What Web3 Can Learn From Corporate Governance | Justine Humenansky - Optimism

Hi everybody. I'm Leavand. I'm head of governance at the Optimism Foundation. The Optimism Foundation has been developing the governance system for optimism um over the past four years. meaning we've run a bunch of experiments to try to figure out what works, what doesn't work, and what we think needs to change in order to support crypto's next wave of adoption.

At this point, I think we can say that most of the original hypotheses around Dows have not played out the way that we thought they would, and now we're kind of left with the product of an outdated regulatory environment. And so a lot of people have become disillusioned with Dows. Um I think it's fair to say that if we started from scratch today, we would not move forward with the design that we currently have. But governance is still really important, especially to support the next wave of enterprise adoption in the case of optimism. So we went back to the drawing board and said, what if we just copied what corporate governance does?

What changes would we want to make to that model? And what would that mean for how web 3 governance looks? So a lot of people are disillusioned with Dows right now. That term has come to mean a treasury controlled by token weighted voting. And we have enough data at this point and there's enough history to support that that model doesn't work very well.

Um at least we can say we wouldn't probably move forward with a model design that way if we started from scratch today. But we still need Dows. And I'm going to outline some of the reasons why we think web 3 governance is still important. But as Vitalic outlined a few weeks ago, we need different Dows or better Dows. And so we're going to look to the long history of corporate governance to see what different and better might look like.

That's what that's like. So why is it still important to have web 3 governance or Dows or some different word to describe that thing? And it's because protocols need to exist into perpetuity. If optimism is building the world's supercomputer or if any other protocol is doing that, it can't crash out in 5 years. And so there's two value propositions that we think web 3 governance can kind of um incorporate that are weaknesses of web 2 governance.

And this is why we think it's still really important that governance exists. And those are that governance over the protocol can reduce platform risk. And platform risk is a problem in web 2. And it is the risk that a platform in our case the OP stack changes against the interests of the stakeholders that rely on that platform. And this has there's practical examples of this.

The second um value proposition is that governance can prevent uh inshitification which is in the dictionary but is a word that describes the phenomenon of the product getting worse over time as profits are overinvested over extracted to investors and underinvested in R&D and so we think that governance over the treasury can prevent inshitification which should lead to a better product and a more sustainable business over time. The issue is that what Dows currently look like today is a lot of bureaucracy with very little benefit and a bunch of other chaos. So originally we thought the benefits of Dows would include things like wisdom of the crowds resulting in better decision-m or plurality allowing us to enable the optimal approach or the optimal path and external contributions allowing us to innovate faster. In practice, there's very few examples of any of these playing out. Instead, what we see most of the time is mismanagement of the treasury, stagnation, directionlessness, stakeholder capture by various different stakeholders and misaligned participants.

All of that results in undermined legitimacy for the governance system that usually reques of decentralization because you're pretending to be decentralized without any of the benefits. because you're pretending to be decentralized. So, how do we move away from this model that we're kind of all currently operating in? And our approach was to look at corporate governance as a sort of base case. What I'm going to describe refers to the US model of corporate governance.

There are other models, but this is the the main one that we looked at. And that model is simple and pretty solid. At a high level, you could describe it as saying shareholders vote on issues that impact their ownership or structural changes. So, how much of the company they own or what they own. They're also typically elect or remove the board of directors who there who also in turn kind of hire and fire management or the CEO.

They can submit shareholder proposals occasionally on other topics. It usually happens once a year at an annual meeting. It's usually within a pretty well- definfined scope and they're usually non-binding. The board of directors is the main mechanism that holds management accountable. Decisions are optimized for shareholder primacy and maximization of shareholder value.

And that whole construct I just described is supported by strong legal and regulatory regimes. Usually this is enforced by requirements for regular reporting and disclosures which mostly happen retroactively. That model has hundreds of years of history and works pretty well. I would say at least works better than most Dows if we want to use that as the point of reference. But it has some important failure modes and there are notable important examples of when this has really failed.

