The 1 Big Benefit to Decentralized Governance
Choosing how to invest your hard-earned money is one of the hardest and most important decisions you’ll make. With traditional investments, most investors start by deciding if they have faith in the company to make solid decisions that grow their bottom line.
With decentralized assets on the blockchain, though, that fundamental step is missing as there is no centralized authority making all decisions unilaterally. Yet in this episode of the Weiss Crypto Sunday Special, host Christ Coney explains how this decentralized structure actually empowers investors.
You can either watch his deep dive into decentralized governance, or keep reading for the full transcript ...
Hi there, guys. Welcome to this week's edition of the Weiss Crypto Sunday Special with me, your host, Chris Coney. Today's topic is going to be decentralized governance with blockchains. I have no guests today, so it's just me and my ideas.
In my view, this topic is important to investors for a couple of reasons.
The first one is that this is akin to assessing the credibility of, say, a management team that's in charge of a publicly traded company you could be considering investing in. In that scenario, part of your decision on whether to buy the stock or not is based on whether you have faith in the management team, whether you have faith in them to make good decisions and steer the company in a positive direction, which ultimately has a positive impact on the share price because that's how we make money.
Then the second is what I'm going to cover today. Hopefully, you'll see how decisions of a superior quality can be gotten from decentralized governance and how, therefore, crypto projects with these kinds of governance systems should have a higher success rate and greater longevity.
So, the key to decentralized governance lies in its flexibility. Now, what I mean by that is the greater the number of people a decision is spread across, the better. That's the basis of democracy, for example.
By contrast, there are plenty of companies that have failed or have just been out-innovated because the small group of executives running them just couldn't keep up with the times. Maybe they were just attached to the way they were doing things or old models; or maybe they were just laggards; or maybe what they were doing wasn't working. I don't know. Whatever, but you know those kinds of stories, right?
Now, I know what you're going to say next. You're going to say, "Well, isn't this the same as a stock with voting rights?"
In some ways, yes. But blockchain technology facilitates stakeholder voting in a way that has significantly less friction and allows a wider range of people to participate. So those would be my key distinctions between blockchain-based decentralized governance and what you might deem traditional shares with voting rights.
Now, like I always say though, there’s nothing new under the sun.
Modern crypto coin offerings are just a blend of two concepts: IPOs — initial public offerings — and good old crowdfunding. Like with traditional crowdfunding, you propose a product, you get the funding for that product upfront and then you make the product and deliver it to the funders upon completion. That was the classic crowdfunding model.
The benefits of this model being that it's low risk to both parties and you get to test the market at the same time to see if there's sufficient demand for whatever product it is you are proposing.
For example, if the project doesn't get in a funding, then maybe the product wouldn't have sold anyway. So then on the other side, an IPO is where you or I buy a share in the company in the hope that we'll take the cash that we just invested and use it to grow the company enough to increase the share price beyond what we paid for it.
Now, when you blend these two things together, you get modern crypto coin offerings.
With these modern crypto coin offerings, we have the benefit of tokenizing the entire ecosystem surrounding the product, which is very different. So, in this model, a founding team proposes a new product, they gather funding from the crowd and then they use that money to create the product. That sounds just like the crowdfunding thing. Right? The incentive for the crowd of funders is that they then get project tokens in exchange.
Those tokens, they typically have one or both of the following features: [First,] you use the token to pay for the product. So, sometimes the product can only be paid for with the native token. Then, the second one is you can use the token to vote on how the product should develop. That's the whole governance piece.
Now, generally speaking and in my opinion, a project needs both of these. Forcing people to pay for the product with the native token, that's what I call a value anchor — the token value is effectively backed by demand for the product. If you can only consume the product by buying the token and then spending it, there's your value anchor right there.
To put that into perspective, the ultimate value anchor for the U.S. dollar is the fact that the U.S. government will only accept payment for taxes in that currency. But the U.S. dollar isn't related to your voting rights, is it? Your right to vote in the United States governmental system comes from your citizenship and your individuality as a human being. It's not necessarily got anything to do with how much money you've got ... lobbying and influencing aside.
So herein lies this topic of huge debate in crypto and decentralized governance in general: Almost all decentralized governance systems that rule crypto projects today are proof-of-stake systems. That means your voting power is typically equal to the number of tokens you have. Thus, you can prove how much you have at stake by showing your wallet balance. Then you say, “Well, therefore I should have more influence over the products because I have more at stake.”
The problem is those tokens can be bought on the open market. So, the question is, does that mean you can effectively buy the vote?
