Polkadot founder Gavin Wood: Treasury conservatism has deviated from its original intention and should explore more effective funding deployment mechanisms like Fellowship

Original Interview: Gavin Wood - Is Polkadot's OpenGov Democratic?

Translation: PolkaWorld

Compilation: OneBlock Community

Polkadot founder Dr. Gavin Wood recently gave an interview to The Kusamarian, sharing his past experiences, views on governance, and discussing topics such as AI, Ethereum, witch attacks, and treasury.

One

Key Points

• Discussing whether a system is more "democratic" is more meaningful; democracy does not solely depend on voting systems.

• Treasury funds are more prone to misuse or deviation from goals compared to VC.

• An on-chain reputation system can supervise and constrain individual behavior.

• Legitimacy is a virtue of governance, but collective identity is more important.

• Treasury conservatism deviates from the original purpose; multiple Fellowships and other mechanisms can be established for effective fund allocation.

• Polkadot should take financial responsibility and diversify its asset portfolio to reduce the inherent volatility of cryptocurrencies.

• Driving well-designed, rule-based systems is what maintains my passion.

On Democracy

Regarding what democracy is, this is a conversation I had with Aron many years ago. There is a funny line in the British comedy "The Office," which I highly recommend, that goes: "Can't I just have everything I want? Isn't that democracy?" If you want an idealized version of democracy, that would be the Athenian democracy of ancient Greece. This is the original source of the word "democracy," referring to the governance of the people of a specific city in ancient Greece. At that time, those who could vote were specified and did not include slaves and women; only men of a certain age could vote. But this was a sufficiently broad group, numbering in the thousands, which made it meaningful, so it has a name different from other forms of governance such as autocracy, imperialism, or aristocracy ------ democracy.

Now saying "X is democratic" is not very meaningful unless we specifically refer to something like Athenian-style "one person, one vote" democracy. Even applying this concept to modern times, its applicability is still questionable. Because we generally expect every person's vote to be counted equally, and everyone should be able to vote, perhaps excluding three-year-olds, but maybe three-year-olds should be given the right to vote. So, we can discuss the degree of democratic systems ------ whether a system is more "democratic." We can imagine a system with proportional representation, universal suffrage, and high voter turnout, and there might even be mechanisms to pay people to vote; such a system might be considered more democratic. In contrast, a system with only two parties, where election results are hardly influenced by voters in most areas, might be considered less democratic, although it is still a form of democracy, just not particularly democratic.

So I think democracy is the rule of the people, a good criterion is to see whether the rule is in the hands of the people. But this is an entire field of political philosophy, and I know too little to provide a well-considered opinion. The only thing I want to say is that there is no universally accepted understanding of the term democracy; the best I can do is to say that a system is more democratic if any given individual's influence on the system is roughly the same as that of any other individual. Of course, this is a rather theoretical and abstract definition. It is not easy to understand the degree of democracy of any specific system. We need to analyze the influence of each individual within the system.

Here’s an interesting point: democracy does not solely depend on voting systems. While voting systems play an important role in democracy, they are not limited to that. I mentioned before that we can imagine a fully democratic system that does not even require a voting system. This is the "one dictator a day" concept, where a citizen is randomly chosen to be the dictator each day. By my definition, this is a fully democratic system because everyone has the same influence on the system, and everyone has the same chance of becoming the dictator. We could even say that randomly selecting someone to be a dictator for ten years, as long as the choice is random, is also a perfect democratic system before that person is chosen, because everyone has an equal chance to influence.

In this case, there is no other way to reason except through probability, as it is a probabilistic outcome. Who becomes the dictator and who influences any particular decision is determined randomly. So what is the probability? If I am one in a million, then I have a one in a million chance; this is the definition of a fully democratic system, meaning I have the same one in a million chance as everyone else to decide something.

Treasury Funds Are More Prone to Misuse or Deviation from Goals Compared to VC

In recent weeks and months, a segment of holders in the community has become increasingly frustrated because they feel they have little influence in the system and are dissatisfied with the lack of democracy. Currently, there are four active voting groups on Polkadot. The first is a role called 16DG, which holds about 30 million voting rights. Recently, they have actually done a lot of transparent work in some subfields of the community, organizing systems and creating competition. There is another group called ChaosDAO, which is a reputation-based system where you enter based on reputation, and then decisions are made on a one-person, one-vote basis. IVY seems strong; it appears to be a one-person, one-vote system, but you must represent others, and if you represent more, you essentially have the final say, but you will listen to everyone's opinions. The last type of voting group only focuses on proposals for system upgrades and shows no interest in other types of proposals.

