Ownership and Governance always needs the right Incentives - Anthony Leuts

Transcript

[Music] Okay, testing, testing. Everybody can hear me at the back. Awesome. Thank you so much. Um, really happy to be here. Thanks to uh obviously the organizers, Duct Tape. They do such a great job. Uh, I often get to go to eat Zurich as well, which is closer to home for me and and get to present. And when Joseph asked me to come, he specifically said that this would be a particularly good event for speaking about governance. And so I thought, okay, I have to take that opportunity and let's get to it. So governance. Um, it's so ironic that I'm talking about a time for a reset. Um, because I just got Vitalic's slidesh this morning from his time in Dublin,

which he said basically the same thing. So thank goodness we're on the right track. Um, so yeah, it's been painful the last few years um, in the governance space. You know, um, Dennis from Tally here also knows that as well. Welcome. Um, you know, um, we've hit some roadblocks. Um, we often hear, "I don't want governance." Um, which is a very strange thing to say because if you're an organization who's making decisions, um, well, you have to have governance unless you're immutable. Uh, and so it's scary when organizations don't want governance, quote unquote, because the best organizations in the world have the best governance. go listen to any podcast, you know, with Lex Friedman, for example, when he's speaking to some

of the top CEOs in the world. Um, you know, he was just recently speaking speaking to the founders of A6Z. And lo and behold, two out of the three hours of the podcast was literally just about governance. Um, and so it's super important. The other thing we sometimes hear is I I don't want to give away control from founders. I I want control. And this has ended up basically meaning that 99% of projects just run off of a multisync. And we see on Twitter these sort of arguments, people, you know, lamenting about this. Um, but there's a reason for that means we haven't done a good enough job of ensuring people have other governance methodologies by which to run their organizations. So let's talk about a few ways that we can fix this. And and

obviously governance is a it's a huge subject matter. I mean, thousands of years of of, you know, human coordination has led to the governance systems that we have today. And so, uh, there is no one-sizefits-all. There's no one silver bullet to fix these things. We just need to chip away at it. And we have a new primitive, which is a blockchain. And so, we can do some wonderful things with that. So, while the crypto industry is shying away from onchain governance, which we're seeing more and more, regulators themselves are beginning to see it as a tool to protect token holders programmatically. And this is interesting that now we're starting to see, you know, individuals in our industry start to cry out for more regulation in order to support this. Um, not something I would have expected a

few years ago. Um, and you can actually see that as well when we look at a lot of tokenized organizations. I know there's a lot going on here on the graph. You can see Bitcoin dominance is growing the last year. You can see that the market cap of altcoins is going down and what's and and that is actually not the the best chart because there are so many projects launching so many tokens that this market cap has been somewhat elevated. But the reality is is if you go click on nearly any project on Coin Gecko or Coin Market Cap, that right hand side is what you're going to see.

probably an average of 90 to 99% down from all-time high. Go click on any project. Seriously. So, it's very clear that token holders and owners are also starting to see valueless tokens and if they don't have voice, what they usually then do is they end up exiting. And this is there's a really great book on this that you should read. Um, and it really talks about how if you don't give voice, you get exit. So, let's be honest, we haven't protected token holders very well in our industry. That's why regulators are coming in. And we've made little headway into creating more effective organizations on the blockchain. So, there's two things I

want to talk a bit about today. One of them is decentralized decision-m versus control and one is about incentive alignment. So I recently wrote a little piece as one does in our Twitter world on decentralized ownership versus decision-m and I think this is a really important thing for organizations to comprehend and understand when they're designing their governance. So decentralization itself um sorry is quite a confusing concept. Everybody thinks they know what it is, right? But actually Miles from A16Z has recently been talking about decentralization

being amorphous. He starts to push towards this decentralized ownership being something we discuss more. Mike friend from the founder of Blockworks recently said I don't even know what decentralized decision-m or leadership is anymore. And recently you probably saw there was a bit of an argument between Polygon base and what is decentralization? Um and host said what makes N2 decentralized? We haven't really, to be honest, figured this out or defined it very well. And there's an absolute key reason for that which I'll discuss in a second. There's different types of decentralization within an organization, right? You can't just say, well, this organization is decentralized. There's decentralized leadership, which can help with growth

or depth within your organization. There's decentralized decisionm this can help with discovery, for example. And there's decentralized ownership or control which can be, you know, safety, security, resiliency. And this last one is particularly what the blockchain enables really, really well. It's not to say that the others aren't important. They are very important. But it's up to each individual organization to decide how decentralized they want to be on that social layer, their leadership and their decision-m. And it's actually very hard to understand what that is, right?