The first kind of weakness of that corporate base case is short- termism. So you tend to see a prioritization of short-term share price over long-term business value. Governance decisions in that model get made by the largest financial interests only and other stakeholders like users uh or customers don't have any voice in that system or they have a very reduced voice. Sometimes we also see that capital allocation decisions get made in a way that enriches management in the short term and can come at the expense of of shareholders or other stakeholders in the long term. And that can look like bad M&A which we also call empire building um misuse of the treasury or just straight funneling profits back to themselves in the form of inflated comp plans.

And there are many prominent examples of that which leads me to the second big weakness of this model which is accountability. And so there are many instances where the board as the primary or singular mechanism to hold management accountable fails at doing that. And there are many reasons for that and there are many examples. In our research on this topic, we interviewed a lot of corporate governance experts and academics. And my favorite quote from all the interviews we did was that the effing board is the biggest shitow in corporate governance we've ever seen.

So the board is necessary and it and it does fulfill an important function, but it's insufficient as kind of the primary or only mechanism for accountability. So what's the diff? If we take that as the base case, what are the changes that we think would be important to make in web 3 or how can we improve upon this model? There are there are like three big ones that I'm going to outline. The first one is what we call at optimism stakeholder voting.

And this is a core concept that has always kind of underpinned the original design of our governance system. And basically it is a technique or a mechanism that can reduce short- termism by ensuring decisions aren't made only by the largest financial interests but also include the interests of in our case users which includes chains, apps, and the actual end user. So financial interests are still represented because they're still important, but they're not the only interests that that make decisions. The second concept is a concept from Eleanor Astramm's governing the commons which is which is graduated sanctions. And so if you look up here, this is the the full list of what we think optimism governance proposals types should be.

And the ones highlighted in blue have like a direct corlary in the corporate governance base case. And then the other ones are additional proposal rights we think should exist. and we think they should exist to enable the two value propositions I outlined. So reducing platform risk for the OP stack and preventing initification of the OP treasury and then also to increase accountability. If a proposal type doesn't accomplish one of those things, we think that it shouldn't be in the governance surface area, which is a pretty big difference from what we see at most other Dows where they vote on many more things than what is outlined here.

But it's hard to tie those um proposal rights to a concrete value proposition or improvement that it's making over the corporate governance base case. And then the last but really important difference is onchain authority. So off-chain governance or relative to off-chain governance, onchain governance can ensure management quote can't be evil. And so off-chain governance kind of works via regular reporting oversight over that the disclosures that are required. Onchain governance can allow like corrective action to be taken in real time.

And what that looks like is the ability to slash or remove representatives, the ability to veto protocol upgrades or treasury transfers before they occur, the ability to amend onchain parameters, and the ability to verify execution rather than audit disclosures. And authority means I can actually stop the action as a as a governance participant. So what I just outlined does not look like what we traditionally think of as a DAO and it also doesn't look at look like what we traditionally think of as a corporation. I'm taking suggestions for new terms that we can use because DAO now has like a very specific connotation that I think we want to move away from. But it's some hybrid organizational structure in the middle that allows uh the business to move with suspic sus sufficient speed, have low initification and platform risk uh and have sufficient actual uh accountability.

So this is not as sexy as we originally thought Dows were going to be, but it's still really important. I don't know what what's happening with my Okay, it's still really important and I think it's similar to the way um DeFi kind of evolved where DeFi evolved to emulate many of the characteristics and structures of the traditional financial system with one simple but really important difference which is it's all transparent. And if you went to tradfi 10 years ago and said just open source it like it's impossible for for us to arrive at the endpoint that way. And so I think a similar thing will happen via Dows uh and and organizational structures where they will evolve to emulate many of the characteristics and structures of traditional corporate governance with a really important difference which is accountability. So Dows are not dead.

They're just going to look different than we have traditional we have historically thought of them. And we think that this long history of corporate governance can help us understand how they might function better. Uh you can participate in optimism governance by going to vote.optimism.io and I'm on Twitter at laala lavender.