Well, yes and no.
Yes, you can buy more tokens on the open market and increase your voting power. But if you wanted to take over the majority of the tokens and, say, take control of that particular network … well, buying them up on the open market would push the price of the tokens toward infinity, progressively. It would make them progressively more expensive and create a parabolic price to infinity, meaning you couldn't really take over the entire supply of the coin. If you did, that would probably crash the value of the system anyway, and scope your efforts.
The fact that the price is going to go sort of parabolic as you accumulate things quickly doesn't stop someone accumulating tokens over time though, does it? So the other problem here is what's known as the civil attack. This is where I set up a thousand Ethereum wallets and then make myself appear to be a thousand different voters. This would be where if you say one vote per Ethereum address, for example. I could just create a thousand different Ethereum addresses and off I go.
Now, because it costs nothing for me to create a new Ethereum wallet, I can create as many as I like. Now, the provisor there is if there are tokens involved, then the thousand wallets do me no good. But I could still use those thousand wallets to spread my tokens out and still appear to be a thousand different voters with different voting powers.
You could consider this to be the downside to being able to create a wallet with no ID requirements. That is both a gift and a curse, really. The fact that you don't need ID means anybody can create an Ethereum wallet. For example, anyone in countries that don't have government documentation or identification, they can still get in on the crypto ecosystem. But like I said, the downside is you get the civil-attack vector.
Now then, back to my suggestion earlier about decentralized governance producing superior outcomes: In the same way that we survey the crowd during the initial funding, a decentralized governance vote leverages the same wisdom of the crowd as a crowd fund.
If a token is both a utility token and a governance token, you would hope that all token holders were also product users.
So, when it comes to voting on product developments or changes, you're effectively surveying the users and the stakeholders simultaneously. Those parties are the best source of that kind of information because they have incentives to be engaged. They have a stake, as we call them stakeholders.
Again, the logic is in the wisdom of the crowd because statistically, a crowd-sourced decision tends to have a much greater accuracy than that of an individual or a group of people. I mean, think democracy vs. dictatorship.
One thing that is spoken about quite often in decentralized governance is voter apathy. So, I could right now buy a bunch of Uniswap (UNI, Tech/Adoption Grade “B”) tokens and then piggyback on the decentralized governance system. What that means is I would be just hoping that people who do vote do so in a way that benefits the token price. So, I'm just a passive investor.
That's actually … probably, if you look at the voter turnouts, how most of these tokens go. The voting participation rates are quite low, and everyone else is literally piggybacking off of that small group of voters, hoping they do a good job.
Now, while that's not really in the spirit of decentralized governance, at least if the token had utility beyond governance, you could understand the low token participation because many holders of the token might just be pure users and not have, I don't know, the expertise, incentive or inclination to participate in voting, especially with the more complex decentralized finance (DeFi) products.
You might have average investors who are just using the product quite happily, but just don't have the understanding of the economic models and the monetary policy to have any value or any way of casting an accurate vote. They're low-information voters, you call them in politics, don't you?
Even if I were a pure user, if one day I think of something more inane — like, I wish the product did this or that, I wish the button was in a different place, or I wish it supported this asset or whatever it is — I then have a direct way of facilitating that by using my tokens to submit a proposal to the community to vote on. Then, if enough stakeholders think my idea is a good one, they'll vote yes. If the vote passes, then that feature will be added to the product. Not just for my benefit, but for the benefit of everybody else. It has been approved by the community, so wisdom of the crowd. If everyone thinks it's a good idea, it's more likely to succeed.
In this way, there's an even closer relationship to all stakeholders. Ultimately, it's why I think decentralized governance produces better quality decisions, better quality products and increases the chances that a given product will be able to sustain itself for the long run.
I mean, that really alludes back to what I said at the start about the team of executives that just loses touch with the market and continues to sail in the direction they always have been when the market has shifted.
It's a feedback loop; [that’s] ultimately what I'm talking about here. With decentralized governance, you'd hope that it would be much more dynamic and it would follow the needs of the market, such that that's what gives it the longevity.
Doesn't matter how the market shifts, you've got this flexibility to vote and pivot through the decentralized governance system, the voting system, because the users are the ones that are in touch. They're the ones using it. That bottom up information flow is really where it's at.
So, let me know what you think to all this by either tweeting at me, or commenting below this video or writing to me at [email protected]
But that is going to do it for this week's edition of the Weiss Crypto Sunday Special. So keep a close eye on your inbox for next week's episode. Until then, it's me, Chris Coney saying, bye for now.