So decentralized leadership or decision-m lives on a spectrum. That's why it's challenging to define how many people are involved, how different are their objectives, how independent are their views, how varied are their experiences. The thing about these is that all of those things are quite subjective and depending on where you stand, the same structure might feel centralized or decentralized. It's like beauty. It lies in the eye of the beholder. So if you have somebody internally who hires five people to help make decisions, they go, "Wow, we're quite decentralized now. We have six people making decisions in this organization." But a token holder or an

investor or whom not on the outside might look in and say, "Well, that's just one team. That's quite centralized." Okay. So what is it? Is it decentralized or centralized? So it depends on whose point of view that is. Once again, very hard to define because it's subjective. So what I think we should be focusing on more and more is something that relates directly to the blockchain which is on ownership. Who has control over what. Unlike decision-m decentralized ownership is less subjective. It doesn't rely on intentions. It doesn't um you know it doesn't rely on vibes. It's on chain.

It's verifiable. Who owns what? What do they control? So this is the direction I think as an industry especially when we talk about organizations where we start to head towards in terms of defining what decentraliz decentralization is what it means and what is important because at the end of the day what's important is resiliency is safety is security particularly in our industry and we can define these much more easily. So, as I said, blockchains enable decentralized ownership and control and smart contracts allow rules to be executed predictably and immutably. And guess what? From a broad stakeholder base. So really, blockchains have opened up this paradigm where for

the first time, we don't have to funnel every decision through one point of execution. We can do that amongst a large group of stakeholders. So, and that to be honest, what was the original vision for Dows? Wasn't supposed to be just a forum discussion, but it's supposed to organizations that minimize the need for enforcement by trusted centralized parties and replace that with code. And that's again not to say that decentralized decision-making or leadership is bad. It's just to say that control is what we can um dictate better with the technology that we have.

So the irony of all of this and where what I was discussing of of like this this world in which we're moving away from decentralized control and ownership in our industry is that three of the most reputable organizations in our space that actually are doing really really well are Lido, a maker are three examples and all of them have decentralized control but more centralized leadership within each lio has quite a large team, but that team itself really drives the Lido ecosystem. However, token holders have absolutely and utterly full control over all parameters, upgrades, etc. of the protocol. Amazing decentralized control with more centralized leadership. A is

the same. Somebody the other day said, "A completely centralized. Mark Zeller makes all the decisions." I said, "Yeah, Mark Zeller makes a lot of decisions over there, and I'm not going to argue with him." But guess what? At the end of the day, those token holders can undlegate from Mark Zeller and Mark Zeller will have zero power. And that's the truth. He actually doesn't own a ton of tokens. So, we therefore have decentralized control in that context because it can be ripped away from him at any time. But we have relatively centralized leadership and that works quite well. And the same goes for Maker.

So, you get the point here. It's ironic that the majority, vast majority of projects are recentralizing when in fact it can be done another way. So these are just three examples. I know you all know them. They're fantastic projects that we should look at more and how they do. So let's let's prescribe something here. Um these are three things that I think can help in this realm. Um I think obviously when we're talking about um minimizing you know governance overhead we're talking about immutability. If we have immutability we don't need to have governance. This is the only time you don't need governance. Okay is when you're immutable and but but but immutability is really tough right like most projects

can't be immutable. Don't most don't want to be immutable right away. There's security risks to that. There's complexity to that. And so um that can't happen all the time. But when we can be immutable, maybe we should. The other is automation and AI. Okay, we're starting to get into this world where AI is becoming um more competent and we can start to add these into um you know our governance flows and automation once again removes the need for human to touch something. It can be set and then it can be automated and thus once again we reduce this burden. And finally, in lie of immutability and automation, we have what we have now, which is decentralization, but focusing on control. And there are three things I'm sort of going to talk about today. One is optimistic governance, one is

separations of power, and one is being privacycentric. And we believe these three things, amongst many others, of course, are going to help onchain organizations be more effective. So, how are we helping at Aragon? Automated voting. We've been working on this and we'll be rolling it out soon primarily focusing on capital allocation. Um it is very hard to do automated voting otherwise because a lot of decisions have to be made. So we need to reduce the parameters or the circumference of those decision of of the decisions that have to be made and how complex they are. So if we can get objective inputs we can then have automated voting. So it's going to be it's going to start really really small and be focused more on capital allocation before attempting to be

