Blockchain-based governance systems often fall short of their ideals. While blockchain technology promises to transform the world, many current governance models rely on pseudo-decentralized token voting, where insiders and large holders (whales) dominate decisions.
However, the design of governance systems is still in its early stages. Market downturns provide an excellent opportunity for experimentation, as thinkers and innovators work on creating the next wave of solutions.
A solid starting point for governance design is establishing clear principles to guide the creation of durable, decentralized systems. At Ekonomia, we adhere to the following key principles:
- Strive for permissionless access, deterministic outcomes, and full transparency.
- Ensure voting power remains decentralized throughout the protocol’s lifecycle.
- Grant voting rights to all protocol users (i.e., those with "skin in the game").
- Incentivize and reward long-term participation.
These principles help distinguish DAOs from traditional companies, suggesting they should be regulated differently.
We have developed eight new governance concepts that align with these principles. Some are works in progress—this article aims to share these ideas, gather feedback, and collaborate on improvements.
The Urgency of Legitimate DAOs
Designing better governance systems is critical now, as regulators increasingly scrutinize crypto protocols, as seen recently with Ooki DAO and LBRY. While many in the crypto community believe agencies like the CFTC and SEC overstepped their authority, the reality is that many on-chain entities masquerade as DAOs while operating like centralized companies. We must do better.
Gabriel Shapiro, General Counsel at Delphi Labs, has outlined how to create DAOs that meet legal standards for decentralization. Key insights include:
- Splitting DAOs into subDAOs that vote on specific protocol parameters.
- Combining subDAOs into an uberDAO for decisions affecting the entire ecosystem.
- Requiring active participation in protocol management.
- Funding the protocol itself rather than the founding team—early users deposit liquidity or pay fees to earn protocol tokens, not through pre-sales to investors.
Gabriel’s ideas emphasize that DAO tokens should control code, not people. Voting should not legally bind individuals to perform tasks, as that resembles corporate contracts and increases the risk of tokens being classified as securities.
DAO protocols should primarily provide autonomous digital infrastructure—smart contract systems adjustable via on-chain voting. Secondarily, they should facilitate loose off-chain consensus on non-binding matters through forums or social media.
These perspectives inspired the following governance concepts.
New Governance Concepts
As a technologist, I approach governance from a DeFi protocol perspective. These concepts all adhere to the four principles outlined earlier and often overlap, potentially combining into a fully interoperable system.
1. Seed Liquidity
Gabriel Shapiro noted, "Pre-selling tokens forever taints their security status." This is evident in the dominance of VC-backed projects, which raise funds like traditional startups. In contrast, Initial Coin Offerings (ICOs) were more公平, with uniform rules and on-chain verification. However, regulatory crackdowns in 2018 pushed new projects toward VC funding, leading to the current landscape where most tokens are VC-backed and at risk of being deemed securities.
Seed liquidity offers a fairer alternative. Users invest liquidity for a set period before protocol launch and receive governance tokens. This happens permissionlessly via smart contracts, allowing anyone to participate. This approach funds protocol development directly, eliminating meetings with VCs, term sheets, and information asymmetry between insiders and the public.
Protocols like OlympusDAO have used similar mechanisms, raising funds in DAI to launch their system. The key difference is making liquidity locks longer-term and structural—think seed liquidity locks, Series A liquidity locks, etc.—until the protocol becomes self-sustaining.
These locks are priced in an open, competitive market, ensuring fair pricing without insider advantages. Governance tokens are distributed to liquidity providers, not sold, and have no price before launch, making them function less like securities.
2. Liquidity Mining Partnerships
DeFi protocols can collaborate with established DAOs/protocols to gain users or liquidity. We call this "liquidity mining partnerships."
For example, Photon Finance is a stablecoin protocol with a modular design—each module uses different collateral and has varying PHO stablecoin minting capacities. These modules incorporate assets from protocols like Aave, Maker, Frax, Compound, Balancer, and LUSD.
DeFi is open and permissionless, enabling synergies through cross-protocol incentives. Instead of vague partnerships announced in press releases, cooperation should occur via on-chain code.
How it works:
- Allocate up to 20% of governance token (TON) rewards to partners.
- DAOs with large liquidity or user bases compete for these rewards.
- DAOs direct liquidity or users to Photon.
- Photon builds a yield aggregator like Yearn, sending TON rewards directly to the DAO or its users based on success.
- Lending protocols like Aave or Euler are incentivized to accept PHO as collateral, with rewards sent to their DAOs.
- DEXs receive a fixed percentage of TON rewards, competing to provide deeper liquidity.
This design creates a "game" where protocols helping Photon the most earn the most TON. DAOs might be required to hold TON tokens for a period, with rewards unlocking over time.
Liquidity mining has often been predatory, with miners dumping rewards. This concept offers a sustainable way for protocols to collaborate.
3. Multi-Protocol Token Voting
This concept relates to governance mining, bringing DeFi DAOs together to improve user experience. DeFi protocols are interconnected, with overlaps in governance proposals and smart contract integrations.
Why not have governance systems that accept votes from two different tokens?
This hasn’t emerged because DAOs are often designed like companies, with a single group deciding the protocol’s future. But with subDAOs, multi-token governance becomes feasible.
For instance, if Maple Finance submits a module to Photon Finance allowing USDC LP tokens to be lent to third parties and used to mint PHO, parameters for this module could be voted on by both TON and MPL holders. MPL holders understand Maple pools better, so they might have slightly higher voting weight. Both communities unite for mutual benefit.
This approach also addresses legal concerns: if governance tokens like TON and MPL are used across multiple DeFi protocols, they become less tied to a single company-built protocol. Tokens gain utility for voting across the entire Ethereum DeFi ecosystem.
This could lead to governance standards for multi-protocol voting.
