Why Crypto Protocols Are Failing at Governance, and How to Fix It by Charles St. Louis

foreign [Music] hello everyone how's everyone doing today hey so this has been absolutely great hasn't it I mean we waited three years to come back to Devcon the talks have been absolutely incredible I just can't stop smiling I'm seeing so many friendly faces so many new faces I'm just so happy there have been many themes at this conference um the merge of course is the highlight we have a lot of L2 development zk's D5 protocols with their financial Primitives and many more but we can't forget about governance after all governance or lack thereof has a massive dependency on the success of our protocols So today we're going to talk about our governance structures why they're failing are Dows and protocols and how to approach fixing it I might have a small life throughout the presentation so I hope you can spot it um but yeah again I'm Charles St Louis I'm the chief operating officer at element finance and head of governance I previously worked at the maker Foundation as the decentralized governance architect and today I'm talking about how to fix our governance systems from the failing or dows so of course element is a fixed rate protocol for variable and yield markets but today I'm talking about a governance protocol that we also built so our company is very focused on research and development and governance is very dear to our hearts so we spent a lot of time countless hours on this governance research and we came up with something called Council which I'll get into a bit later but before I talk about all the challenges and things we dislike about governance I just want to do a quick little fun Journey Down history Lane so since humans have existed there's been some form of governance and coordination let's say it starts with tribes and clans three million years ago where people started grouping together to make resource Gathering a lot more efficient give or take a couple years later we had kingdoms and that came with Kings Taxation and better resource defense for the resource Gathering that we developed over the past Thousand Years the next came Empires which introduced a large amount of hierarchies and power inequality but the thing about Empires is that they always fail from Empires we came to democracy it didn't come easy there was a lot of battling and fighting to make this happen but it truly introduced the first concept of the vote where everyone in society or at least some people in society inclusivity didn't take that much time to like develop through that but each person had a say in their governance decisions and how things move forward so democracy was great and all but it also had some problems tyranny of the majority and also bad decisions getting pushed forward because people just simply didn't want to vote I mean I can probably like 80 percent of you who probably don't want to vote in their local jurisdictions or in decentralized governance so how can we expect this to be an efficient system from democracies we had republics which weren't too far away from each other as you can see here like they're not mutually exclusive the only difference is that we're essentially trusting people who are paid compensated to be experts in their area to make decisions for us and obviously with republics became constitutional republics and so on it is paraphrased history so today many forms of these governance systems exist they're emulated they're improved upon but we also have new forms of technology that have evolved our governance systems the internet of course blockchain and many more so at this point I hope you can kind of see some similarities between what we've done in the past and what we've learned and how they translate directly to our systems today in defy and crypto so the first one I mean direct democracy I think it's pretty self-explanatory here I think the closest one that we have is the one token one vote we have the new system of reputational voting where you have non-transferable voting power based on your contributions to your community or your society and whatnot and then we have an emulation of representative democracy which is token weighted voting with delegation we even have Republic like Dao's where teams are voted into do their areas of expertise and basically deliver like Finance work operations and all that but we trust them to do that work on behalf of our Dow to push it forward so by now I'm sure you're all wondering why I gave you this weird history lesson but I swear I do have a point and that point is governments fail they failed and evolved over thousands of years it takes time to find out what works and what works often changes nothing is permanent so why are we building our governance systems as if we're getting at it right on the first try or first deployment it's pretty silly isn't it it's not realistic it doesn't work the rules are complex people don't want to vote it's just not working so these are some of the pioneers of the governance systems that we've seen in ethereum and generally in blockchain and I'm not picking on these protocols at all they've done so much for the entire ecosystem but there definitely are some challenges in these systems around adapting too slowly or not at all we have a lot to thank to maker they were the first on-cheam system in ethereum and they've done so much great work but at the same time they aren't easily adaptable they have a smart contract system that was deployed once in order to change anything you'd have to completely redeploy the system you'd have a token migration you'd have a lot of technical debt user disruption and much more so it's not simply easy to evolve in a similar case with compound yes they did Master upgradability of smart contracts but that also comes with the technical debt user disruption every time they want to add a feature or a security feature and that is a problem because a lot of protocols in the space have actually forked compound governance we've gone from alpha to Bravo projects like uniswap and Bitcoin are both following that system and they have to upgrade their systems each time too or unless they fall victim to vulnerability security and lack of features we also have a big favorite here urine the protocol is absolutely awesome they have this upgradability via modularity system in their core protocol however on the governance side it's still a little lacking because it is relying on a lot of