Balanced Blockchain Governance. The Pros and Cons of Incentivized Governance.

Governance 2.0 on Polkadot and Kusama. Massively democratic and open. However, there is one open question. Is it good to incentivize voters to participate in governance? What are the pros and cons? The exploration of how incentives are a continuum and not just a binary question with potentially many details to take care of as well as pitfalls.

Case 1: Extreme incentives. Need for Extreme Governance Participation.

An example of this is Dfinity’s Internet computer. Once, unrealistically touting blockchain AI governance, Dfinity had to settle for liquid democracy. On this blockchain, the only way for users to accrue inflation rewards is not through staking delegation or nomination due to the centralized nature of validation and node operation on Dfinity’s Internet Computer. Validators were initially hand-selected by the Internet Computer Association and Dfinity, which is just another group of current and former Dfinity members and community. So open participation as a validator is not possible at this time, it’s a permissioned network with the highest requirements for hardware. In this environment, token holders need a way to opt in to inflation rewards and this way is governance participation.

The main drawback is the need for extreme participation on this network’s governance. Daily, Dfinity governance processes dozens of governance requests, many requiring heavy technical knowledge and other times things as banal as adjusting the rewards to the SDR price. So these matters are done by governance instead of oracles, so a person wanting to vote for every motion would require high technical capabilities and time. For this reason two cons have appeared for the Internet Computer’s type of governance.

-Few centralized entities that decide the vast majority of votes. For obvious reasons, the average Dfinity holder and developer wouldn’t want to be involved on dozens of daily governance questions. So the way to make it easy for holders is to delegate their vote to “trusted entities” so that they take care of the person’s vote. This is a non-controversial issue by itself. By default, Cosmos has vote delegation to validators and Polkadot has opt in delegation to whomever you wish to vote for you and governance 2.0 will also have the option to pick different accounts for different topics. However, due to the sheer amount of required governance votes, only 3 semi-independent entities (formed by former and present Dfinity employees and developers) and two centralized entities (Dfinity and the Internet Computer Association) have been offered as defaults on the governance UI. People are free to delegate their vote whomever they want outside of these options but no good alternatives are available on high numbers. Compare that to the number of independent votes and delegations on Cosmos and Polkadot and you will get a tiny fraction of active decision makers on Dfinity as opposed as Polkadot and Cosmos.

Consequently, the total amount of decision makers on Dfinity is just a handful of well connected people more often that not to Dfinity and the number of total voting power is no good measure of participation in the governance system for Dfinity, as this number is almost 100% of neuron locked token holders but with only a small fraction of them, actively making decisions.

-Incentivized voting without other incentives creates spam on governance. Unlike governance 2.0 on Polkadot where proposals need to go through a filter first. Dfinity government proposals are spammed so that they get voted in. Which in turn will yield more governance rewards for all Dfinity voters. This is a major issue that Dfinity still has not solved because anyone can create a proposal which will be voted on and voters rewarded. The implementation of a filtering system would require a redesign of one of the core components which is not going to be done soon or easily. So the most likely governance solution by Dfinity in the short term will be blacklisting certain addresses in a cat and mice sort of way.

Case 2 No incentives. Massive Governance Participation

One of the possible scenarios for governance 2.0 in Polkadot and the likely one for the start of governance 2.0. The plan of creating a social filtering mechanism that doesn’t allow spam, malicious and overall bad proposals to reach the referendum period. This will have massive participation from legitimate proposal as well as attackers. Neither the responsible for the filtering nor the entities participating in the referenda will have any type of incentive. The main theoretical drawback? That participation in voting or filtering will not be as large as if there was any type of compensation. Probably proposals will also not be as numerous as the Dfinity case where, without any type of inzentivation, network participants are financially motivated to spam the network. Another risk appears with this type of governance which has made its rounds on Cosmos already. With the inclusion of malware links attached to governance, the people in charge of the filtering will have to fend off these types of attacks so that unsuspecting voters don’t find these malware links on their final referendum. Whether this will increase or decrease with or without incentives is still uncertain.

Case 3 Incentives on Filtering and Voting. Massive Governance Participation

The second possible scenario for governance 2.0 in Polkadot which most likely be voted and tried first on Kusama after the activation of Governance 2.0. The social filtering will be incentivized as well as the referendum participation. However, this will bring us closer to the incentivized spam case of Dfinity’s Internet Computer. The good thing about this scenario is, that the incentivization for the entities responsible of filtering will also activate more active participation in order to avoid spamming of the actual voting.
The main drawback of this scenario, is that incentives will have to be distributed to more people thus increasing inflation if rewards aren’t bound by a concrete number. On the other hand, if there is a fixed number for rewards then these can be diluted too much if there is a large number of participants. Alternatively, If the number of rewarded participants is too little then rewards would be disproportionately high, though, this scenario is unlikely to happen as people usually tend to flock towards incentivized participation of any sort.

Case 4 Incentives on only Filtering. Massive Governance Participation

The following is the least likely as will not increase proper participation on the most important part of governance 2.0, the referenda. This scenario is the least likely for exploration as the entities in charge of filtering proposals will be highly incentivized but voting would be expected to be the same as now or slightly higher due to the increase in participation in filtering.

Case 5 Incentives on only Voting. Massive Governance Participation

The most vulnerable scenario as people would not be rewarded for stopping bad proposals but only rewarded for voting. This is the most similar scenario to Dfinity’s Internet Computer and will likely attract the most spam proposals as this will increase the payouts for governance participation without having much incentives for people trying to stop them.

In conclusion, incentives for governance participation is a good idea when designed properly but it doesn’t come without its trade-offs and possible unforeseen pitfalls.

Published by: Saxemberg on Aug. 20, 2022