannot issue unlimited Bitcoins.
Oracle . The oracle needs some form of human mechanism to determine whether its data is valid.
Areas that may require governance include:
Wealth management . Governance may be needed in the foreseeable future: deciding how to allocate funds is a difficult problem to automate.
Complex parameter settings : For example, Maker currently needs governance to approve new collateral types and set corresponding collateral requirements. New collaterals (some of them may not even exist today!) have applicability issues, their risk profile is difficult to assess in advance, and these functions are inherently difficult to implement with coding.
Over time, certain governance can be eliminated. For example, Maker can build a mechanism to set interest rates programmatically, without having to set the interest rate governance.
Governance is often a complex trade-offs. For example, the Maker system chooses to allow many different collateral types to improve capital efficiency. Of course, this also has a shortcoming, that is, the ability to deal with new types of collateral requires governance, along with all the system risks, community energy and complexity associated with that governance. It is possible to construct an alternative to Maker with minimal governance by using only one type of collateral; the assessment of whether this system is “better” is quite challenging.
Finally, in some cases, it may be a function of governance. For example, people can change the rules of the game (governance), which may become the core mechanism for certain games or social applications to attract users.
Minimizing governance does not cover all diseases
Although agreements to minimize governance are more reliable, they may still have undesirable consequences for certain stakeholder groups.
For example, most participants governance to minimize the agreement can still select hard forked their favor, at the expense of others. However, its high cost: a flagrant violation of neutrality credible, can lead to potential future stakeholders lose trust, stakeholder out, it tends to reduce the use of network effects and protocols. Of course, bifurcation can also be a function: two different stakeholder groups can use bifurcation to each get the protocol life they want.
Most importantly, removing governance in some places does not mean that governance can or will be eliminated everywhere. It may even cause: in less areas where governance is concentrated, governance becomes more important.
Encryption governance is still important, and the time for innovation is ripe
Well-functioning governance remains crucial, especially in the areas of essential governance (such as first-level consensus, oracles). If the essence of the block chain is to provide a truth universally accepted ledger, its integrity is crucial.
Innovation of on-chain governance systems is still an important area. Improvements may be made on the current naive ” one coin, one vote ” standard (such as secondary voting, decision-making market futarchy), and its creation is very important.
I am still very excited to see these experiments running, and I believe that we will see more innovations in the governance system through blockchain in the next few decades than in the “real world.”
The degree of governance required for value is an experiment in real time. Pointer sticky, Gas cost, user-initiated state (for example, to the center of the exchange of real-time bidding, users need to restart in a new agreement) and other network effects, these factors can produce defensive, and can minimize the governance agreement Capture value.
Value capture = use x conversion rate . The core idea of this paper is to minimize the use of management agreements will receive a higher value capture (the left side of the equation). The conversion rate (right side of the equation) is still a question with no definite answer.
Compared with traditional enterprises, the number of governance minimization agreements may be higher, but the conversion rate is lower. This is the relationship to be discovered economically.
In addition, there are many people who are keen to hear “value capture” but think it is “evil”! Value capture can serve several important purposes. First, it created incentives agreement. Secondly, if you need treatment, it is necessary to capture the value of governance, incentives for governance and security can contribute to (the higher of 51% of the cost of governance in the attack). Finally, it can help fund further development.
In the end, only ” essential governance ” is defensible. Anything that is not indispensable may be eliminated by competition over time.
Agreements with minimal governance will usher in the most widespread use. This is a core property, turned positive feedback loop between the trust and adoption. It also puts powerful and basic tools in the hands of all creators, creating more opportunities and faster progress for the entire crypto ecosystem.
With encryption technology to grow into one of the most important technologies in the coming decades, governance can be minimized bring greater opportunities for society as a whole and faster progress.
Thanks to Brian Armstrong, Vitalik Buterin, Gus Coldebella, Jacob Horne, Matt Huang, Georgios Konstantopoulos, Steve Lee, Charlie Noyes, James Prestwich, Dan Romero, and David Vorick for their conversations and contributions to this article.
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