a16z: What can Web3 learn from the history of traditional governance?
Compared to traditional forms of governance, Web3 governance can go further and faster.Original Title: 《Lightspeed Democracy: What web3 organizations can learn from the history of governance》
Original Authors: Andrew Hall and Porter Smith, a16z
Compiled by: PANews
Web3 creates a brand new "laboratory" for community governance, where public incentives and private incentives intertwine, and projects can be both open-source and for-profit, allowing public goods and private projects to coexist. In Web3, governance is continuous, participation is fully open, and execution is swift.
Web3 governance is defined by different categories of participants, as customers are owners. As a result, a new form of digital participation emerges, characterized by extensive experimentation and rapid iteration cycles.
However, so far, participation in Web3 governance has not been high, and interest groups can easily capture and manipulate group decision-making. To address this issue, we may find some lessons from the history of systemic governance.
While Web3 is a new phenomenon, governance is not. The governance challenges faced by societies and organizations over the past few thousand years have been nearly the same—emerging from the Athenian assembly, where citizens gathered to make collective policy decisions, and rising with the Dutch East India Company, where good governance could decentralize risk and aggregate capital at scale, driving a new era of organizational design and privatized governance through an added layer of legal separation between shareholders and creditors.
In this article, a16z leverages its expertise in political science and political economy research, along with long-term observation and active participation in Web3 governance within DAOs, to explore the key challenges of decentralized governance and provide a pathway for building a mature decentralized governance system in the future.
How Representative Governance Can Improve Web3 Decentralized Governance
Some believe that representative governance in Web3 is inferior to direct governance, but this is a misconception: by reducing the demands on community members, representative governance in Web3 can actually empower them more, guiding and concentrating their activities to encourage participation and prevent interest groups from seizing the system.
The same logic applies to corporate governance; Apple does not require shareholders to vote on the technical framework for the next generation of iPhones. Amazon does not publicly solicit shareholder feedback on every step of its development plans. Instead, a small group of shareholders regularly makes decisions, such as electing a board of directors tasked with overseeing the interests of shareholders.
The pain point of current Web3 governance may be system complexity. We expect to see more complex and broader forms of expression continue to develop in Web3 governance. From a first principles perspective, if the Web3 community needs to implement the system design and social contracts formed among participants in the ecosystem, specific tools must be employed.
While Web3 governance differs from traditional governance prototypes, it can also draw on the essence of traditional frameworks to build more inclusive and efficient organizations, such as:
- Clearly defining the roles of internal units,
- Requiring representatives to possess certain expertise to make decisions,
- Leaving strategic capital allocation decisions to all members as a check on the organization itself.
In turn, these changes can also promote the scalability of Web3 governance, effectively organizing governance in a representative manner without sacrificing decisiveness, agility, or inclusiveness.
Launching the Accountability Flywheel
Representative governance in Web3 can only function effectively when addressing the principal-agent problem: representatives must want to win re-election, and community members must have the necessary information to determine whether their representatives are worthy of re-election. Similarly, in corporate governance, board members must act in the long-term interests of the company, or they risk being removed by shareholders, even if such removals are uncommon.
Web3 allows us to think about this issue differently. There are no boards in Web3, and many participants are anonymous, with low barriers to entry and exit from organizations. Generally, the more informed and attentive community members are, the stronger the motivation for representatives to perform well. When representatives do better, stakeholders are more likely to trust the organizational system and are more willing to invest time and effort in the organization, further enhancing the motivation for representatives to perform well. If this can create a virtuous cycle, the system itself can achieve self-reinforcement, meaning that good governance leads to more good governance—what we call the accountability flywheel.
Web3 has a powerful tool to promote accountability: Tokens. Tokens can serve as a new tool for allocating economic, social, and political rights to stakeholders within the ecosystem. Just as startups incentivize employees with ownership, Tokens can be used to motivate contributors and users to continue creating value on the network.
However, relying solely on Tokens is not enough to stimulate the accountability flywheel; we can also assist by:
- Appropriately compensating contributors and users, defining their roles, and possibly guaranteeing them a term to encourage capable and dedicated representatives.
- Tokens can play a key role by designing a Token release schedule to maintain long-term incentives, similar to providing performance-based stock options to board members.
How to Express Governance Voice in Web3?
Those who represent Token holders are often an important part of the Web3 system, but they are not the only representatives. As Vitalik Buterin pointed out in his 2016 article on decentralized governance, there are many other important voices in the community besides large Token holders, and pure Token voting may not capture these voices. The design of Web3 governance (one Token, one vote) has become a difficult problem to solve, as Token weight often favors founding teams and institutional investors, while stakeholders holding few or no Tokens actively participate in the protocol.
On the other hand, non-Token holders do not bear the economic consequences of their actions, especially in open governance systems, which turns Token governance into a double-edged sword. So, how can we address these issues? In fact, the Web3 space has already begun optimization experiments, such as:
- Directly distributing governance Tokens to relevant groups.
Typical example: Anyone who makes meaningful contributions to the protocol can be traced back and rewarded with an airdrop.
- Creating separate governance functions.
Typical example: Optimism's "Citizen's House," a voting chamber composed of community contributors, where everyone votes with non-transferable Tokens, and the Citizen's House allocates funds for public goods projects.
- Reserving some incentives for specific groups, such as full-time contributors, active forum members, or user groups.
Typical example: Currently, there is no such scenario in the Web3 community, but this is a logical future scenario that could expand Web3 governance beyond Token voting.
- Granting power to non-token holders in other ways.
Typical example: Lido's governance proposal grants dual governance power to LDO holders and stETH holders, the latter of whom will have veto power over certain types of proposals.
A Useful Model for Web3 Governance: Indirect Accountability
At this stage, almost all Web3 native organizations do not utilize indirect accountability, but they should, and can try two general approaches:
- Granting representatives (whether appointed or elected) formal oversight authority.
- This approach may be closest to traditional corporate governance models, but in Web3, representatives may have more power than corporate boards and can require Token holders to engage in broader direct voting when appropriate.
- As outlined in traditional corporate charters, key oversight powers include "the power of the wallet." In Web3 governance, this means the power to oversee community treasuries and the ability to allocate or withdraw funding for certain positions, projects, and groups within the organization.
- Creating an executive committee, either involving representatives holding the most delegated Tokens in governance or allowing representatives to hire full-time employees. The executive committee will be responsible for overseeing the workforce and establishing a unified vision for the organization.
- This model resembles the parliamentary system in Western countries or the "council-manager" style of city government in the United States.
It is important to note that when designing any governance system, participants should not create situations that may require the application of securities laws to the underlying Tokens to protect holders and users from information asymmetry, especially as the community needs to ensure that governance design does not lead to the underlying Token's value being overly dependent on the "management efforts" of such representatives; otherwise, the Token may be considered a security by the U.S. Securities and Exchange Commission.
Conclusion
Web3 is a new thing, but governance is not.
For centuries, we have been continuously optimizing based on lessons learned from traditional governance. Web3 organizations can leverage the power of representation, balance expertise, and develop better mechanisms for oversight and trust.
More importantly, Web3 organizations should not stop there. Compared to traditional forms of governance, Web3 governance can go further and faster. In the real world, democratic experiments are slow; for example, figuring out whether one form of constitution is better than another can take decades or even centuries. But in Web3, protocols can continuously experiment to develop and test new forms of expression, thereby shortening governance cycles.
Web3 governance offers a tremendous opportunity for platforms to be better managed, leading to more credible and lasting commitments with counterparties, unlocking the immense growth potential of new forms of economic activity.
