Governance Layer

The formal process for submitting changes to the protocol. This typically involves:

• On-chain proposals: Formal transactions that include executable code or parameter changes.
• Governance tokens: Often required to submit a proposal, acting as a spam-prevention deposit.
• Temperature checks: Informal off-chain discussions (e.g., on forums) to gauge community sentiment before an on-chain vote.

Examples include Ethereum's EIP process and Compound's Governor Bravo contracts.

The system by which token holders express their preference on proposals. Key models include:

• Token-weighted voting: One token equals one vote; used by most DAOs.
• Quadratic voting: Voting power increases with the square root of tokens committed, reducing whale dominance.
• Delegation: Token holders can delegate their voting power to experts or representatives, enabling participation without constant engagement.

Votes are often cast on-chain, with the outcome automatically executable.

The governance layer controls the protocol's treasury—a pool of assets (often native tokens and stablecoins) used to fund development, grants, and incentives. Governance decides:

• Budget allocations: How much funding goes to different initiatives.
• Grant approvals: Which developer proposals receive financial support.
• Tokenomics: Parameters like inflation rates or token buybacks.

This turns the treasury into a decentralized venture fund managed by token holders.

The mechanism for implementing approved changes, which varies by protocol architecture:

• Direct execution: Votes pass and code executes automatically (e.g., Compound).
• Time-locked execution: Approved proposals enter a timelock period, giving users time to exit if they disagree before changes go live.
• Multisig fallback: A council or foundation holds emergency upgrade keys for critical security fixes, creating a hybrid model.

This feature ensures changes are enacted predictably and securely.

Systems to handle conflicts, failed upgrades, or malicious proposals. Common approaches include:

• Veto powers: A security council or delay mechanism can halt obviously harmful proposals.
• Forking: The ultimate form of dispute resolution, where a dissenting community creates a new chain with different rules (e.g., Ethereum Classic).
• On-chain courts: Platforms like Kleros or Aragon Court provide decentralized arbitration for subjective disputes.

These mechanisms provide checks and balances within the decentralized system.

The native asset that confers voting rights within the system. Its key functions are:

• Voting Power: Grants proportional influence over proposals.
• Proposal Rights: Often required to submit governance actions.
• Value Accrual: Tokens may capture value from protocol fees or treasury growth.

Design choices, such as token distribution (airdrop, sale, mining) and lock-up mechanisms (ve-tokens), critically impact decentralization and voter alignment.

Mechanisms to improve participation and commitment in governance systems by allowing token holders to delegate voting power or lock tokens for enhanced influence.

• Delegation: Allows holders to assign their voting power to knowledgeable delegates (e.g., in Compound or Uniswap).
• Vote-Escrow (ve) Model: Pioneered by Curve Finance, where users lock tokens for a set period to receive veTokens, which grant proportional voting power and often protocol fee rewards. This aligns long-term incentives.

The process by which a decentralized autonomous organization (DAO) or protocol governs its community treasury, which often holds substantial reserves of native tokens and other assets.

• Governance Control: Token holders vote on treasury allocations for grants, funding, liquidity incentives, and operational budgets.
• Examples: Uniswap DAO treasury, which holds over $2B in UNI and stablecoins, or Arbitrum DAO's control of ARB tokens for ecosystem development.
• Challenge: Requires sophisticated proposal and multisig systems to manage risk and ensure funds are used effectively.

The ultimate governance mechanism in open-source, permissionless systems: if consensus fails, dissenting parties can fork the protocol's code and launch a competing network with modified rules.

• Example: The creation of Ethereum Classic after The DAO hack and the split of the Bitcoin Cash blockchain from Bitcoin.
• Function: Acts as a credible threat, incentivizing governance systems to be broadly acceptable to the community to avoid fragmentation.
• Result: Creates competing implementations and tests different governance philosophies in the market.

Known risks and vulnerabilities within decentralized governance systems that malicious actors can exploit.

• Vote Buying/ Bribing: Platforms like Bribe.crv.finance allow protocols to offer incentives to veToken holders for their votes, which can subvert intended outcomes.
• 51% Attacks: An entity acquiring a majority of voting tokens can force through self-serving proposals.
• Time-based Attacks: Exploiting low voter turnout during specific periods (e.g., holidays).
• Sybil Attacks: Creating many wallets to mimic broad community support.

Low voter turnout can lead to governance capture by a small, motivated group. This centralizes decision-making power and undermines the decentralized ethos.

• Example: A proposal may pass with support from only a small percentage of the total token supply.
• Risk: Malicious or low-quality proposals can be approved if the silent majority does not vote.

Governance weight is often proportional to token holdings, creating a plutocratic system where the wealthiest holders have disproportionate influence.

• Consequence: Decisions may favor large holders ("whales") over the broader community's interests.
• Mitigation: Some protocols explore quadratic voting or delegation to dilute pure capital-based power.

The process from proposal to on-chain execution introduces multiple attack vectors.

• Malicious Code: A proposal may contain subtle bugs or backdoors that are not caught during the review period.
• Timelock Bypass: If a timelock (a mandatory delay before execution) is not implemented, malicious changes can be enacted immediately.
• Parameter Manipulation: Proposals can alter critical security parameters like slashing conditions or fee structures.

The tokens used for voting themselves can be targeted.

• Vote Buying: Entities may borrow or temporarily acquire tokens (vote renting) to swing a specific proposal.
• 51% Attack: An attacker acquiring a majority of governance tokens can pass any proposal, potentially draining the treasury or changing the protocol's core logic.
• Flash Loan Attacks: Attackers use flash loans to temporarily amass voting power without the capital outlay.

