The Governance Cost of Managing a Reputation System

Governance becomes a full-time job adjudicating slashing disputes. Every new AVS or LRT creates a new vector for Byzantine behavior, forcing tokenholders to become expert jurors.

• Exponential Overhead: N AVSs require evaluating N slashing conditions, not one.
• Liability Escalation: A single bad slashing call can trigger mass unstaking and >30% TVL flight.
• Precedent Risk: Each ruling sets a costly legal precedent for the entire cryptoeconomic system.

Shift from human committees to verifiable, on-chain execution. Use TEEs (like Obol's DVT) or co-processors (like Ritual's Infernet) to programmatically verify slashing proofs.

• Removes Subjectivity: Slashing conditions are binary checks executed in a trusted environment.
• Scales Sublinearly: Adding an AVS only requires deploying a new verifier module, not a new political process.
• Enables Real-Time Security: Decisions in ~2 seconds, not weeks of Snapshot voting.

Liquid Restaking Tokens (LRTs) like Kelp DAO or ether.fi introduce a principal-agent problem. LRT holders want yield, not slashing risk, creating misaligned voting incentives.

• Yield Maximization Pressure: Voters favor riskier, higher-yield AVSs to boost LRT APY, compromising network security.
• Diluted Accountability: $10B+ in delegated capital is governed by a tiny subset of actors with non-native tokens.
• Protocol Capture: AVS teams lobby LRT protocols instead of the core restaking layer.

Move from monolithic 'reputation' to granular, tradable risk segments. Inspired by EigenLayer's intersubjective forking, but automated.

• Risk Segmentation: Operators earn reputation scores per AVS type (e.g., DA, Oracle). LRTs can bundle specific risk tranches.
• Automated Rebalancing: Smart contracts auto-opt operators out of AVS categories where their reputation score falls below a threshold.
• Market-Driven Security: Reputation scores become a priced commodity, allowing efficient capital allocation without daily governance.

Every core protocol upgrade (e.g., changing slashing parameters, adding a new AVS framework) requires a contentious, network-wide vote. This stifles innovation and creates coordination failure.

• Innovation Tax: New cryptographic primitives (e.g., ZK proofs for slashing) take 6-12 months to deploy via governance.
• Hard Fork Risk: Contentious upgrades threaten chain splits, as seen in early Ethereum and Bitcoin governance.
• Competitive Disadvantage: Agile competitors (e.g., AltLayer, Hyperliquid) with lighter governance outpace upgrades.

Adopt a modular governance model where the core protocol governs a minimal slashing clock, and upgradeable 'governance modules' handle specific policies. Inspired by Cosmos SDK and Celestia's rollup-centric design.

• Sovereign Modules: AVS categories can deploy their own governance for slashing logic, upgrading without mainnet votes.
• Core as Referee: The base layer only intervenes in cases of verifiable liveness failure or module censorship.
• Parallel Experimentation: Multiple slashing models (e.g., optimistic, ZK-based) can compete within the same ecosystem.

Setting the speed of reputation decay is a political act. A fast decay (e.g., 50% per month) purges inactive users but empowers whales and bots that can constantly re-engage. A slow decay (e.g., 10% per year) protects long-term contributors but cements early adopter advantage, creating a stagnant oligarchy.

• Governance Attack: A malicious proposal can subtly adjust decay to silently invalidate a rival faction's voting power.
• Real Cost: Projects like Aave and Compound face constant governance battles over parameter tuning, with proposals costing $50k+ in gas and social capital.

Decay mechanisms clash with delegation, the bedrock of liquid democracy. A delegate's influence crumbles if their supporters' scores decay from inactivity, forcing constant re-campaigning. This mirrors the real-world political cost of maintaining a base.

• Instability: Delegated voting power becomes highly volatile, undermining long-term policy planning.
• Weaponization: Adversaries can trigger mass decay of a delegate's constituents by spamming transactions to reset their own scores, creating a gas war arms race.

The Uniswap airdrop created a permanent, non-decaying reputation class (UNI holders). The lack of decay has led to voter apathy and low proposal turnout, as early users retain power indefinitely. This shows the opposite weapon: using no decay to entrench power.

• Data Point: Many top UNI delegators have <1% voting participation but hold outsized power.
• Lesson: Without decay, reputation systems become captured assets. With it, they become a continuous governance battleground. Systems like Hop and Optimism now grapple with this exact design tension.