Why Vesting Schedules Create Perverse Governance Incentives

Token holders with unvested, locked tokens cannot sell, but they can vote. This creates a powerful incentive to vote for short-term, high-volatility proposals that pump the token price before their cliff expires, regardless of long-term protocol health.

• Incentive: Maximize price at unlock, not sustainable value.
• Consequence: Governance attacks from large, locked holders (e.g., early VCs) pushing risky upgrades.

Fully vested, early investors often become passive, absentee voters. Their massive, stagnant stakes create governance stagnation and low participation rates, making the protocol vulnerable to capture by small, coordinated groups.

• Metric: <40% voter turnout common in major DAOs.
• Risk: Proposal passing threshold is a fraction of total supply, enabling activist minority control.

Protocols like Curve and veTokenomics models directly tie voting power to the duration of a commitment. Locking tokens longer grants exponentially more voting power, aligning influence with long-term conviction.

• Mechanism: Vote weight = tokens * lock time.
• Result: Incentivizes patient capital and penalizes short-term speculation in governance.

Inspired by Lido's stETH, this model separates governance rights from liquidity. Vesting tokens are automatically delegated to a professional operator or committee until unlock, preventing short-term voting by disinterested parties.

• Benefit: Professional, continuous governance from dedicated actors.
• Benefit: Removes perverse incentive for locked holders to manipulate votes.

Large, locked token allocations grant outsized governance power to insiders who may not be active participants. This creates a centralization risk and can lead to apathetic or misaligned voting.

• Key Risk: A single entity with 40%+ of voting power can dictate protocol changes.
• Key Consequence: Low voter turnout from the community, as their votes are rendered ineffective.

Adopt a model where voting power is proportional to the lock duration, not just token quantity. This aligns long-term incentives directly with governance participation.

• Key Benefit: Rewards users for committing to the protocol's future, not just their initial investment.
• Key Benefit: Mitigates flash-loan attacks on governance by requiring time-locked capital. See implementations in Curve Finance and Balancer.

Insiders are incentivized to sell tokens immediately post-vest while retaining governance rights, creating a principal-agent problem. Their financial interest diverges from tokenholders'.

• Key Risk: Decision-makers no longer bear the financial consequences of poor governance.
• Key Consequence: Short-term, extractive proposals gain traction, harming long-term value.

Structure vesting to release tokens based on governance participation metrics or protocol milestones, not just time. Use smart contract-enforced cliffs.

• Key Benefit: Ties capital release to active, constructive contribution (e.g., voting on proposals, submitting audits).
• Key Benefit: Automates alignment using on-chain verifiable conditions, reducing managerial overhead.

Traditional schedules force a binary choice: keep tokens locked for governance power or sell for liquidity. This discourages broad-based, informed governance from the community.

• Key Risk: Governance becomes the domain of illiquid "whales" or mercenary capital.
• Key Consequence: Reduces the diversity of perspectives in critical protocol decisions.

Issue a liquid, yield-bearing derivative token that retains governance rights. This separates the utility of governance from the liquidity of the asset.

• Key Benefit: Users can participate in governance without sacrificing capital flexibility, broadening the voter base.
• Key Benefit: Creates a more efficient market for governance influence, as power is tied to a tradable asset. Inspired by Lido and Aave.