In this regard, Gavin believes that these phenomena indicate that OpenGov is fulfilling its role in promoting the development of new systems and mechanisms. If you see that the underlying design of a system is unexpected by people but found to be useful, that is usually a good sign. I have voted on some things, but I typically do not participate in voting because it may have too much influence on things, undoubtedly introducing bias. But I have opinions on many matters, and occasionally I may leverage my influence. I do not want to mention the names of those I voted for here, but I will share my general thoughts.

I have observed a tendency in the community to compare treasury funds with VC and use these funds in a manner similar to VC. The nature of community funds is different from VC funds, especially in terms of ownership. I think this comparison is unreasonable for several reasons. First, VCs conduct extensive due diligence; if a VC performs poorly in a large investment, their reputation is damaged, not that of the recipient of the funds. Second, VCs are legally protected and do not misuse funds. This creates a fiduciary responsibility for the recipients of the funds, which does not exist with treasury funds. Third, VCs typically do not provide all funds at once; they have legal means to exit contracts, which is clearly not how Polkadot treasury funds are provided, as recipients want to ensure they receive fiat currency as expected, not just cryptocurrency.

For me, the legal situation is a key and often overlooked aspect. That is why Polkadot treasury funds should be divided into smaller amounts for final expenditure, but when funds are managed by broader, less tightly-knit representative groups (like a Fellowship), they can be managed in larger amounts in principle.

So, these teams should not seek funds from the treasury. Especially those with large funding proposals but without ensuring that the funds will be used for their intended purposes, or where the things built may ultimately be used for purposes outside of Polkadot, or may be combined with some profit mechanism that disproportionately benefits them.

In venture capital, if a team decides to shut down a company and start a new project with the same team, this is usually illegal. This is because investors invest not just in the product but in the team. If that team decides to pivot to another project, then under corporate law, they must protect the interests of the investors. In a sense, this is similar to you now "marrying" me; you cannot just divorce at will. I have invested in this marriage, and I expect a return on my investment. Therefore, in a sense, as an investor, as a shareholder, you have considerable protection. So, compared to VC, the distribution of treasury funds lacks sufficient legal protection and constraints, making it prone to misuse or use for projects that deviate from the original purpose.

On-Chain Reputation System: Individual Supervision and Constraint in a Decentralized Society

This protection does not exist in the treasury unless we enforce some comprehensive rules that people permanently agree to. Just like whatever agreement I sign here, such as token swaps or others, I agree to be bound by these broader rules, just like social laws; if I violate them, I will face greater consequences. For example, if someone wants to obtain funds from the treasury, they may need to first stake a certain amount of funds (like $10,000) as a guarantee. If they violate the rules, they will lose this deposit. But this is not very effective because most people cannot afford a $10,000 deposit, and moreover, if participants know they might violate the rules and thus lose their deposit, they might try to raise more funds to compensate for this potential loss. For instance, if they anticipate losing a $10,000 deposit, they might try to raise about $20,000, with half of the funds viewed as covering the cost of the deposit they expect to violate.

So what you actually need is a civil resistance system. This is essentially what the legal system and society provide for us, similar to the mechanisms of social credit systems. In this system, everyone is initially assigned a certain amount of social credit or reputation. As long as they do not engage in actions that violate important long-term social rules, their social credit remains unchanged. However, if they engage in actions that damage their credit, such as declaring bankruptcy after using funds and then starting a new venture with more funds, they will lose social credit. Once social credit is lost, the likelihood of them obtaining funds again will significantly decrease because people know they have had bad behavior in the past. Therefore, some degree of "civil resistance" or long-term reputation system, known as a social credit system, is needed to maintain this supervision and constraint on individual behavior.

This is a reputation system, but it is a reputation system managed on-chain; more importantly, it is a civil resistance system. The role of this system is that if you want to start a new project, it can help you not to disclose your true identity while still indicating that you have never disappointed investors before. Typically, when an investor invests in a team, understanding the team rather than the project is key. This is actually an important part of what investors are buying. If a product is deemed unsuitable, but the team wants to build another similar product, then the investment should be transferred in some form to this new product because it is still the same team.

