a16z on the governance of cryptocurrencies

Author: a16z Translator: Zhou Yan

The governance of a cryptocurrency protocol should be enforced by a decentralized community of stakeholders. This is not just because it is more efficient or for ideological reasons, but because it is necessary to unlock its core value proposition: the underlying protocols will continue to function as designed, and will be open to anyone who wants to use or build on them. People stay open without letting the rules change under their feet.

Bitcoin was the original embodiment of these ideas, creating the first large-scale internet-native currency. These ideas are equally applicable (and valuable) to other types of Open Finance primitives, including lending, lending, transactions, and so on. While specific applications may differ, their need for decentralized governance is the same.

For cryptocurrency startups, the transition to decentralized community governance is complex, with challenges in terms of sustainability, voter engagement, and incentive alignment among stakeholders. Ultimately, however, such a transformation is necessary to enable the protocol to outperform its original developers and provide lasting value as an open financial infrastructure.

As committed stakeholders in many of these networks, we would like to provide a brief overview of how we (a16z) view the governance of cryptocurrencies, and our role in it going forward.

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

What are some examples of this?

1. Proxy voting

Over the past year, we have seen major innovations in the governance models of tokens by leading cryptocurrency applications. One of the most important new features to emerge is delegated voting, which allows token holders to transfer their voting rights to others (proxies), allowing these proxies to participate more actively in governance.

We are strong supporters of delegated voting and see it as an important tool: From a governance perspective, it can increase overall diversity, reduce the centralization of voting rights across the network, and enhance the overall participation of the entire community. Because of this, we are committed to delegating a significant portion of our voting power in networks like Compound, Uniswap, etc. to a broad pool of eligible participants.

Given the implications of these decisions, we responsibly seek candidates who not only bring a diversity of perspectives, but also meet other key criteria. These standards include:

• Consistency. Are they aligned with the overall success of the protocol, or is there a potential conflict of interest?
• COMMITMENT. Are they committed to the long-term health and sustainable growth of the protocol, or are they taking a more short-term strategy?
• Independence. Are they fully independent, distanced from 16z, able to vote freely in the best interest of the protocol?
• Expertise. Do they have sufficient expertise, or are they still learning core topics?
• Management Capabilities. Are they generally good stewards and representatives of the agreement and its underlying mission?

To participants who meet these criteria, we will grant considerable voting power and ensure full autonomy to participate in governance, acting as they see fit best.

What are some of the early examples we've selected so far? They include student self-government organizations (such as Stanford Blockchain Club, Harvard Law Blockchain and Fintech Initiative, UCLA Blockchain, and Berkeley Blockchain) who are passionate about cryptocurrencies and represent the next generation Cryptocurrency leader. Also included are existing cryptocurrency companies (such as Argent and Dharma) who have experience building and participating in communities on top of the underlying protocols. 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 we look forward to seeing a more diverse broker ecosystem emerge over time. Let us know if you qualify!

2. Agreement Sponsorship Program

Today, many protocols have considerable financial resources in the form of on-chain capital reserves. These reserves represent a powerful tool that can be used to fund continued development from the community and keep the protocol on a path to long-term sustainable growth.

We support governance initiatives (such as sponsorship programs) that aim to use these funds strategically over time and believe they have many benefits. First, they enable the protocol to tap into the talents and resources of a vast number of third-party developers globally, far beyond what any one company or development team can provide. Second, they create valuable economic opportunity for many people around the world who would otherwise not be able to obtain the work, or are forced to do it for free. Finally, they reduce the degree of reliance on the efforts of the original development team, potentially reducing the regulatory risk of the protocol in some key contexts.

As a concrete example, Uniswap token holders control an on-chain fund reserve (vested over the next four years) worth over $7 billion. These funds can be used to incentivize gas optimization of the underlying protocol, integration of other applications, new front-end interfaces, or even marketing campaigns aimed at promoting growth. These funds can even be used to fund protocol agents, further decentralizing the governance process, as discussed above. Last year, we were pleased to support the creation of an official Uniswap sponsorship program. We look forward to supporting similar efforts to incentivize community participation in other protocols.

3. Early Adopter Reward

In the end, we believe that a token distribution model that rewards true early users and contributors may create a more engaged community and thus a more sustainable protocol. Early adopters are the kind of users and developers who contribute value to a protocol before it develops a real network effect, or even when the protocol itself has limited utility. For example, early users of Uniswap and participants providing liquidity, as well as early developers building applications on Compound. In our opinion, 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 efforts to reward these types of early adopters are likely to set the stage for the long-term success of the protocol, and we will support them wherever possible.

Protocols that decentralize effectively are more likely to achieve long-term adoption and sustainability than those that do not. While the potential design space for governance is vast, we remain guided by this fundamental principle and support initiatives that we believe embody it. Here we provide some such examples in the hope of helping to identify and develop others that may arise in the future.