Growing & Securing Networks What’s Next for Onchain Governance - Anthony Leutenegger

[Music] We are ready for our next talk. And for this one, I'd like to bring on Anthony from Aragon to tell you about the future of DAO governance. Please give Anthony a big round of applause. Thank you so much. Um, hey everybody.

It's a real pleasure to be here. Obviously, um, Ken is a beautiful place, beautiful weather. I think at first everybody was like a little bit trepid about moving from Paris or Brussels. Um, and then we came here, now everybody's super excited and it's like great, perfect. And we know we're going to be here for a few years, I think.

So, um, let's do it. So, uh, I'll be talking about growing and securing networks and sort of what's next for governance. um governance is and and and was supposed to be one of the best possible use cases for the blockchain, right? Um you saw Vitalik speak about it yesterday. I'm speaking about it today, but there's been a lot of issues over the years of in our in in how we're going to get to where we want to be in terms of providing good governance and that means organizations s being successful or being effective at reaching their goals.

So what's next? So obvious obviously governance is the the process by which we make decisions. Um and until recently we haven't been able to actually execute on a lot of the decisions that we want to make until we have a blockchain with no intermediary. So we know we can do that and we know know that we can do that as a group. Now, so the problem or one of the big problems with governance over the last few years is that it has not been defined by organizations trying to reach their goals.

It's primarily been defined by organizations trying to abide by unclear regulations. And you know, it's pretty challenging if you're not actually designing your governance to achieve your goals, but to some other regulator somewhere or lawyers telling you what to do when you build your business that you're going to be successful. Inherently, there was misaligned incentives right off the bat. So that meant that like one form of governance really started to like emerge and it was mainly to deal with these regulator like these this regulatory uncertainty and that was this sort of cookie gutter referendum based governance which I think by now we've sort of like determined doesn't wor work for most organizations depending on what stage they're at right like in in where in the world other than maybe in Switzerland but it only happens sort of quarterly does you know Do all stakeholders, especially large amounts of stakeholders, have to vote on every single decision that needs to be made? It doesn't really make sense, especially for most of the crypto industry, which are mostly startups or organizations that are trying to scale, create products, etc.

So, as as I said, every decision required a token holderwide referendum. Decision making then becomes very slow and so does the execution on that. incentive alignment immediately was off because you you have things like equity versus tokens. You have organizations focusing on regulations, not their product. Um and projects couldn't adapt to this rapidly changing environment.

So there are a few exceptions. um Lido, a maker to some degree some there are a few organizations that are extremely successful are using this model but they also have something in common um that many other organizations didn't copy and that's actually they have to some degree centralized leadership decentralization itself obviously is quite broad right like like you can have decentralized control which I'll talk about in a second you can have decentralized decision-m you can have decentralized leadership and sometimes centralization is okay.

Yes.

And these three organizations, yes, they have still their founders are still somewhat involved or heavily involved. Um they have a group of people that might be working or funded to work. Um but most importantly is that their protocols are secured because they've decentralized control of that particular aspect and that particular aspect is what needs to actually be decentralized. But it doesn't mean that they don't have issues themselves. you know they they have to deal with things while they're building their products products like trying to reach quorum for example and that is something that they're all struggling with here you can see Brantley in the ENSA talking about how it's decreasing you can see the arbitrum dows delegation has decreased you can see lido not reaching quorum six times etc so this is a huge problem so the overreaction to the failure of decentralized governance to actually scale throughout the industry to other organizations is that now you basically have status quo almost every network in the industry is not decentralizing or opting not to or not opting to give control to some of their major stakeholders such as token holders and this is also going to be a problem that we'll see.

So the reality is though is that if you are launching a token, it is looking more and more like regulations are moving towards actual decentralized control and those tokens having actual hard power. And here you have Jake Travinsky, you have Miles Jennings from A16Z and Variant Fun who are also working, you know, they're lawyers, but they're working at the forefront of helping crafting these new regulations. And they really talk about this. They talk about the fact that the current model's broken that value is being driven away from the tokens to equity to these projects and this is creating this mis misincentive align uh um sorry aligned uh mis misaligned incentives apologies. So we know that regulations are changing.