When fundraising in a decentralized system, merely stating "I am an individual" is not enough. If the basis for raising funds is people's trust and investment in you as an individual, then this trust relationship needs to be explicitly encoded or recorded in some way. This is because decentralized funding distribution systems like treasuries need to be able to clearly identify individuals and recognize them again when these individuals seek funds in different ways later on.

Furthermore, when allocating funds to individuals, there needs to be a mechanism to ensure that the same person does not repeatedly receive funds. Additionally, to ensure the effective use and distribution of funds in a decentralized environment, a "civil resistance" or social credit system is needed. Such a system can help establish long-term credibility records among different individuals, ensuring that funds are not repeatedly or improperly used. This system can supervise and manage participants in decentralized systems on a human level, not just on a technical level.

The Beauty of Governance: The Subtle Balance Between Legitimacy and Collective Identity

I think we must understand what our goals for governance are. Because I see two competing goals: one is inclusivity, and the other is the degree of benefit to individuals. You can think of governance as inputs and outputs; inputs might be what people say, people's actions, people's votes, how their opinions are counted; outputs are the collective decisions made based on these inputs, such as what the collective does, how treasury funds are spent, which upgrades are approved, what groups can be formed, who is ranked, who is not ranked, what events occur, and so on.

Some believe that the essence of governance is not to make good decisions but to ensure the legitimacy of decisions. If a bad decision has clear legitimacy, it is better than a good decision that lacks clear legitimacy. I think this is nonsense, but I accept that it is a viewpoint. I do believe that legitimacy is a virtue of governance systems, but not because of itself, but because it maintains the belief of people within the collective. If a collective has no members, then it is meaningless.

So we must look at why members stay in a collective. The two reasons they stay are economic interest, but economic interest is very short-term and can be very volatile; if people do not see economic benefits over a period, not everyone can focus on the long term; they may shift to another collective, feeling disappointed and thinking it's enough to go to a better place. If an organization or system cannot continuously provide economic benefits according to members' expectations, then relying solely on economic incentives is unreliable.

The second thing people seek in a collective is whether they identify with that collective. How does a person identify with a collective? They feel fairly represented and believe that the decisions made by the collective are legitimate. They may seek legitimacy within the collective, or say that a collective that appears illegitimate may not gain their identification. People want to operate under fair rules, even if it is against their interests. If a decision benefits people, as long as they are rational actors, they usually do not care about the legitimacy of that decision. But if a decision does not benefit them and also appears illegitimate, then they may not continue to support or stay in that system.

I would say that legitimacy is a consideration, but I would not say it is the primary consideration. I still believe the primary consideration is making good decisions. If a governance system can make good decisions, then it does not necessarily have to be legitimate. I use the term legitimacy here very specifically because legitimacy actually refers to meeting members' expectations based on how the system operates and makes decisions. Different members may have different expectations; some may feel that the system operates illegitimately, even if it is actually operating completely according to its rules. This is a concept that is difficult to define clearly.

Note: In Gavin Wood's discussion, "the legitimacy of decisions" refers to the effectiveness and acceptance of the decision-making process. Legitimacy is not just about following rules and procedures; it involves whether the decision-making process can gain broad recognition and support from the community or participants. This means that a decision, even if it may not be the best choice, is considered legitimate if it is derived from a process perceived as fair and transparent.

Treasury Conservatism Is Unadvisable; Establish Multiple Fellowships for Effective Fund Allocation

In the past few weeks, an interesting situation occurred in Kusama, where a very opaque voting group, referred to by some as a chaotic entity, holds about 320,000 to 350,000 voting rights. They seem to vote randomly, often in opposition to others, and can be seen as an opposition group. Recently, they nearly funded an ecosystem agent with the aim of bringing the treasury balance to zero.

In this regard, Gavin stated that the launch of Kusama was to help test what Polkadot would use, which could not be tested on the testnet due to a lack of economic incentives. In this respect, I think it has done well; it is an interesting leading indicator showing what might happen on Polkadot. I believe there are people in the Kusama community who care about prices, token values, and treasury expenditures, which is a good thing. I do not necessarily agree with their views, but I think it is beneficial that Kusama can bring these issues to light, as it helps understand the socio-economic environment in which Polkadot operates. It is another data point on the map, and having as many data points as possible is important.

