Hi!

Welcome to Web3 Bits, where I share a few of the most interesting web3 bits for you to consumer over the weekend.

Today will be focused on governance - why it matters, recent issues and directions for research.

Writings

• ​Portal for all things governance research focused. If you're interested in DAO/crypto governance - start here.
• ​Your checklist for when to launch a token​

A Governance analysis

Is DAO governance problematic? Yes.

Good governance should focus on four questions to ensure the promise of crypto governance. Governance where users are actually owners and protocols are credibly neutral. These four questions are:

1. Increasing the number of participants in governance - aka voter participation. Increasing voter participation is a part of reducing value capture by a small group, increases trust and brings the benefit of better decision making by aggregating information from a diverse set of participants.
2. Ensuring that the right people are participating: It’s not only a question of participation but a matter of getting the right people to participate. The right people means honest participants who can offer value. Not bots or dishonest actors.
3. Making sure we’re voting on the right things: Decisions are only as important as what is being decided. Governance needs to find ways to structure the problems needing to be solved to ensure that problems offered and the participating community are deciding on things that matter.
4. Eliciting smart voting: Getting the right people to vote on issues that matter isn’t enough. Voters also have to be incentivized to make the best possible decision they can. Good governance dissuades random and malicious voting and rewards effortful voters.

Governance analysis: Uniswap proposal

Uniswap foundation requests $65m, with a week to vote on it: Last year, Uniswap governance approved $74m in budget to the Uniswap Foundation. They received the first tranche last year, and are now asking for the second, larger, tranche of $65m - all in $UNI tokens. Some points:

• They're requesting a 10% buffer since last time $UNI dumped between when the vote was approved and when the UNI tokens arrived in their wallet and they were able to sell. It's as if the market knew there was a supply dump coming...
• How different is Uniswap Governance from the Uniswap Foundation? The top 10 holders hold 33% of the token.
• There is a remarkably low participation and engagement on the proposal in the Uniswap forum. This speaks to the problem above and lack of engagement from the community. Governance engagement is very hard - a topic I've been researching.
• The proposal is very detailed and long, and yet lacks all the actual details a board of directors or managers would actually look at: KPIs, metrics, ROI . In my view, while the intentions are good, this is the worst of both worlds. The proposal is too long for most people to read and invest time in, yet if they do, lacks all the most important metrics: actual KPIs and ROI. This proposal reads as "there's a lot on our plate, trust us to execute well --> even though we haven't shown we can". This isn't to bash on the UF, the intentions clearly are good, yet real decision making requires seeing the numbers. As it is, this proposal seems like a way to whitewash a very, very large budget for a small group of people to continue to do as they wish in web3, without much practical oversight. This can work so long as the core Uniswap product keeps delivering. This reminds me of Facebook & Google, companies that can get away with a lot of useless spending due to their core products, until all of a sudden they can't.
• There is absolutely no reason to hold the UNI token. If you hold, or buy, you are, quite literally, the exit liquidity of the Uniswap Foundation, who are selling all these UNI tokens to finance their expenses.
• Uniswap resembles a corporation much more than a protocol. This isn't bad per se. Governance serves many different reasons (better management, credible neutrality, censorship resistance being three examples), but it should be clear that this isn't a decentralized protocol.
• Uniswap has huge upside due to its amazing positioning in the ecosystem. While they're not the first to innovate, similar to Apple, when they innovate - everyone takes notice. If they turn on their fee switch, or distribute revenue from Uniswap V4 back to the UF and/or token holders, this could change a lot of things. For the better.

This proposal highlights the recent trend in DAO governance - towards delegation of power, much like the European and US representative democracies. While these work to some extent, they are rife with problems: low participation rate and disenchantment from the system, value capture by the executive branch and special interest groups and more. In short - it's not any better than what we've currently got and doesn't justify a token or a new crypto structure. Uniswap has been able to pull it off because they were early, built something very cool and have good reputation - all reasons why such a large part of the community was willing to speculate on their token and give them the funds to 'dump' on the ecosystem to fund their activity. This won't work for other protocols.

Resources

• ​Stanford Blockchain week talks and videos for those who weren't there.
• ​Andy Hall discussing governance.