Staking for Governance

This is the core mechanism where a user's voting power is directly proportional to the number of tokens they have staked and locked. Key implementations include:

• Linear Weighting: One token equals one vote.
• Quadratic Voting: Voting power increases with the square root of tokens staked, reducing whale dominance.
• Time-locked Boosts: Staking tokens for longer periods (e.g., veTokens) grants multiplied voting power, encouraging long-term alignment.

To prevent spam, protocols require a minimum staked token balance to create a governance proposal. This proposal deposit is often slashed if the proposal is deemed malicious or fails to meet a participation quorum. For example, a DAO may require a proposer to stake 0.1% of the total token supply, ensuring only serious, financially committed ideas are presented.

Token holders can delegate their voting power to other addresses without transferring custody. This enables:

• Expert Voting: Users delegate to knowledgeable community members or developers.
• Vote Aggregation: Delegates can represent the will of many smaller holders.
• Liquid Delegation: Delegation is not permanent; users can re-delegate or vote directly at any time, as seen in systems like Compound Governance.

Staking for governance is often incentivized beyond voting rights to drive participation. Common rewards include:

• Protocol Revenue Share: A portion of fees or revenue is distributed to stakers (e.g., Curve's veCRV model).
• Governance Token Emissions: Additional token rewards for participating in votes.
• Access to Features: Exclusive access to liquidity pools, airdrops, or boosted yield farms.

To ensure responsible governance, some systems implement slashing, where a portion of staked tokens can be confiscated for harmful actions. Penalties may apply for:

• Malicious Voting: Consistently voting against the clear majority or network interest.
• Proposal Fraud: Submitting a proposal with hidden malicious code.
• Inactivity: Failing to vote on critical security-related proposals.

Governance outcomes can be executed in different ways:

• On-Chain Execution: Approved proposals automatically execute code changes via smart contracts (e.g., changing a parameter in a DeFi protocol). This is high-stakes and requires rigorous security.
• Off-Chain Execution: Votes are used for signaling, with a trusted multisig or team executing the decision. This is common for treasury management or meta-governance decisions.

In governance staking, a user's voting power is typically proportional to the number of tokens they have staked and the duration of the stake. This is often implemented through vote-escrow models (e.g., veTokens), where longer lock-ups grant greater voting weight. This design aims to align decision-making power with long-term stakeholders.

• Example: In Curve Finance's veCRV model, locking CRV for 4 years provides maximum voting power.
• Mechanism: Voting weight often decays linearly with the remaining lock time.

Staked governance tokens enable users to create and vote on proposals that steer protocol development. A minimum stake is usually required to submit a proposal. Voting occurs on-chain via smart contracts, with common decision types including:

• Parameter changes (e.g., fee adjustments, reward rates).
• Treasury management and fund allocation.
• Protocol upgrades or integrations.
• Grant funding for ecosystem projects.

Staking requirements for governance provide Sybil resistance by making it economically costly to amass disproportionate voting power. By requiring capital at risk, the system incentivizes voters to act in the network's best interest. This contrasts with one-token-one-vote systems that are more vulnerable to manipulation. The skin-in-the-game principle ensures that voters bear the consequences of their decisions.

Users can delegate their staked voting power to other entities without transferring custody. Liquid staking derivatives (e.g., stETH, stSOL) introduce complexity, as the derivative token may or may not carry governance rights. Some protocols, like Lido, use a separate governance token (LDO) to govern the staking protocol itself, decoupling it from the staked asset's (ETH) native governance.

Several major DeFi protocols implement distinct governance staking models:

• Compound & Uniswap: Use straightforward token-weighted voting with their COMP and UNI tokens.
• Curve Finance: Pioneered the vote-escrow model with veCRV.
• MakerDAO: Uses MKR token staking for voting on critical risk parameters and executive proposals.
• Cosmos Hub: Employs staked ATOM for on-chain governance of the blockchain's core parameters.

Governance staking faces several practical challenges:

• Voter Apathy: Low participation rates are common, leading to concentration of power.
• Whale Dominance: Large stakeholders can disproportionately influence outcomes.
• Complexity Barrier: Technical proposal details can hinder informed voting.
• Liquidity Trade-off: Locking tokens for voting weight reduces capital efficiency and liquidity for the staker.

Governance power is typically proportional to stake, leading to centralization risks where large holders (whales) or concentrated pools (like a CEX) can dominate proposals. This can result in plutocracy and decisions that favor large capital over network health. Mitigations include:

• Quadratic voting to diminish large holder influence.
• Delegation to knowledgeable, smaller participants.
• Time-locked or vesting votes to reward long-term alignment.

To secure the governance process, protocols may implement slashing—the punitive removal of a portion of a voter's staked tokens—for malicious actions. Common slashable offenses include:

• Double voting on conflicting proposals.
• Vote selling or bribery (collusion).
• Extended inactivity in delegated proof-of-stake systems. This creates a direct economic cost for misbehavior, aligning individual security with protocol security.

The separation of voting power from direct economic interest is a critical vulnerability. Actors can borrow or rent voting power (vote leasing) to pass proposals without long-term skin in the game. This is facilitated by flash loans or specialized lending markets. Defenses include:

• Skin-in-the-game requirements like minimum stake duration.
• Sybil-resistant identity systems (e.g., proof-of-personhood).
• Execution delays to allow the community to react to malicious proposals.

Staking tokens for governance imposes a direct opportunity cost. Locked capital cannot be used for other yield-generating activities (e.g., DeFi lending) or sold, creating illiquidity. This trade-off is measured by:

• Staking yield vs. market yield: The governance reward must compensate for forgone alternatives.
• Unbonding periods: Time required to withdraw staked tokens, during which they are illiquid and vulnerable to price volatility.
• Liquid staking tokens (LSTs) like Lido's stETH attempt to solve this by providing a tradable derivative of the staked asset.

The governance mechanism itself can be a target for exploits. Key attack vectors include:

• Proposal spam: Flooding the system with proposals to cause voter fatigue.
• Timing attacks: Submitting malicious code changes that execute before the community can organize a response.
• Treasury governance attacks: Passing proposals to drain the protocol's treasury funds.
• 51% attacks: In pure token-weighted voting, acquiring a majority of staked tokens to control all outcomes.

Preventing one entity from creating many fake identities (Sybil attacks) to amplify voting power is fundamental. Common stake-weighting models include:

• One-token-one-vote (1T1V): Simple but vulnerable to wealth concentration.
• Quadratic Funding/Voting: Power increases with the square root of tokens held, favoring broader participation.
• Proof-of-personhood: Linking voting power to a verified human identity.
• Proof-of-use: Weighting votes by historical usage of the protocol, not just capital.