semi-centralized parties with multi-cigs executing transactions lastly not so related to defy but we have Aragon to be able to be one of the projects who invented the term Dao and and really brought it to the market and they've done a lot of customization with their projects so you can do a lot of different voting systems different types of quorums etc etc but because it's so customizable the smart contracts structure suffers a little it's almost too upgradable in the sense of smart contract upgradability not just modularity all right so here's the little lie that I told you about so I'm not going to tell you that there's one solution fixes all our problems there's way too many to address there but there is something that we can do to help significantly improve the failure of all our governance systems and help them adapt way faster and that is to build adoptable governance systems from the start and I know that's big but what we've done at element is to build a very minimal core structure at the foundational layer and everything else is modular that way you can upgrade quickly you can remove things if you don't like them and it evolves more quickly with the political dynamics of your protocol or Dao so the hope with council is to reinvigorate the standard model for governance while keeping decentralization at the Forefront of governance but also allowing our Dows to scale better and make decisions quicker outside of the adaptability there are a few other goals that we strive for when Building Council and the first is to continuously strengthen inclusivity the one token one vote just simply can't work especially when it's a capital burden to acquire that there's many flaws of that model because people with tons of capital can capture tons of votes and they can sway governments activists investor Style what we can do is allow the actual people in the trenches on our GitHub on our discords speaking on community calls to have a say in governance as well to equalize that Capital um burden the second one applies to all of D5 of course in governance and that is to make voting not a burden for people voteropathy and voter fatigue are real and actually can be detrimental to a governance system and protocol people stop caring bad votes come in systems fail so the last one is the most important point that I want to get to and I know upgradability in the smart contract sense is a highly contentious topic but this type of upgradability is built on a very minimal structure at the core and everything else's modules you can add on and off so we want to design a system that can actually adapt as we change our minds throughout history instead of having to redeploy and fail and fail so this is the core it's very simple that's it that's all all this does at the center of the governance system is to define the voting process for those with governance power in the system it tracks proposals and counts their voting power and it retrieves user voting power from approved sources which I'll get to in a quick second so that's it that's all the core system does everything else is a tooling or tool belt to use in current situations future situations and much more the modules or tools I've selected here today are my favorite ones and we've decided to choose these for very specific reasons but keep in mind anything you can come up with can be added to the system whether it's a new form of Delegation rank Choice expiry the possibilities are endless so the first one here is kind of a take on traditional corporate governance where board of directors are trusted voted in compensated to make better decisions for the organization and obviously scaling decision making a lot faster there is a Twist here but I'll leave that for later the second one is my absolute favorite boating vaults in a way this allows you to sign voting power to any person use case position Etc so it breeds inclusivity but also Capital efficiency which is a huge problem with D5 voting governance voting the next is optimistic grants and that's kind of a Twist on optimistic Roll-Ups but also the literal sense of the word optimistic because many grants programs with dials or organizations are very pessimistic they assume the grantee is going to fail at their work so this takes the opposite approach where it assumes they're going to succeed and if they do they automatically invest their payout but if not it can be clawed back at the discretion of the governance system the last one is Dow teams with authority and this one is really important but it's not a module of itself it's an addition to the same structure that the GSC has and that is giving your Dow teams authority over their areas of expertise if a dow team has to go through the regular governance process that everyone else has to go through decisions take forever processes you developed kind of become outdated and it results in a lot of people just not wanting to get their daily work done because it takes a month three weeks to pass a vote it's a little more on the governance during Council like I mentioned it was definitely inspired by traditional corporate governance because we can't discredit that it's worked for Generations it's been battle tested I get that we like inventing new things and trying new things but this stuff works so why don't we try it here the way it works is you become a GSC member by getting delegated votes from anyone here once you reach a certain threshold you're then able to join the GSC and what that means by joining the GC is like you're given authority over your work people trust you you should be able to do things The Authority we've baked into this is the ability to push boats on chain automatically so without having to go through that long external governance process so they can make the calls for people at the top level the second one is they can spend part of the treasury up to a certain limit but they can still do one-off Brands bug bounties you name it they don't have to pass that vote through like a month-long process to spend some of the treasury which is good in some senses which is why it's capped at petty cash levels and the last one like I mentioned other councils within the system can be formed using the smart contract structure Dow teams can have authority over their expertise so a treasury management working group could spend the treasury without a resistance or a protocol team could basically deploy things to the protocol without having to be burdened with the