Proposal to change Governance Process

Hello fellow citizens,

in light of the recent snapshot vote for/against voting delegation I´d like to start a discussion about governance structure and incentives that will result in a proposal to vote on.

I´ll first outline my thoughts about some pain points, propose a solution and try to ask the right questions in the end so we can have a fruitful discussion.

Note

First of all, let me clarify that the mentioned pain points are somewhat weaker in XIO because this community is crazy when it comes to involvement. However, when XIO and its creations one day hopefully become super successful, many of us here will either exit or at least sell a reasonable portion to secure profits. This brings in new people who are not necessarily as familiar nor as involved with the project(s) as we are now. The consistency of the community will inevitably change with success and our DAO should be expected to behave similarly to other DAOs – with a substantial amount of apathy.

So please take this discussion as a forward-looking measure to make things right in the first place instead of having to fix them later.


Pain Point 1: Voting participation

When you look at more mature DAOs like SUSHI, UNI or AAVE the voting participation is in the ballpark of 1-15% of circulating supply, with SUSHI being the great exception, having 10%+ participation on a fairly consistent basis. The other´s are more in the 1-3% area.

Even smaller DAOs like BZRX, which recently had a very important vote about buying out their extensions on other chains only come up to 3% voting participation. PERP which is another 1b USD market cap DAO messes around in the 0.1% to 3% participation area.

All of these DAOs have one thing in common: they have multiples and multiples of XIO´s market cap and therefore many more investors that are purely focused on the investment thesis. They also have in common that they have working products that generate cash flows for the token holders. This obviously attracts holders with the investor mindset. They trust the team – which makes sense of course – but oddly enough, they are less interested in the nitty gritty details of governance. The numbers don’t lie…

XIO – without any wildly successful working product – has a voting participation of around 30%. That´s 10x of the participation in a normal, successful DAO.

In other words, when we become successful it is very likely that voting participation will drop like a rock because the token holder community changes.

Another reason for overall low voting participation is what I experience myself: the lack of structure. If you invest in more than a handful of DAOs but you are not a fulltime investor, you simply miss a discussion and vote every now and then. This is especially frustrating and dangerous to the DAO if these decisions have short deadlines, are under communicated and cause big impact on the project. As long as the voting process can be started out of the blue, this problem persists and leads to further decreased participation.


Pain Point 2: Power structure

In the early days, when the community is not too big so discussions feel like between partners of a big start-up team, the participation is high and individuals have a sense of influence. Not only that but because the market cap is low, they are likely to factually hold quite some power through voting.

In a successful project, this changes down the road because of the diluting effect of new investors. Since the team usually is the most die-hard group of bag holders, they hold the most concentrated influence over time. This is often not a problem, when the team is aligned with the interest of the other token holders but it can actually be a problem when there are conflicts of interest. This just happened with the mentioned buyout of BZRX´s extensions, where a vote was pushed through without announcement and full “3 days of discussion”. In the XIO context – although I hope it will never happen – similar conflicts of interest could occur when it comes to development of individual projects, like Flash V2 vs V3, Aqua etc. So we have to seriously account for changes in motivation of the team or simply changes in personnel.

In my opinion, token holders have the right to vote but also the obligation to not harm the project. Now, let´s say there is the option to delegate votes and most of the “lazy investor type” of holders just delegate their vote to someone they either superficially associate with the team or they simply are not up to date with who represents what type of opinion (like political camps), how can they make a rational decision on where to delegate? If I was in this situation, I would probably just delegate to the address with the most or second most votes because I would assume they have the highest vested interest.

But this is so wrong. Not only can this largest holder be an outside investor that maybe wants to harm the protocol in order to gain disproportionally from his other (competing) investments, which is not uncommon in traditional finance. But there can also be a host of other reasons why this particular holder may not have the best interest of the project at heart – even down to personal reasons or interest in market manipulation (first make bad decisions for token holders, crash price, buy cheap, turn 180 with the next proposal and sell high).

Vote delegation inevitably leads to a concentration of power, which is the antithesis of decentralized networks and decentralized finance. This is why I voted against it and I´m happy to see others join.


Solution

How to prepare for a successful DAO structure with effective voting and high participation?

I think pain point 2 can only be “solved” by reinforcing the awareness of token holders about their responsibility for their investment. This means encouraging participation and not enabling vote delegation.

My solution for pain point 1 is twofold:

Fixed, regular voting schedule

Let´s assume I´m a responsible investor but want to be more laid back by not actively participating in forum discussions. If I knew that 3 months from now on Sunday there will be a slot for major project-determining governance decisions, I could mark that date red in my calendar and check a week early to see if there is any topic coming up that I need to inform myself about. For example by reading a discussion thread of the proposal that is coming up, so that I can make an informed decision.

Right now, it´s a total blackbox. Any day, a potentially very important topic can come up and be put to vote without me noticing.

My clearly defined proposal to tackle this problem is to create regular intervals of votes with different classification of importance. For example:

  • Profound, direction changing decisions like starting a new token and allocation a budget (Flash V3 would fit this category): every 3 months
  • Important decisions like adding / removing features that don´t fundamentally change the respective project, larger marketing campaigns: monthly
  • Minor decisions like grants or marketing actions to a certain $ value, partnerships or some front-end gimmicks: weekly

If there is no proposal for a certain category active, that´s fine and no vote is necessary. But if there is one, everyone knows when the voting starts.

The advantage of such a system is not only a reliable rhythm of governance processes but it also allows investors to select on which level of operations they want to participate.

Now you might ask, why look at anything else than quarterly or maybe monthly votes?

This leads me to the second part of the solution which is:

Voting incentives

Kyber network pioneered this concept by fixing cashflow from the token to your weekly governance voting activity. We should think about ways to financially incentivize our citizens in the future to participate in voting, just like we successfully do with the mental mining program.

I don´t want to discuss the details of such a system here but stay on the high level and argue that we need some sort of incentive. This engages more users on the lower levels of importance and hopefully leads to better results (swarm intelligence).


But what happens if there is a pressing issue (probably important) that needs to changed ASAP, but the regular voting date is still 7 weeks out or so?

Except for bug fixes – which don´t need a governance vote, correct? – I can only see this happening rarely. However, we can still cater for that by making a spontaneous vote like nowadays but with the hardcoded condition that the contract changes back to it´s original state if there is no confirmation by the DAO within 3 months. Or in case it´s a completely new contract, it self-destructs without confirmation. This way, the DAO keeps the last word but there is more flexibility in the short term if need be.


Questions

Now, my questions to this wonderful community:

  • Do you agree or disagree that there is need to adjust the governance process at all? Why / why not?
  • What is your critical reflection on pain point 1 and the solution? Do you have other ideas?
  • What is your critical reflection on pain point 2 and the solution? Do you have other ideas?
  • What do you think about the conflict between flexibility and plannability of the governance process? Do you have other solutions?
  • Anything else you want to add?

I´m thrilled to see how we as a community can tackle this problem, which is one of the most profound and unpopular problems in whole crypto.

Cheers!

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I only had the option to post it here or in the archive… a moderator please move it to the appropriate place. Thanks :slight_smile:

Hey @DeFiChad , I moved this discussion to #general-discussion .
Thank you for starting this important topic.

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