expanded. Um, we've created quite a bit of optimistic and modular governance as we call it, trying to allow you to have more decision-making power and separating the control within one organization so that experts can do their job on certain things and still have the right checks and balances um otherwise from it could be token holders for example. And then finally, we've been working with Massie on their on a private voting plugin, which Vitalik just tweeted about yesterday or a couple days ago, which was super super exciting because we've come to the realization that if you don't have private voting, for example, then the social layer starts to come into the game and you start to have problems with

people wanting to vote, uh, alienate themselves, be called out publicly, and we know how the Twitter verse can get in such a small industry. So, these are three things we're working on. So let's take a very quick look at how they look at. So right now most onchain organizations I said either just use a multisync or they have what I call referendum voting and there are some other projects as well as tally who are working on this as well where we are actually separating permissions by proposal type who can govern what. So in this example we have three proposal types. We have let's say the minting of the token. We have protocol upgrades and we have grants. And all three proposal types govern different permissions or things could be assets for example and have different governance flows. Now most of

you are sitting there thinking well that that's pretty normal. Like don't normal businesses do that. The answer is yes. And that's why we're trying to encode this on chain. So here you can say see an example of one of these proposals a protocol upgrade. Here we have three stages and within each stage I'll go to the next slide. We have different members. So in stage one we have a very simple multisig. This multisig can put up a proposal and with our stage proposal processor once that passes it now goes to the next stage and this next stage can have a completely different governing body and in this case it's token holders they are able to veto what

the multi-IG put on chain and then finally we can just simply click a button we can add a time lock so people can exit if they disagree. So now we have three different stages, right? We have different governing bodies within each and they can govern different things. So this is really really exciting. Um and let's skip ahead. So the first example of who is using this as a rollup I believe and it's actually now on mainnet is the Tao DAO. So the Tao DAO for example have opted to use optimistic governance. This is to move more quickly while keeping security a little more centralized at first. So only their multisig security council can put up a proposal and token holders have hard

power to veto. If they don't, it optimistically passes. This means to token holders don't need to vote on everything. They only need to vote on what concerns them, which is ensuring the safety of the protocol itself. So very excited about that launch. I believe it's the first time a rollup is using onchain optimistic governance and very very excited about that. So that was the first sort of conversation here. Um we really need to work on getting more granular uh on how we offer our onchain governance tooling and now we're moving on to incentive alignment which is really important and there's a couple other projects also working on this as well because it's very clear that incentives are not

aligned in our industry. It's unbelievable. I mean from the day a organization is born often they already are offering tokens and are offering equity and the incentive alignment begins to fall apart from day one. So there's a clear dissonance between founders or projects users the mission and even token holders. An example with token value cruel we are trying to create value to the token to send obviously some of the emissions incentives rewards to them but this immediately means that reers are going to token holders versus necessarily going back into growth for

the mission right so we have a little bit of dichotomy there founders and early investors are often don't have the right or the same incentives as new token holders buying tokens they're often used as exit liquidity And users are caught in the middle of all of this. Users are trying to use a product, trying to build their own products and realizing that these projects that they're building on top of are not incentive aligned, probably not going to last that long and thus they're caught without the right tools. So we have a lot of friction within um particularly with onchain organizations.

And one of the reasons also is is that we have a complete mismatch with outregulations and without onchain control. who is protecting those token holders for example, who is protecting the mission for example, who is protecting founders for example. So it becomes this sort of like PVP game you could almost say between each stakeholder within an organization. In the normal world there are regulations to try and you know to try and temper this. In our world the whole plan was to move this on chain and make it extremely clear, transparent um but that sadly hasn't happened. So what does that lead to? it starts to lead to a decrease in voter participation because once again if you have no voice or no credible voice what

do you do you exit you sell your token you leave I'd say the irony is that onchain governance can solve all of this which is uh which is great but the tooling has been lacking so again what are we prescribing so for most projects growth at this stage is one of the most fundamentally important things um There are a few organizations that have also moved to some degree past that um such as Lido for example where you know nearly 30% of stake ETH needs to be secured and so their priorities are a little different but for the most part we're trying to unlock a lot of growth within our governance and so recently we launched this value cruel kit unlocking the growth flywheel and the point is is that users lock their