They're heading in a new direction. It looks like control might be something you actually have to start to distribute. Uh and so that means we need to find a better model otherwise we're not going to be successful. So as I mentioned the thing that they want to focus on is that decentralized ownership and control is the most important aspect

not necessarily decision-m on everything and that means we need to focus on what actually needs to be decentralized.

So the prescription for this is that we need to also look at how much needs to be governed. So there's immutability. We know if something's immutable, it doesn't actually need to be governed. That's the only time. If it's not immutable, then there have to be decisions at some point made.

And that's when we want to bring in automation in AI because then we can start to, as Vitalic put, automate at the center and move humans to the edges. And then finally, if we are unable to make things immutable over time, if we can't automate it, that's when we need to start making decisions over it. So we reduce the amount that actual large groups of people need to actually vote on things or participate on things. And so this leads us to having

good governance that has both offense and defense. And I think previously we have always looked as decentralized governance in our industry as something that's defensive. We have to decentralize to secure something. But actually good governance should also allow you to excel at something and that's the offense. And so today we'll talk about defense and offense.

So number three that's protocol resiliency would be more of how we look at defense and growth through incentive alignment is how we look at offense. And I'll show you today two sort of models by separations of power that allow us to hopefully tackle both. So let's look at the protocol first. So most organizations, most protocols are looking to defend their users, their token holders, their protocol, but without hindering growth. And so there are a few options that we have nowadays that seem to fit potentially both giving away some control while still moving quickly.

Optimistic governance was something that was basically invented at at least uh on a blockchain roughly in 2020. It's starting to become more popular again. This allows token holders to have hard power via veto u veto powers. So this means you can have uh a security council team work optimistically. They can work more quickly.

Um but you still have this safeguard. And the safeguard is that token holders for example or other stakeholders can actually veto a poor or malicious decision. And then as number four there says you can also add a time lock to exit. This gives everybody the ability to exit the system if they think it's going to be malicious and going to pass. And then something that's really important is something we call separations of power.

This means we don't have to have the same governance methodology over the protocol as we do over let's say incentivization or grants or whatever other model we might have or any other permission we might actually want to govern um because they may not require the exact same type of governance. So, Tao just launched uh obviously a little while ago, but they they just moved over their permissions on mainnet to their dowo and they're exactly using this model. So, they are they have a security council who can put up a proposal for any type of change and then they have token holders can veto that if they think it's malicious and then they have the ability to exit after. So here we're actually giving safety and security to all these token holders, users, participants of the network on the blockchain, but also the team can move more quickly rather than having a referendum vote on every protocol upgrade or change. Maybe one day they want to get to that state, but for now that's not realistic.

And so what does this look like? So this is what Aragon's been working on. We call it modular governance, but you can start to actually see what this looks like in the UI. Now instead of one right governance type for every single decision, we now have different proposal types and this also is mimicked on our protocol level. So basically we look at the organization as the executor right not token holders or not just a multisync.

We look at it at the executor level and then we can start to bake different governance types and different proposal types governing different permissions on one executor. So here we have three different proposal types. We have you know minting the token for example, we have protocol upgrades for example, we have grants for example whatever right and so within each proposal type here you can see one we have a governance methodology that goes in stages and these stages can be switched changed for each proposal type. So here you can have you have for example three stages. The first stage allows you the multi-IG one out of one member here to put up the proposal.

If it moves to stage two, it'll be in a community review. It it moves over and now token holders can potentially veto if they want to and protect themselves. And then in stage three, you can easily add a time lock and they can exit. So that is just one proposal type and one process within that proposal type. And we can continue to do that for different permissions or different types of proposals.

