Governance Proposal Thresholds: Token-based vs Reputation-based

Clear, objective threshold: A fixed token quantity (e.g., 1% of supply) defines proposal rights. This enables rapid, decisive action for protocols like Uniswap and Aave, where large holders have direct skin in the game. Ideal for high-stakes treasury management or urgent parameter updates.

Attack cost is quantifiable: To manipulate governance, an attacker must acquire a large, expensive stake, making attacks economically prohibitive for mature protocols. This provides strong security for high-value DeFi protocols like Compound and MakerDAO, where the cost of an attack often outweighs the potential gain.

Power earned, not bought: Voting weight is based on contributions (e.g., code commits, forum activity). This aligns influence with proven expertise, as seen in Optimism's Citizen House or Gitcoin DAO. Best for funding public goods or technical decisions where deep community knowledge is critical.

Incentivizes sustained contribution: Reputation (like SourceCred scores or POAPs) is non-transferable and can decay, forcing continuous engagement. This builds a core of dedicated stewards, perfect for protocol foundations like Element Finance managing long-term roadmap and values.

Direct stake in outcomes: Voters with significant token holdings are financially incentivized to protect and grow the protocol's value. This aligns governance power with economic skin-in-the-game, as seen in systems like Compound and Uniswap. This matters for protocols where capital efficiency and treasury management are primary concerns.

Objective, on-chain metric: Proposal power is tied to a publicly verifiable, scarce asset (the token). This creates a high-cost barrier for Sybil attacks, unlike anonymous reputation systems. The threshold is simple to calculate and audit. This matters for permissionless, public blockchains where attack surface minimization is critical.

Power centralization: Governance becomes dominated by whales, VCs, and large stakers, potentially marginalizing small but dedicated users and developers. This can lead to proposals that favor short-term token price over long-term ecosystem health, a noted challenge in early MakerDAO and SushiSwap governance.

Vote-buying and apathy: Large, temporary token holders ("mercenary capital") can swing votes without long-term commitment. Conversely, many small holders lack incentive to vote, leading to low participation. This matters for protocols needing high-quality, informed voter turnout, not just raw capital weight.

Power earned, not bought: Governance influence is granted based on proven contributions like code commits, community moderation, or educational content, as modeled by SourceCred or Gitcoin DAO. This matters for developer-centric protocols (e.g., Ethereum client teams) where expertise is more valuable than capital.

Incentivizes long-term engagement: Since reputation decays or must be maintained, it rewards consistent, quality participation over passive token holding. This builds a more dedicated core contributor base. This matters for complex protocol upgrades (e.g., Optimism's Citizen House) requiring deep contextual knowledge.

Difficult to quantify and audit: Reputation scores often rely on off-chain social consensus or opaque algorithms, making them hard to verify and vulnerable to manipulation by insiders. Establishing a fair initial distribution ("reputation launch") is a major hurdle. This matters for protocols prioritizing transparency and permissionless entry.

Illiquid and context-specific: Reputation is typically non-transferable and tied to a specific community, preventing holders from leveraging it as collateral or exiting easily. This can limit contributor flexibility and reduce the total addressable market for governance participants. This matters for protocols competing for top-tier developer talent in a competitive market.

Direct economic alignment: A voter's stake (e.g., 1 token = 1 vote) directly correlates with their financial skin in the game, as seen in Uniswap and Compound. This creates clear, quantifiable thresholds (e.g., 2.5M UNI to propose). Advantage: Simple to implement and audit, providing predictable sybil resistance through capital cost.

Deep market integration: Governance tokens are liquid assets on DEXs like Uniswap and can be used as collateral in lending protocols like Aave. This enables delegated voting via tools like Tally and Snapshot without locking capital. Advantage: Fosters a vibrant ecosystem of delegates, voter incentives, and derivative products.

Identity-based weighting: Reputation (e.g., earned via consistent participation, contributions, or soulbound tokens) decouples influence from mere wealth. Systems like Optimism's Citizen House or Gitcoin Grants resist whale dominance. Advantage: Prioritizes knowledgeable, engaged community members, reducing governance attacks and short-term speculation.

Lower barrier to meaningful participation: Users without large capital can gain influence through proven contributions (code, content, community moderation). This models expertise, as seen in developer DAOs or SourceCred instances. Advantage: Can surface higher-quality proposals and foster a more dedicated, expert-led governance cohort.

Voting power follows capital concentration: Large holders (VCs, whales) can dominate decisions, potentially prioritizing short-term token price over long-term health. Mitigation via vote delegation (e.g., Compound) is often underutilized. Trade-off: May alienate small holders and centralize control despite decentralized token distribution.

Difficult to quantify and audit: Measuring "reputation" objectively (e.g., what contributions count?) introduces subjectivity and potential for committee bias. Systems like Colony's reputation decay add maintenance overhead. Trade-off: Higher implementation cost, potential for political gaming, and less transparent threshold calculations.