tokens defining a period and signaling long-term commitment. they then can participate in governance and in exchange they start to receive timew weighted voting power back. So the longer they have signaled or confirmed that they want to participate in this organization in its ecosystem in its governance the more voting power that they're going to get because the longer term aligned they are they then have the ability to um allocate resources which in return can increase ecosystem participation and growth which in return

can mean more usage on a protocol which increases the value of the network and then that value to some degree whatever is defined goes back to the token holders as well. Now obviously there has to be a determination there for more growth from token holders etc. This is the growth flywheel that we've been working on a few projects with. Um, which I'll describe in a minute. And so far, it's looking really, really great because the focus is on long-term incentive alignment. Making tokens actually valuable. If you don't have control with your token, what do you have? Well, at least here you have both control and you start to have value. And both of those things are great and why people would hold on to the token rather

rather than just exiting. So, as I mentioned, we get incentive alignment, value acrruel, and stronger governance infrastructure because of it. And so, here's sort of a comparison on what you're looking at. So, we get more voting power and it's based on amount plus duration. So, this is anti-IBLE, anti-whale. Basically, you are actually given your voting power is equivalent to the weight of your token holding. And so you actually you don't get to you get to distri distribute the amount of funds of the value that you hold. So you aren't being blocked by whales on you know one proposal and you're also not subjected to the whims of um you know the social layer of people complaining on Twitter

or complaining in forums like you get to direct the incentives of how many tokens you hold. Very simple. You're not blocked by whales. You're not blocked by those who may not have any tokens at all. We get better um governance risk or decrease governance risk. Um, we get more incentive design, more value acrruel, and obviously we'd like to keep things modular because let's be honest, we haven't like really in our industry defined everything to be set completely in stone. It's pretty rare and so we want to be able to always ensure that we can upgrade, change, move over time. This is a mistake we made well in the past and we don't want to make that mistake again in the future. So, um, here's just one use case example. We had some great numbers. I

wish I could pull some some of the other projects as well maybe next speech. But after 6 weeks with mode, um 43% of circulating supply had locked or staked. 7,600 unique voters had participated and 31,000 votes were cast. Pretty exceptional numbers in the governance space. And that's because they actually really cared about where they were sending the money. They benefited from it and they were locked in for the long term. So they were actually incentivized to participate and they actually had value that they were holding. So we have some other great projects that are using it as well. We have Puffer, um, Bedrock, Cello, um, just partnered with them. They're doing

a pilot on this as well. And sadly, I can't name a few, but we have a few more big roll-ups that will be using the VE gauge methodology as well, um, which we're super excited about. So lockers, they give participants skin in the game. Gauges let them decide where that skin goes. and the outcome real investment for long-term value generation. But look, at the end of the day, governance is simply the process by which we make and now because we have a blockchain, execute on these decisions. And at the end of the day, we need to assess what are our goals and how do we want to reach them. And then we have to make a governance system that helps us reach it. And not one governance system is going to work for everybody. So, the only advice I can honestly give is be

thoughtful, speak to experts, you know, try and learn, keep things modular, flexible, um, and, you know, try and keep long-term incentive alignment in play. That's it. Thank you so much, everybody. I really appreciate it. Um, you can follow me on Twitter. You can shoot me a DM. Happy to chat after, grab lunch, whatever you want. I know that was a rapid fire, but had a lot of ideas. Wonderful, wonderful presentation, Anthony. We have about five minutes for a quick Q&A. If anyone has any questions, feel free. Dennis, go ahead. Yeah, so I got a chance to see Oh, hey. Um, hi Dennis from Tally. Uh, I got a chance also to see Vitalik's slide just the other day from East Dublin and it was pretty interesting. One of the

things that sort of stood out for me, I I think some of the lessons that, you know, we have taken away at Tally is that many things actually end up being handled by market dynamics, which is a little bit disappointing, right? like people vote with their feet. If they don't like something they they leave and we see that a lot and Vitalik was talking about, you know, how we can use more automation, how we have more decentralization, etc., etc. U one of the questions I've posed to him and I'd like to pose to you is what do we actually need the Dows for that actually free market dynamics can't handle on their own?