rest of the voting process all right so this is my favorite and it is voting vaults and the reason I mean the main reason we developed this system is that a lot of governance systems today make you lock your voting tokens in the governance contract all you can do is vote if you're a small minnow in a sea of whales your vote barely matters why wouldn't you go use your tokens and put it in defy or make some Capital out of it so it's really inefficient from that standpoint so what we did here is we allow you to assign voting power to those types of positions or reputation and those people are automatically given votes in the system so it balances out the like Capital barrier of people um just buying tokens and they're also modular and upgradable so what I mean by that is let's say you assign voting power to GitHub contributors and you find that their voting power is too little or too high you can change that through governance you can also upgrade these things quite easily and I get that this is very theoretical so I did highlight a couple examples to make it real for everyone the first one is probably the most interesting and that is a compound Ave maker voting vault so like I mentioned before you have to lock your tokens in those systems to get voting power but in this system using Council you can essentially borrow against your CL like your collateral in these systems but still maintain the ability to vote or delegate so you get the best Both Worlds in a similar in a similar case you have the lp volt so you could be in a liquidity provision and still maintain the ability to delegate or vote and lastly the identity verified vault is pretty cool so you could verify your identity on chain and get voting power for that or even a reputational thing where it's an aggregate score of your work and GitHub discourse Community calls working groups and it scores it and assigns voting power and the last one is an nft so if like you own an ft you could basically map that to voting power in the element system when we launched we gave a gift to the community and that was the lfiverse nfts so right now someone in the community is building a voting Vault to give anyone with an nft voting power in the system it really spreads out the inclusivity of the whole Community which is absolutely amazing so dry here all right so the next is optimistic grants which like I said it's an optimistic Twist on the pessimistic view of grand systems whether it's just from an organization a Dao and whatnot so the base like the tldr is that you can set a schedule and a Time expiry the grantee can claim that Grant if the time expiry is hit without it getting clawed back so when the Grant's allocated it contains that expiry date if it isn't removed by that date they can withdraw and get their Grant if the governance system or the GSC realizes that they're not making their Milestones they can Claude back foreign so what does this entire system look like I said it's modular so there's many options the first one being what we chose for element Dao and it is a refined form of rep like representative democracy so with the GSC it's basically like representative democracy but as you can see here this is this is only the core contract so it tracks the proposals counts voting power retrieves retrieves the voting power from the defined voting vaults and basically the time lock up here can add new Quorum or change the voting vaults as we go so all of these things here are modules this is the only course I really want to emphasize that this is the base course and very little things can impact that your system could also look something like this which is liquid democracy so you take away the GSC because you just want simple delegation and the last one I want to show is just inclusive governance I also took out the time lock the time lock is definitely a recommended security feature because it has a pause between when you make execution in calls but if you want things to happen quicker and you don't care about that risk like you can remove it it's like D5 Legos but governance Legos so by now I've talked about the long history of failing governments and how it takes so long to improve I've talked about our considerations with how we built this system and the core and the modular aspect of our architecture so now I just want to talk a bit about the council protocol in action so we launched governance for element on March 31st of this year and we were really excited to just see the traction happen I mean a lot of this was a big experiment right the GSC the rolling the rolling delegation was very new so we weren't sure if it was going to work but today I'm happy to say that the GSE is nine people and they all have together pushed forward quite a few proposals to improve the system on the social layer but also on the protocol layer we also have two voting vaults a vesting one and a locking one the vesting one essentially allows like the core contributors who created this protocol investors advisors key Partners to have voting power in the system but a lower multiple so the community outweighs the actual core team which is a pretty cool balance of voting power like I mentioned earlier we also have the LV nft voting Vault that's in the works so that will be three coming up quite soon I've talked mostly about the on-chain and smart contract aspects of the system but the social Frameworks and DOW structures have also moved really quickly and that's because we've designed that proposal framework to actually adapt really quickly so people can make changes to like the proposal process or how we want to onboard assets and that's already happened twice already without friction so we're all really excited to see how the governance steering Council evolves right now I mean they've pushed proposal forward they haven't spent any of the treasure yet we have to see if that actually helps scaling these decision-making processes and if it doesn't we might go back to the direct democracy that everyone else uses where everyone just has the ability to delegate their Vote or vote themselves so what can you do with Council today well you can do a lot I mean you can Fork us you can build with us it's all open any dower protocol can use this for their own governance system and like I mentioned the system is very upgradable it's modular it's literally built for experimentation we want people to try things add it to our system create a voting Vault so that your governance protocol