a16z Partner: A Brief Discussion on Cryptocurrency Protocol Governance

This article was published on Golden Finance, authored by A16z

Cryptocurrency protocols should be managed by decentralized communities composed of token holders. This is not because this method is more efficient, or for more significant ideological reasons, but rather for the realization of core values: the underlying protocol will continue to operate as originally designed, remaining open to those who wish to use it or innovate upon it, while the original rules can largely remain unchanged.

BTC is the initial embodiment of these concepts and the first large-scale internet-native currency. However, these very important concepts also apply to other types of open financial primitives, such as lending and trading. While specific applications may differ, the need for decentralized governance remains the same.

For cryptocurrency startups, transitioning to community governance involves a complex process that presents challenges in many areas, such as current development progress, voter participation, and the incentive balance among stakeholders. But these are necessary, as through this process, the protocol can evolve beyond its initial version and provide lasting value as an open financial infrastructure.

A16z is also committed to various forms of community governance, and the following will elaborate on A16z's views on cryptocurrency protocol governance, as well as introduce the role A16z will play in governance in the future.

In simple terms, regarding governance, A 16 z's main goal is to create the necessary conditions for the protocol, allowing it to be applied long-term and achieve self-development . The universal principle of governance is to achieve decentralization. We believe that in certain key aspects, such as voting rights, development progress, and economic benefits, if the protocol achieves further decentralization, it is more likely to reach the above two ultimate goals compared to protocols that cannot do so. Therefore, in terms of governance work, A16z focuses on promoting decentralization in these key areas. We believe this is the most effective way to participate in governance and is more likely than any other method to ensure the long-term sustainability of the underlying protocol.

The following examples illustrate how to achieve further decentralization in these areas.

1. Delegated Voting

Over the past year or so, various well-known cryptocurrency applications have made significant innovations in token-based governance models. Delegated voting is one of the most significant upcoming innovations, allowing token holders to transfer their voting rights to others, enabling these representatives to participate more actively in governance.

We strongly support this approach and see it as an important tool, as it can provide diverse governance opinions, reduce the centralization of network voting rights, and increase overall community participation. This is why A16z is committed to delegating a significant portion of voting rights to numerous qualified governors in cryptocurrency networks like Compound and Uniswap.

Given the impact of this decision, we take the selection process very seriously. The chosen governors must not only provide diverse governance opinions but also meet other key criteria. These criteria include:

Recognition: Are they recognized for their success with the protocol, and will they cause potential conflicts?

Loyalty: Are they committed to maintaining the long-term healthy sustainability of the protocol, or are they short-sighted?

Independence: Are they completely independent of A16z and distanced from it, allowing them to vote freely to maximize the protocol's interests?

Expertise: Do they possess sufficient expertise, or are they still learning the core aspects of the protocol?

Regulatory Capability: Are they capable of effectively representing the protocol in governance to achieve fundamental goals?

For governors who meet the above criteria, we grant them substantial voting rights and ensure that these governors can participate freely in governance.

So far, early selected governors include student-run organizations such as the Stanford Blockchain Club, Harvard Law School Blockchain and Fintech Initiative, UCLA, and Berkeley Blockchain Club, which are passionate about crypto technology and represent the next generation of crypto technology leaders. Governors also include existing cryptocurrency companies like Argent and Dharma, which have extensive experience in innovation based on the underlying protocol and community participation. Other governors include industry experts like Gauntlet, who are also protocol governance specialists capable of significantly advancing this area. These are just the early selected governors, and we look forward to a more diverse selection of governors in the future. If you meet the above criteria, please let A16z know!

2. Protocol Reward Programs

Today, many protocols have substantial on-chain assets. These funds are a powerful tool that can be used to finance the ongoing development of the community, allowing the protocol to achieve long-term sustainability.

A16z strongly supports governance proposals such as reward programs, through which funds are utilized effectively to achieve strategic goals, benefiting the protocol for the following reasons: First, the protocol can access a large pool of third-party development talent and resources from around the world, something no single company or development team can achieve. Second, this can create substantial income for talent worldwide; without this program, they would lack job opportunities or be forced to work for free. Finally, this program reduces reliance on the original development team, thereby potentially decreasing regulatory risks for the protocol in certain aspects.

For example, Uniswap's token holders control on-chain assets valued at over $7 billion, which will be gradually released over the next four years. These funds can be used to incentivize gas fee optimization for the underlying protocol, promote integration with other applications, update the front-end interface, and even launch marketing campaigns to foster protocol development. Furthermore, these funds can also provide incentives for delegated voting, further achieving the decentralization of governance mentioned above. Last year, A16z supported the establishment of a formal Uniswap reward program and looks forward to supporting similar programs to enhance community participation in other protocols.

3. Rewards for Early Protocol Adopters

Finally, A16z believes that early users and contributors to the protocol, after receiving rewards from the token circulation model, are more likely to drive community participation and enable the protocol to achieve sustainable development. These users and developers contribute value to the protocol, creating network effects, and they themselves can play many roles. Early users and liquidity providers on Uniswap, as well as early developers building other applications on Compound, fall into this category. A16z believes that this type of user may be the best long-term managers of the protocol. While any token circulation model must consider regulatory aspects, generally speaking, when early users of these protocols are rewarded, the protocol is more likely to achieve long-term success. A16z hopes to support them whenever possible.