Honestly, in my view, the treasury is meant to be spent. Markets are strange things; they operate in strange ways. I have seen some opinions on why the community does not want to see treasury funds distributed to teams that primarily have fiat expenditures. I understand these, but in my view, Kusama or the Kusama treasury may not have effectively completed its work as I would hope because it has retained funds without spending them. My thought is that treasury funds should be spent as soon as they come in. There may be some fluctuations, but there should not be a large surplus. If there is a surplus, it should primarily be used as a sovereign wealth fund, such as purchasing other tokens, investing in centralized exchanges, or providing loans to teams. But the current situation is that we are almost unconsciously heading towards treasury conservatism, as if the funds in the treasury should never be spent. This was not the original purpose.

I do not think having a large treasury is a bad thing; it means we have a lot of funds to support many cool projects. But it should be clearly understood that the treasury is meant to pay for things; the less the funds in the treasury are used, the more harmful it becomes. The worst way might be to burn it, as this has almost no impact on the Kusama ecosystem and will not immediately affect individuals within Kusama; I find it hard to imagine what direct benefits this would bring to them. Although burning funds in the treasury might just be an instinctive reaction, at least it is a way to utilize those funds, even if that way might not be the best choice. Burning funds illustrates an economic argument that the funds in the treasury do not directly increase market supply, which may reduce the likelihood of inflation.

If we only have two choices: to let the funds remain permanently in the treasury or to burn the funds to reduce inflation in the market, I would choose the latter. But that is not the only choice; we can allocate these funds in other ways. We should explore better ways to use funds and more effective mechanisms for deploying funds, which may require better governance structures. For example, multiple Fellowships could be established, each responsible for managing and allocating specific categories of funds. A "sovereign wealth fund" could even be created, which would use part of the treasury funds to purchase other tokens or assets on decentralized exchanges to diversify the treasury's asset portfolio.

Polkadot's Financial Strategy: Diversifying Asset Portfolio to Mitigate Volatility

The idea of bringing DOT into Kusama comes from the Web3 Foundation, so it depends on how the Web3 Foundation implements this. I believe the initial proposal was that one percent of DOT, or ten million DOT, would be used to incentivize participation in the Kusama community. The most basic approach might be to hand it over to the Kusama treasury. This would be a crazy move. The Polkadot-Kusama bridge is coming soon.

I believe that as a responsible decentralized autonomous organization (DAO), Polkadot should take financial responsibility and diversify its asset portfolio to reduce the inherent volatility of cryptocurrencies. Some may argue: as part of Polkadot, why hold anything other than DOT, since it believes in itself? This is certainly an absurd statement. Holding only DOT tokens is not a reasonable asset management strategy. As a rational organization, Polkadot should consider holding different types of assets, such as gold, fiat currency, other cryptocurrencies, NFTs, commodities, land, or even buildings or companies. Doing so can help the organization protect itself from market fluctuations and establish a long-term well-functioning organization.

I think in terms of fellowships, we are moving towards a significant trend, especially in its attempt as a decentralized entity to acquire non-native tokens from the platform. This will help manage volatility. We will see how this develops, but I think this is something that must happen.

I talked about these things back in 2017, 2018, and 2019, so I am quite excited to see how it works out. Especially considering the treasuries of Polkadot and Kusama, we are funding projects that require fiat payments, so it makes a lot of sense to have fiat in advance and manage them like real assets. Of course, the question is how to manage these assets. If management is too public, it may lead to market manipulation and other issues. Some clever methods may be needed to manage these large amounts of capital in the long term, but in the short term, using tools like HydraDX should be sufficient.

My Passion Lies in Driving Well-Designed Systems

When it comes to visions for the future world and how contributions from this technology can affect that world, Gavin responded that he hopes, first of all, we still have a world. Ideally, it is a peaceful and just world. I think this largely drives me. I believe that centers of power can be sources of injustice, especially when power is arbitrary; injustice seems to be lurking nearby. Therefore, creating rule-based and transparent power systems ------ this is exactly what blockchain is doing ------ is an effective systematic approach to reducing injustice in the world. By limiting arbitrary power, blockchain can govern vast amounts of wealth and power, thereby reducing injustice to some extent.

Another point is that I feel I have made quite a good contribution to designing the rules of these systems. Even in a society that follows rules, if the rules are poorly designed, it may not operate well and could even lead to injustice. Ultimately, rules need to be simple enough for people to think about them and reason from first principles, ensuring that the rules are indeed followed by those parts of society that should adhere to them (such as civil servants, politicians, or possibly machines that might take over their jobs). Well-designed, rule-based systems will become a very critical part of civilization, and as these systems become more complex, this will become even more important. Therefore, the drive for well-designed, rule-based systems is what maintains my passion.