On Crypto Governance

Crypto protocols are meant to be governed by decentralized communities of stakeholders. Not because it’s more efficient, or important for ideological reasons, but because it’s necessary to unlock their core value proposition: that the underlying protocols will continue to run as designed, and will remain open to anyone who wants to use or build on them, without having the rules shift under their feet. 

Bitcoin is the original embodiment of these concepts, creating the first internet-native money at scale. But they are equally applicable (and valuable) to other types of open financial primitives as well, including things like borrowing, lending, trading, and so on. Though the specific application may differ, the need for decentralized governance remains the same.

For crypto startups, transitions towards community governance are complicated, and raise difficult questions around ongoing development, voter participation, and incentive alignment between stakeholders. But they are ultimately necessary in order for the protocols to transcend their original developers and provide enduring value as open financial infrastructure. 

As committed stakeholders in many of these networks, we wanted to briefly expand on how we at a16z think about crypto governance, and how we see our role in it going forward.

Put simply, our primary objective in governance is to create the conditions necessary for protocols to achieve long-term adoption and self-sustainability. As a general principle, we believe that protocols that achieve greater decentralization along certain key dimensions — voting power, development work, economic upside, etc. — are more likely to reach this ultimate goal than those that do not. As a result, we focus our governance efforts on those initiatives that have the effect of increasing decentralization in these key areas. We believe this is the highest-leverage way for us to participate and is more likely to hasten the transition of the underlying protocols towards long-term sustainability than any other approach.  

What are some examples of this?

1. Delegated Voting  

Over the last year or so we’ve seen significant innovation in token-based governance models among leading crypto applications. One of the most important new features to emerge is delegated voting, which allows token holders to transfer their voting rights to others so that those delegates may more actively participate in governance.

We are strong supporters of delegation and view it as an important tool to increase the overall diversity of perspectives in governance, to reduce the concentration of voting power across the network, and to increase overall engagement throughout the community. That’s why we’ve committed to delegating a significant portion of our voting power in networks like Compound, Uniswap, and others to a wide range of qualified participants. 

Given the implications of these decisions, we take this responsibility seriously and look for candidates who not only bring diverse perspectives, but also meet other key criteria. These include things like:

• Alignment. Are they aligned with the protocol’s overall success, or do they have potential sources of conflict? 
• Commitment. Are they committed to the protocol’s long-term health and sustainable growth, or do they take a more short-term approach? 
• Independence. Are they fully independent and arms-length from a16z, such that they can freely vote as they see fit in the best interest of the protocol?
• Expertise. Do they have a sufficient degree of expertise, or are they still learning the core subject matter? 
• Stewardship. Are they overall good stewards and representatives for the protocol and its underlying mission?   

For participants who meet these criteria, we delegate a meaningful amount of voting power, and ensure that they have full discretion to participate in governance as they see fit.

Who are some of the early examples that we’ve selected so far? They include student-run organizations (like Stanford Blockchain Club, Harvard Law Blockchain & Fintech Initiative, Blockchain at UCLA, and Blockchain at Berkeley) who are passionate about crypto and represent the next generation of crypto leaders. They include existing crypto companies (like Argent and Dharma) who have experience building on the underlying protocols and engaging with their communities. They include industry experts (like Gauntlet) who specialize in protocol governance and bring a quantitative rigor to the discipline. These are only a few early examples, and we look forward to seeing an even more diverse ecosystem of delegates emerge over time. Let us know if that might be you!

2. Protocol Grant Programs

Many protocols today possess significant financial resources in the form of their on-chain treasuries. These treasuries represent a powerful tool that can be used to fund ongoing development from the community and set the protocol on a path towards long-term sustainability. 

We support governance initiatives (such as grant programs) that look to strategically deploy these funds over time, and believe they are beneficial for a number of reasons. First, they allow a protocol to leverage an immense amount of third-party developer talent and resources around the world, far greater than any one company or developer team could bring to bear. Second, and relatedly, they create a meaningful economic opportunity for a variety of people around the world who would otherwise not have access to this work, or would be forced to do it for free. And finally, they reduce the degree of reliance on the efforts of the original development team, which may in turn reduce regulatory risk for the protocol in certain key contexts.

To give a concrete example, Uniswap token holders control an on-chain treasury worth over $7 billion (vesting over the next four years). These funds can be used to incentivize things like gas optimizations for the underlying protocol, or integrations with other apps, or new front-end interfaces, or even marketing activities designed to boost growth. They could even be used to fund protocol delegates to further decentralize the governance process, as discussed above. We were excited to support the creation of a formal Uniswap grant program last year, and look forward to supporting similar efforts to incentivize community engagement in other protocols as well.

3. Early Adopter Rewards 

Finally, we believe that token distribution models that reward bonafide early users and contributors are likely to create more engaged communities, and therefore more sustainable protocols. These are the types of users and developers who add value before a protocol achieves real network effects, or even has much inherent utility. Examples include the early users and liquidity providers on Uniswap and the early developers who built applications on top of Compound. We believe that these are the types of users who are likely to be the best long-term stewards of the protocol. While any token distribution model must take into account regulatory considerations, we generally believe that efforts to reward these types of early adopters are likely to position a protocol for long-term success, and we look to support them wherever possible. 

Protocols that achieve meaningful decentralization are more likely to gain long-term adoption and sustainability than those that do not. While the potential design space of governance is massive, we remain guided by this basic principle, and support initiatives that we feel embody it. We’ve provided a few such examples here, and look forward to helping identify and develop others that may emerge over time.