The community treasury, often holding substantial assets, is a prime target. Governance controls its allocation and spending.

• Rug Pulls: A malicious proposal could authorize transferring treasury funds to an attacker's address.
• Inefficient Allocation: Poorly designed grants or investments can deplete funds without generating value.
• Custody Risk: Reliance on multisig wallets or specific DAO tooling introduces dependencies and potential single points of failure.

Governance security is not purely technical; it relies on human coordination and vigilance.

• Forum Spam: Bad actors can flood discussion forums to drown out legitimate debate.
• Misinformation: Spreading false information can sway voter sentiment on critical proposals.
• Sybil Attacks: Creating many fake identities to simulate broader community support for a proposal.

A system where governance proposals and voting are executed directly via smart contracts on the blockchain. This creates a transparent, immutable, and automated process for protocol upgrades and parameter changes. Key characteristics include:

• Proposal Submission: Requires a stake or deposit.
• Voting Period: A defined timeframe for token holders to cast votes.
• Automatic Execution: Approved proposals are executed by the protocol without manual intervention. Examples include Compound's Governor Bravo and Uniswap's governance process.

Coordination and decision-making that occurs through social consensus and informal channels outside the blockchain's protocol layer. This often involves:

• Discourse Forums & Social Media: For discussion and signaling.
• Snapshot Voting: Gas-free voting that records sentiment but doesn't execute changes.
• Core Developer Consensus: Key contributors ultimately implement agreed-upon changes. This model is common in early-stage projects (like early Ethereum upgrades) and allows for more nuanced discussion but relies on trusted actors for final execution.

A cryptographic token that grants holders the right to participate in a protocol's governance process. These tokens represent voting power, which is typically proportional to the amount held or delegated. Their functions include:

• Proposal Creation: Submitting formal change proposals to the network.
• Voting: Casting votes on proposals, often with weight based on token balance.
• Delegation: Allowing holders to delegate their voting power to other addresses. Examples include UNI (Uniswap), MKR (MakerDAO), and AAVE (Aave).

An entity structure with no central leadership, governed by smart contracts and the collective votes of its token-holding members. A DAO is the primary organizational manifestation of a governance layer. Key components are:

• Treasury: A pool of funds controlled by the DAO's rules.
• Membership: Defined by token ownership or other credentials.
• Proposal Framework: A formal process for suggesting and ratifying actions. DAOs manage everything from protocol upgrades (e.g., MakerDAO) to investment funds (e.g., The LAO).

The specific rules and algorithms used to aggregate voter preferences and reach a decision. Different mechanisms create different incentives and security properties.

• Token-Weighted Voting: One token equals one vote; simple but favors whales.
• Quadratic Voting: Voting power increases with the square root of tokens committed, reducing whale dominance.
• Conviction Voting: Voting power increases the longer a vote is held, signaling stronger preference.
• Futarchy: Proposals are evaluated based on predicted market outcomes.

The process where token holders (delegators) assign their voting power to other entities (delegates or stewards) who vote on their behalf. This is crucial for scaling participation and leveraging expertise.

• Delegators: Often passive token holders seeking informed representation.
• Delegates: Individuals or entities who research proposals and vote actively, often publishing their platform or voting history.
• Voting Safes: Tools like SafeSnap combine Snapshot off-chain votes with on-chain execution via a multisig, enabling complex delegation strategies.

The most common governance model where voting power is proportional to the quantity of governance tokens held. This creates a plutocratic system, aligning influence with financial stake. Key mechanisms include:

• Snapshot: Off-chain, gas-free voting using signed messages.
• On-chain execution: Votes that directly trigger protocol changes via smart contracts.
• Vote delegation: Allows token holders to delegate their voting power to experts or representatives.

Native assets that confer voting rights within a protocol's governance layer. Examples include UNI (Uniswap), MKR (MakerDAO), and AAVE (Aave). Their primary functions are:

• Proposal creation: Often requires holding a minimum token threshold.
• Voting: Used to cast votes on proposals.
• Value accrual: May entitle holders to a share of protocol fees or revenue, though this is a separate treasury governance function.

An entity structure governed by smart contracts and member votes, with no central authority. The governance layer is the operational core of a DAO. Key components include:

• Treasury management: Voting on fund allocation and grants.
• Parameter adjustment: Updating fees, interest rates, or collateral ratios.
• Upgradeability: Deciding on and executing smart contract upgrades.

The ultimate governance mechanism where dissenting community members can copy the protocol's code and start a new chain with different rules. This acts as a credible exit threat and market check on governance decisions. Historic examples include:

• Ethereum / Ethereum Classic: Fork over the DAO hack reversal.
• Uniswap / SushiSwap: Fork with a different token distribution model. This demonstrates that code immutability is often subordinate to social consensus.

Flaws in governance design that can lead to protocol capture or failure. Critical risks include:

• Vote buying / bribery: Collusion to concentrate voting power temporarily.
• Whale dominance: A single entity controlling a majority of tokens.
• Low voter turnout: Making the protocol vulnerable to a motivated minority.
• Timelock exploits: Circumventing the delay between a vote and its execution. Mitigations include quorums, vote delegation, and multi-sig execution.

An experimental governance model proposed by Robin Hanson where decisions are made based on prediction markets. Instead of voting on proposals directly, markets are created to predict the outcome (e.g., token price) if a proposal passes or fails. The decision with the more favorable predicted outcome is automatically executed. This aims to aggregate information and incentivize truth-telling, though it remains largely theoretical in large-scale implementation.