Yeah, it's a great question. Um, sometimes I think free market dynam I mean free market market dynamics are great but they can lead us often short term into paths that we can't pull ourselves sometimes out of which I feel like is where we're at now with the governance particularly the control space the free market can move so quickly that we're unable to pull ourselves out and I feel like that is exactly what's happening right now and that's why regulations probably accelerating ing so quickly is because we've gone so deep. Um, you can see some correction happening. There's no question like you can like I showed that sort of slide earlier where it's like yeah like BTC dominance is on the rise.

Why? It's simple. You know it can't really rug you. you know, um, ETH was catering. Um, and it was so interesting. Somebody recently said to me, had ETH had ETH holders had slightly more voice, potentially you wouldn't have seen so much exit, which is a really interesting thought that I personally have not thought about. And so, the market, however, has ETH since the Ethereum Foundation has sort of to some degree changed their their tone a little bit. If you've noticed, has outperformed other assets. So, I do think that the market, you know, can correct itself over time, but sometimes that can have a huge consequence that is super um long-lasting and maybe you can't pull yourself out of. So, I wonder if if trying to get in front of that sometimes

is still a wise decision or not. But a really good question. Thank you for a great talk. Um I spent the last four four years in different governance forums and closely involved with governance. So it's great that you're talking about you know incentive alignment and how it can be done. I think that many different ecosystems onchain ecosystems and protocols and dials were initially interested in governance because of regulations and the premise of sufficient decentralization and so there was this whole decentralization theatrics which they were doing in order to essentially insulate and protect themselves. Yeah.

And I I do think that's one of the biggest downsides now. But I do believe that the very same regulations will be the reason that governance comes back because I think now there seems to be sort of consensus around it is a reasonable way to go about it to have a sufficient threshold for sufficient decentralization and governance is one of the means and ways to do it. But I was curious about your opinion those that truly are and uphold these values such as you know let's say arbitum um how do you couple governance with efficiency and ensuring that you don't have too much bureaucracy and too much hurdle but that you're still in that nent stage where you're

able to move fast and break things. So what's the optimal design in your eyes to have all of these things aligned but also not becoming too bureaucratic and making it difficult for people to be heard? Yeah, really great question. I firstly I I totally agree with what you're talking about regulatory wise. I mean it seems like it's heading in a direction where it could be quite sensible regulations where decentralized ownership and control is like a hard requirement and because it's uh you know because it's objective that it could be defined more easily as a requirement. It's really sad that we have to potentially rely on regulations to kick our industry in the butt to get back into protecting token holders. It's another topic I guess to discuss. A bit sad to be honest, but it seems quite

positive. Um, so to your question though, um, yes. So I wish I could go back in my slides, but I particularly wanted to focus on what we call governance modularity. I know that's just a strange term, but in short, it's through two things. to try and be you know still be to be effective to mean to move quickly but still have the right checks and balances in place in my opinion requires separations of power number one uh and two I like the optimistic governance setup my personal opinion on the matter I think most token holders don't want to vote on on everything and anything I think most token holders want to put great people in you know positions of leadership or

power to run fast and hard and then those but with the right checks and balances and that's where optimistic governance can do that. You have you know a team is given funding they can make these decisions it goes on chain it will automatically pass to move x amount of funds or to upgrade the code but guess what those token holders can veto that you know that upgrade or that that money being moved if they find it to be malicious or something like that. I think that can balance it quite well. I think separations of power is another something that's completely doesn't exist in our industry right now which I think is super important and this basically means that you don't have one governing body over one entire organization meaning all token holders

vote on all decisions and then maybe you have at a multisig that can say yes or no or vice versa. What you have is you have okay for protocol upgrades this is the design this is the flow it's going to only have a security council and guess that security council is technically savvy or focused right that's that's what they do um and then your next proposal type is about let's say capital allocation right guess what that should be a different team uh than the one that's doing protocol upgrades tell me how many people in our industry are an expert at you know um writing code upgrade you know putting an upgrade to a protocol and then also as an an expert at capital allocation. Absolute nonsense, right? And so maybe there's a

bit of overlap to ensure that you know they work well together. Um but at the end of the day that would be a different team. It would have a different governance methodology. Maybe there is no veto. Maybe there's two multisigs. One has to put forward a proposal and one has to accept it to execute it. Right? So we now have the ability to do this no code out of the box plug and play and not have everybody do one you know style of governance on every decision. So uh that's how I think we can manage to to do both at the same time. Awesome. Thanks. No worries. Thank you for the great question. Thank you.

Thank you so much for uh the wonderful topic and that's about it. Great. Thank you everybody. I really appreciate it.