How to tackle Cardano's governance.
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#axotrade #cardano #cardanocommunity #ada $ada #defi
- Thread Time 🧵-
#axotrade #cardano #cardanocommunity #ada $ada #defi
1/ Intro
Cardano is entering the age of Voltaire, the age of community governance.
This is going to be a critical development period, which will, in no small part, determine the future of the blockchain.
In this thread, we'll discuss the pitfalls and solutions to governance.
Cardano is entering the age of Voltaire, the age of community governance.
This is going to be a critical development period, which will, in no small part, determine the future of the blockchain.
In this thread, we'll discuss the pitfalls and solutions to governance.
2/ 1st Principles
The problem that governance seeks to solve is what is termed in finance as the "principal-agent problem" (PAP), as in when stakeholders nominate someone to represent them, but they're unsure if the agent will act in the stakeholder's best interests or their own
The problem that governance seeks to solve is what is termed in finance as the "principal-agent problem" (PAP), as in when stakeholders nominate someone to represent them, but they're unsure if the agent will act in the stakeholder's best interests or their own
3/ Age Old Problem
The PAP is VERY old. Just ask the Roman emperors, who'd give an army to a general, and then with the newfound power, generals would organize a coup.
Even now, a lot of modern management and governance theory seeks to address and solve the PAP
The PAP is VERY old. Just ask the Roman emperors, who'd give an army to a general, and then with the newfound power, generals would organize a coup.
Even now, a lot of modern management and governance theory seeks to address and solve the PAP
4/ Aligning Incentives
One of the key ways in which the PAP is addressed is by trying to align the well-being of the agents & the stakeholders.
In companies, this is often done by things like offering stocks - so that if agents manage the company well, they are rewarded.
One of the key ways in which the PAP is addressed is by trying to align the well-being of the agents & the stakeholders.
In companies, this is often done by things like offering stocks - so that if agents manage the company well, they are rewarded.
5/ Gaming the Metrics
The problem with trying to align well-being by giving tokens/equity is that the agents are then incentivized to do things that benefit price appreciation but do nothing to improve the business - such as buying stock with the company's cash reserves.
The problem with trying to align well-being by giving tokens/equity is that the agents are then incentivized to do things that benefit price appreciation but do nothing to improve the business - such as buying stock with the company's cash reserves.
6/ Trust
A difficult thing to stomach for an industry aspiring to be trustless is that governance implicitly relies on a degree of trust.
No matter how carefully you organize governance, humans are still making decisions, and you can't predict their actions.
A difficult thing to stomach for an industry aspiring to be trustless is that governance implicitly relies on a degree of trust.
No matter how carefully you organize governance, humans are still making decisions, and you can't predict their actions.
7/ Track Record
Only give power to people who have been proven to be capable of managing the responsibilities and privileges that come with power.
You shouldn't choose agents based on unrelated criteria, such as whether you find them funny or interesting.
Only give power to people who have been proven to be capable of managing the responsibilities and privileges that come with power.
You shouldn't choose agents based on unrelated criteria, such as whether you find them funny or interesting.
8/ Limit the Damage
The system should be designed so that no matter how corrupt or ineffective any single agent is, the network can push out the bad agent, self-heal, and continue.
There should never be any key person in the organization, or it's doomed to fail.
The system should be designed so that no matter how corrupt or ineffective any single agent is, the network can push out the bad agent, self-heal, and continue.
There should never be any key person in the organization, or it's doomed to fail.
9/ Defining the Remit
Stakeholders can further control their representatives by only giving them freedom of action within a predefined space. Any action requiring elements outside this space would require direct approval by the stakeholders.
Stakeholders can further control their representatives by only giving them freedom of action within a predefined space. Any action requiring elements outside this space would require direct approval by the stakeholders.
10/ Neutered Power
An issue that arises with limiting is that no action requiring immediate and effective power can be addressed with this slow and methodical approach.
Sometimes the house is on fire, and someone has to make the decision to put it out before everyone can agree.
An issue that arises with limiting is that no action requiring immediate and effective power can be addressed with this slow and methodical approach.
Sometimes the house is on fire, and someone has to make the decision to put it out before everyone can agree.
11/ Who Watches the Watchers?
Everyone with any degree of influence over the system should be observed- every decision questioned, and they should never be taken at their word.
That's where the community comes in. Together you are powerful and can apply pressure where needed.
Everyone with any degree of influence over the system should be observed- every decision questioned, and they should never be taken at their word.
That's where the community comes in. Together you are powerful and can apply pressure where needed.
12/ Balance
Governance is a spectrum - every system benefits from some degree of centralization/decentralization in key areas.
If Cardano is to succeed in governance & create a DeFi space that is fair and efficient for everyone, it must identify and address these points.
Governance is a spectrum - every system benefits from some degree of centralization/decentralization in key areas.
If Cardano is to succeed in governance & create a DeFi space that is fair and efficient for everyone, it must identify and address these points.
13/ Conclusion
Governments, corporations and now blockchains have been struggling with the principal-agent problem since they were invented.
There are many challenges ahead.
But with a bit of patience, skepticism, and care, Cardano can build something unique in the industry.
Governments, corporations and now blockchains have been struggling with the principal-agent problem since they were invented.
There are many challenges ahead.
But with a bit of patience, skepticism, and care, Cardano can build something unique in the industry.
If you enjoyed this thread, please let us know in the comments, and subscribe to @axotrade 🧵
For something more in-depth, make sure to check out our ongoing History of Finance series:
axo.trade/newsroom/posts…
For something more in-depth, make sure to check out our ongoing History of Finance series:
axo.trade/newsroom/posts…
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