4. Dynamic Multi-Protocol Token Voting
Traditional token voting is often controlled by a few large investors or founders, especially early on when low token circulation concentrates power. To regulators, this looks 100% centralized, even if decentralization is planned long-term.
Dynamic multi-token voting allows a protocol to be governed by multiple tokens. For example:
- TON starts with 6% emission but only 35% voting power.
- Other voting powers are split: CRV (30%), UNI (20%), AAVE (10%), MPL (5%).
- As more TON is emitted linearly, TON voting power increases while others decrease.
This might make tokens less security-like by granting utility across DeFi. However, careful planning is needed to prevent other communities from colluding against the protocol.
5. Usage-Based Governance
Change the traditional DAO structure: only liquidity providers (LPs) manage LP pools, only traders (during active periods) get fee rebates, only developers manage code for rewards.
Osmosis already allows LP tokens governance rights over specific pool parameters like fees or AMM curves. Photon Finance could let PHO stablecoin holders vote, similar to DAI holders in Maker.
6. NFT-Based Voting
NFT-based voting isn’t new but hasn’t gained traction. It offers opportunities, especially combined with other voting types.
For example, a DEX could issue NFTs based on total trading fees accumulated by users over time. This:
- Allows real traders to participate in governance.
- Combined with governance tokens, gives more weight to active users who hold tokens—more advanced than veCRV, which isn’t tied to trading volume.
- Resists Sybil attacks, as accumulating fees costs real money.
- With Soulbound NFTs, voting rights can’t be sold.
This rewards frequent users with skin in the game. Balance is key: if rewards are too hard to earn, users won’t care; if too easy, they become meaningless. One solution is seasonal NFT rewards, like 6-month trading tournaments where top users gain the most voting power, resetting afterward.
This adapts to the fast-paced crypto world without compromising core voting mechanics.
7. Migration Upgrades
Migration upgrades aren’t new but worth highlighting. Upgrading contracts via proxies and governance votes is cumbersome and risky—Compound lost $80 million in COMP due to an upgrade flaw.
Migrating to new, persistent, non-upgradable smart contract versions is safer. No vote is needed; new versions are deployed, and users upgrade via "liquidity voting." Uniswap did this moving from V1 to V2 to V3. Funds migrate slowly, allowing early bug detection before full migration.
8. Permissionless Triggers
DeFi protocols need efficient, secure, and up-to-date decisions on:
- Which oracle to use?
- Where to concentrate liquidity?
- Which bridge to use for cross-chain transfers?
- When to start new liquidity mining rewards?
Proposals are usually initiated by dev teams via multisig, a centralization risk. Instead, protocols can use hard-coded triggers for automatic changes without human intervention.
Centralized DEX Liquidity Bonus
Protocols should concentrate DEX liquidity in a single reliable DEX. CEXs like Binance often have the deepest liquidity, harming DeFi by reinforcing their dominance. Protocols like Osmosis and Olympus have succeeded here:
- OSMO has over 80% trading volume on Osmosis due to high staking and liquidity incentives.
- OHM has 100% DEX volume due to its rebase mechanism and decentralization vision.
A sustainable approach: reduce fees when DEX liquidity exceeds thresholds:
- Below 70% DEX liquidity → 0.30% fee.
- Above 70% → 0.05% fee.
- Above 90% → 0.01% fee.
This incentivizes communities to concentrate liquidity, improving decentralized trading. OlympusDAO’s over 95% DEX liquidity lets it set DEX parameters and earn most fees.
Upgrading Oracles
Protocols struggle to upgrade oracles. Low liquidity can quickly change prices on decentralized oracles. With high liquidity thresholds, protocols can automatically use DEX oracles; below that, fall back to Chainlink or UMA’s Optimistic Oracle with dispute resolution.
Treasury Transfers and Bonus Triggers
Protocol incentives often require multisig transfers from treasuries, a centralization risk. Instead, token release dates can be hard-coded. Further, unlocks can trigger based on performance—e.g., a stablecoin protocol requiring $100 million total supply by a specific date for founder/investor bonuses.
Frequently Asked Questions
What is decentralized governance in DeFi?
Decentralized governance allows token holders or users to collectively decide on protocol changes, ensuring no single entity controls the system. It often involves voting on proposals, parameter adjustments, and upgrades, leveraging blockchain for transparency and fairness.
How do seed liquidity pools improve fairness?
Seed liquidity pools allow anyone to contribute liquidity before launch in exchange for governance tokens, via smart contracts. This eliminates VC dominance and insider advantages, creating a fairer, open fundraising model aligned with long-term protocol success.
Why are multi-protocol token voting models important?
They enable governance across multiple DeFi protocols, reducing reliance on single entities and enhancing decentralization. This cross-protocol utility can help tokens avoid being classified as securities while fostering ecosystem collaboration.
What are the risks of dynamic multi-token voting?
Primary risks include collusion among large token communities to manipulate protocols. Careful weight distribution and emission schedules are needed to ensure native token holders gain influence over time, protecting protocol integrity.
How do NFT-based voting systems work?
NFTs represent voting rights based on user activity, like trading volume or fees paid. This rewards active participants, combats Sybil attacks, and can be combined with token voting for more nuanced governance, especially with non-transferable Soulbound NFTs.
Can permissionless triggers replace human governance?
For specific, parameter-based decisions, yes. Hard-coded triggers automate actions like fee adjustments or oracle switches based on predefined conditions, reducing centralization risks from manual interventions. However, complex strategic decisions still benefit from community voting.
Conclusion
These ideas only scratch the surface of what’s possible in decentralized governance. We are coding and iterating on these mechanisms to see what works best, refining our ideas around the four principles of governance design. The future is bright for truly decentralized autonomous organizations. 👉 Explore advanced governance strategies