And here you can take a quick look that now the DAO is not token holders. It is not the multisig. There are multiple governing bodies in one Dow or one organization, one executor and they all can have different roles and responsibilities within that organization. Whether that be a veto power, whether that be putting up a proposal, whether that be executing a proposal, etc. You get my point.

So it's more it's more heading towards like a modular organization where you can actually build what you want, govern different permissions how you want to and that's how we believe we'll be able to be more successful rather than one cookie cutter you know methodology for every single organization in the industry which we know at this point doesn't work. So I have to call out that of course on Monday lido launched optimistic dual governance. This is pretty incredible. So this allows actually speaking of multiple governing bodies and light is built on Aragon. This allows LDO holders.

So LIDA holders are able to upgrade make an upgrade on the on the protocol right by voting participating. But now they've added in where staked ETH holders so the actual users can veto if they disagree with LDO holders. And so this actually now puts the hard power in the hands only on a veto of the actual users of the protocol. And you know Vicil the founder um a few days ago mentioned that he thought this was some of the best user protection that has ever been implemented bar none in the world. Full stop not just our own industry.

And this is fantastic because it's all on chain. There's no trusted intermediaries. There's no need for lawyers etc. And here is Vitalic obviously commenting on it as well. So these are the types of things we can start to get when we actually break down governance more granularly.

We can have multiple governing bodies and different processes. We can actually get somewhere where we're trying to go as an organization. So that's the defense of things, right? It's focusing on a methodology of governance that actually defends your protocol, defends your users, and defends your token holders because you have multiple stakeholders. But let's go to the offense now, right?

because that also hasn't gone super well in our industry. Lots of money has flown out the doors in every grant program you can think of. It's not really incentivizing people to do the right things and they don't typically stay within the system. Often it's mercenary money. They come in, they get their money, they move on to the next L2 to the next L2 to the next network, the next protocol.

Um, and nothing's left for those organizations. And so you see grant programs are also a little bit on the decline in our industry as well. So, what are we prescribing? This is amazing because we've been building this and now it's really starting to pick up in our industry. It's an it's it's an old model, but it's actually coming back as new.

It's a VE gauge model, and we call it the token value cruel kit. It was first originated, at least that we're aware of, by Michael from Curve. They have a particular model. It's then a drrome has really taken it from there and has been extremely successful. And now we're seeing other organizations come up and start to use this because it it's meant to align incentives properly to reach a certain goal.

So it's a tokconomics first governance framework and I'll talk about what that looks like in this diagram here. So TLDDR in short. So the token holder can deposit into this voting escro locker. They receive a token back and there's a voting power curve and this is exactly where you can start to play around with it based on your organization. There is a flat curve where the power doesn't change over time.

Um curves model the power starts uh at the maximum when you lock to a maximum of four years and it degrades over time. So when you're leaving the system and you're the least aligned, you actually have the least amount of power. And the new system we've been working on with projects we'll mention in a minute actually have an increasing power curve. So the longer you stay in the system, the more voting power you get. And so this means you are incentivized to stay longer to acrew more power up until a maximum uh of course and then you're able to actually vote through what we call gauges on um distributing incentives emissions um inflation whatever towards liquidity pools whatever you might want.

So that's how the system sort of works and this unlocks what we call the growth flywheel and every organization as I said wants to defend their protocol right with a particular form of governance and every single protocol and project is looking to grow at least I hope so. Uh and so what this unlocks this system where you have to lock into the system, participate and you get rewarded for doing so is that you get this growth flywheel where participants lock tokens for a predefined period. In exchange they receive this VE token. Um holders vote via gauges. So they're actually participating which is also good from let's say a regulatory perspective.

Um and then they they sort of direct funds to the initiatives that you know earn the most votes. And then this fly wheel begins where it actually you retain value for participating and the more you participate the more value you retain and the longer you're in the system the more incentive aligned you are. So voting power scales with time commitment and rewards. There's actual token value acrruel. So now the token has actual value.