can have vote in ours and vice versa the possibilities are endless so you can use this system or you can add more to it so with that I've gone over all the problems with governance how we can adapt faster and the architecture of what it could look like if you were to adopt this model but right now I just want to say that like governance is evolving as always it's going to fail as always so we should build these systems to adapt quicker and for us governance systems are literally the make or break for our protocols I think the best is yet to come and thank you to everyone here for being a big part of that and for caring about governance and being here today thank you oh any questions yeah oh finally some water thank you that was super interesting I'm really Amazed by the way that you're thinking about Governors and the upgradability of it and um so my question is a little bit philosophical sorry about that but uh delegation I see it as a way to handle this problem that people don't want to vote right but delegation can't always work because it can very easily if people don't care it can very easily turn into popularity games like who do I know that I can delegate my votes to um so like we have this problem that people don't want to vote and delegation is not really a solution to it so how how in your experience can we have people engage more be more I don't know socially responsible and all of that and I have a second question I don't want to monopolize so feel free not to answer but uh I also think that reputation is kind of very key element to solving governance issues but the thing is that uh reputation itself is not a solved problem as far as I'm aware so I'm wondering how do you approach reputation and element yeah so for the first question I mean yeah delegation can definitely be a popularity conference especially with like big people on Twitter with previous experience being delegates I think the best way to do that is just like have accountability layers so like if these delegates are just doing nothing or like abstaining from boats you have to kind of have that like disincentive there or transparency reports I Think Geek coin is doing a pretty cool job with their report cards on like how their delegates are behaving how they're participating and all that I don't think there's like a quick fix but there are two things that I do want to see more in delegation systems and that is ranked Choice delegation so if I choose you as my first one you're my second year my third if you're away for a weekend with your family it reverts to him and then to you so it just kind of plays more to that human level of governance like people have their lives they're not always going to be online and so on but also adding the time expiry of Delegation so if I delegate to you and I forget about it for a year my votes are basically just wasted especially if you stop voting so if the delegation actually like reverts or expires after a year it puts the omen on me to actually find someone I align with more as for the reputational thing it's definitely a tough one um maker did a really cool experiment with Source cred where they like had a custom algorithm that took months to kind of filter in their discourse forum but it assigned kind of incentives for those participation people I think the reputational layer can definitely be gamed and whenever you add metrics to something there's definitely risks but if you could aggregate like certain scores and like for like my involvement in Discord my involvement on community calls the or the more tangible things like GitHub commits and you aggregate into a score I think you can kind of give you some level of their like participation in the system or if they own an nft so you kind of have to pull from a lot of different sources to even like vet if they're like an active member versus like the gameable aspects but yeah it's definitely a tough subject I can't give you a great answer Charles um you talk about here you talk about a delegation expiring after certain amount of time um I'm wondering are you guys creating certain rituals or let's say re-elections every every let's say certain amount of time um and yeah I'm asking this is because as you said some people use delegate and then they forget about it and and yeah there's no retools there's no like a way for coming back uh like as we do it in traditional governance we have let's say in governments we have like four years election or stuff like that are you guys thinking um to do something similar among those lines or what yeah so when we originally came up with a governance steering Council the idea was to have like election Styles like every six months in the beginning and then like maybe like every year but there is a big problem with that and as the off-boarding of a member who is a big delegate or a council member you have to create a very like stronghold process involves governance so that's why we went with the rolling King of the Hill Style with like a delegation threshold so if someone were like that to like just kind of abstain from everything or do something malicious they would simply just like Drop in delegation and then someone could kick them off the GSC so it's a little more like dynamic when you say someone can you explain that um so if a GST member were to fall below the threshold to be on the GSE anyone in the community or any internet in a wallet can kick them by clicking a function so it's immediate off-boarding basically so is that kind of like a liquid democracy where you're essentially like I don't like this delegator anymore I pass it to I pass my boats to another person and then uh once they uh the threshold is below a certain point basically they can get kicked out yeah so it's a roof it's representative democracy like but mixed with liquid Deli like democracy that's a mouthful but yeah so it's a group of people on a council being able to do things someone does something malicious or they're just not doing a great job people stop delegating to them so that's liquid democracy aspect and then once they fall below the threshold someone kicks them they're no longer in Authority position so it's a lot quicker than having to do an off-boarding proposal where it takes a month to Upward someone where they can still do bad things or be an active and get compensated for it um we'll see if it works I mean the election style is not out of the question I think it's just a worthy experiment to try for sure