This has been completely disconnected in most of our industry where the token retains no value from the protocol. often it goes maybe to the core team to equity or there is no value that is distributed or it's distributed via grants poorly and then you get stronger governance infrastructure from this as well. So if you end up using this system what are some of the benefits so one thing is anti-hale delusion delution which I find very interesting is that so the amount of power that you have as your token holder is the amount of rewards that you can give out. So, it's not like voting on one particular thing where a whale may come in, let's say, and nuke what you wanted to vote on or you wanted to fund. Uh, also the opposite is that if there's like a huge social consensus of people without much actual voting power trying to push a vote in a certain direction, you're not impacted by that either.

There's skin in the game long term, of course, because you have to own the token, you have to lock the token for x period of time. This decreases governance risk. Um, and the system we've built is modular, so you can customize because we know, as I said earlier, that cookie cutter governance doesn't work. One size doesn't fit all.

So, lockers give participants skin in the game. Gauges let them decide where it goes. The outcome, real investment for long-term value generation. So, let's take a look at some use cases very briefly of how this has gone. So, mod's use case, 6 weeks after deployment, we had 43% of the circulating supply locked.

This is also good from a tokconomic perspective. We had over 7,000 unique voters who participated. You won't find these types of numbers in any traditional voting system. And 31,000 votes were cast via gauges. Some other users of the system, Aerodrome, Pendle Curve, you can see that 98% of token holders locked for four years, the maximum amount they could lock.

And roughly 3.75 3.65 65 years is the average lock up within those systems of those token holders. So token holders on systems and in organizations that are quite doing quite well are willing to lock for a long period of time. This also is great so that the organization token holders know when these unlocks are occurring.

It's all very transparent as well. And so we also know now that based on some curves data that that um this model locks approximately three times more tokens than would be removed through a burn mechanism. Right now everybody in the industry is discussing this like fee switch the fee switch. Um they're doing buybacks and many are just burning these tokens away while others using this model are creating a token sync and you can see now and obviously there's not a ton of data in our industry on these types of things. curve is the oldest using this mechanism um that it is more impactful at decreasing the total supply using a locking mechanism rather than a buyback and burn and hopefully we'll get more information from aerodyome and other organizations that are a bit younger soon as well to validate this and thanks to Michael from curve for this information so there's other use cases we have cello public goods are using it to fund um different apps that they want to build on top of the cello network um Puffer are using it as well to incentivize providing liquidity and we're very excited to announce that we're actually going to be working with Katana which was a new chain I think it went on mainet maybe even yesterday um incubated by Polygon and GSR that will also be using this system along with Voltbridge to incentivize users to participate in the network secure the network and be involved in the system.

So really exciting that probably one of the biggest newest chains launching is using the system as well. We're continuing to see huge growth in the VE gauge model versus a traditional model because it signals true accountability and that you want to acrue value to your token and that means people may want to actually own that token and participate in that network. So I'm out of time 5 seconds left. Um the value acrruel toolkit is open source now. Uh anybody can take it.

You can run with it. Um, you can use it for your project. It comes with a UI kit as well and an app template. Um, or just reach out to us. We're happy to help you um, build your token value cruel mechanisms as well as the defensive side, not as sexy, but of, you know, defending your protocols.

Um, but at the end of the day, right, governance is the process by which we make and execute on decisions. It can be offensive and defensive. The key is is to not fade it. You have to be thoughtful about this. If you listen to any major podcast recently with Lex Fridman and and some of the co-founders who go on there, um they all talk about how important it is.

If you're not going to be immutable, you have to make decisions. So, put yourself in a situation to make the best decisions and speak to experts so you don't fall into traps laid out by regulators or lawyers who lead you in the wrong direction. So, thank you so much. Be thoughtful everybody. That's it.

You can find me here.

Thanks, Anthony. Uh this is awesome. Hopefully we get to uh actually see all these new projects actually implement all these new mechanisms and uh change kind of how we think about DeFi especially.

It's time. We definitely need to make some change. Thank you so much. That'll

be wonderful. Well, thank you.

Cheers everybody. Thank you. [Music]