#4 Governance Series
Did you know that protocols achieve on average a governance voter participation rate of only 5–10%?
Decentralized governance requires the community’s commitment and time more than anything else. With the number of token holders so high, it is unlikely that all token holders will exercise their vote. The concept of delegation helps solve the issues that decentralized governance currently faces.
Delegates act as a representative of token holders for the governance of a protocol. They are expected to participate in forum discussions, meetings and vote on submitted proposals to determine a protocol’s future.
In this post, we will explore the function of delegation, the benefits and drawbacks, and issues that delegates currently face. StableLab acts as delegates at various protocols such as Element Finance, Optimism, and various others, and we believe delegation is an essential part of the puzzle to successful decentralized governance.
What is a Delegate?
With decentralized protocols such as MakerDAO, Balancer, and others now relying on the voice of the token holders to further the protocol, it has become apparent that very few token holders actually participate in the voting. When analyzing on-chain data with tools like Dune analytics one can observe that very few addresses actively participate in voting or have never voted for a specific protocol.
A lack of voting means protocols can become subject to malicious activity, such as a hostile takeover or liquidation. Hence, there are voting mechanisms such as delegation that can mitigate this type of activity.
Delegates are individuals who act as a representative for token holders who do not wish to participate in governance themselves, either because they are not interested or do not have enough time. It is unrealistic to expect token holders to be active in each protocol they are invested in, so delegates are a great way to trust another person who can act on your behalf.
This way, token holders can transfer their voting power to their chosen delegates, who then have the combined voting power of token holders to vote on proposals. Delegates only have access to the voting power and do not have custody of the token itself. Token holders can also re-delegate or self-delegate if they believe their original delegate no longer shares their values.
Many protocols are currently starting to implement delegates into their protocol, as relying solely on token holders is becoming unsustainable. With so many protocols implementing delegates, we have noticed both positives and negatives, which we will further explore in this post.
Why do we need delegates?
Currently, protocols are lucky even to achieve a voter participation rate of 5–10% due to the overwhelming nature of voters being spread across many different protocols and invested in various projects. In web3 governance, it is common to use various communication tools such as discussion forums, Discord, and Twitter, making it demanding and time-consuming to stay updated with even one protocol. It is unsustainable to expect an individual token holder to be active in a variety of protocols. Especially if they are whales or VCs, that can mean a significant amount of idle voting power.
Delegates take that responsibility off from token holders and focus on one protocol, meaning that a delegate is expected to have a better insight into the protocol than an average token holder. This transferability of voting power coupled with the expertise of delegates means that protocols are likely to notice an increase in votes and informed votes. Informally, delegates are expected to summarize their reasoning for each vote, so scraping through this data could present more informed votes. An average token holder isn’t required to explain their reasoning behind a vote.
Token holders can and should continue to vote for protocols. However, if they don’t dedicate the time and resources to understand and support the protocol, their votes might be misinformed. A lack of understanding can potentially harm the protocol. Another scenario is that token holders might “follow the sheep,” meaning they vote following the majority, disregarding making an informed decision, as they assume the majority is always correct.
We believe that token holders should vote if they can commit the time and resources to make informed decisions, but if not, they should recognize their limitations and delegate to individuals they trust. This also leads to a win-win situation as delegates actively participate in governance, making more informed decisions, leading to a better outcome for the protocol. Delegation won’t always lead to better results, but one can safely assume that, if applied correctly, it will positively impact the protocol’s governance over time.
Does delegation mean decentralization?
A commitment to decentralization requires an understanding of the benefits and drawbacks of each voting mechanism. So far, we have identified that coin-voting is not an ideal tool and will not be for the foreseeable future, but one way to mitigate the dangers of coin-voting is to introduce delegates. In coin-voting, one token equals one vote. Therefore large token holders have a more significant influence than small token holders, even though it doesn’t necessarily mean they have a more informed opinion. This is a plutocracy — an organization governed by a few wealthy.
Delegation enables small token holders to pool their voting power to one individual who volunteers to participate actively and potentially have the same voting power as larger token holders. Even though delegation reduces the impact of coin voting, it is only a temporary band-aid as we explore other voting mechanisms such as quadratic voting or conviction voting.
Who can be a delegate?
Anyone can become a delegate. Protocols have applications that involve filling out a template given by that specific DAO, like the Balancer application template seen below. These applications can be vague, but some, like Balancer, have questions that require further research on the protocol and their vision.
After you have been accepted as a delegate, depending on their process, they might have a delegate page where you can see all the delegates, similar to the Optimism delegate page below.
Some protocols do not have a delegate page, and instead, token holders will have to scroll through the forums to identify an ideal delegate and delegate to them through the Snapshot.
Every individual has an opportunity to act as a delegate, regardless of background and resources. Delegates can also apply as professional organizations like we at StableLab. The advantage of professional delegates is that they work at a high level with the subject matter and are therefore well qualified. There are several emerging governance-focused organizations like us and one can expect this to increase. A diverse collection of delegates complements another skill set, as each type of delegate has its benefits and drawbacks. This leads to a diverse pool of delegates which is essential, as each delegate would have a different perspective on each proposal.
The Law of Un-attraction
As much as delegation seems like an attractive opportunity for token holders, it is currently a very unattractive role for delegates. Delegates are still expected to volunteer their time and resources to support decentralized protocols while it requires a history of experience and a considerable amount of commitment.
Instead, this has led to the “honeymoon” phase for delegates. Initially, delegates are eager to impact, but soon after realizing the amount of work without compensation, their participation rate declines. This is more common for delegates who apply as individuals as they need a source of income. It’s not a fair nor sustainable model in the long term. In the bear market, delegates will be one of the key players who help advance and safeguard the protocol, so we must accordingly reward delegates for their efforts.
Specifically for individual delegates, it is unfair to expect them to work for free. As a company, we are fortunate to have resources and a team who can work on our delegation commitments. However, we believe that protocols need to have a diverse pool of delegates, ranging from individuals to groups to VCs. Currently, delegation is more likely to be undertaken by groups such as financial firms or affluent individuals who can continue working without payment for the foreseeable future.
At this moment in time, only MakerDAO actively has a monetary compensation model in place for their delegates, making it a somewhat more attractive role. Relative to other roles in the space, it has a lower compensation rate, and this is one of the reasons that delegation has not taken off (yet).
A better future for delegates
We believe that to increase the quality of delegates and delegate participation rate, delegates should be financially rewarded. At MakerDAO, the compensation model revolves around various factors such as; the amount of MKR voting power, forum participation, and voting participation.
We believe various models should be tested to compensate delegates to identify the method that best encapsulates their value-added to an ecosystem without under or overpaying them. Besides financial interests, we believe that delegates will become a more respected and essential role within mature DAOs, as they act as one of the leading voices for a protocol.
Delegation is one of the most promising tools to accelerate the decentralization of protocols, but with a lack of incentives, it might not scale. As delegation undergoes the experimentation phase, we can expect to see various methods that combine delegates within the governance structure of a protocol with its incentive mechanisms.
We at StableLab look forward to acting as active delegates in various protocols and are more than willing to work with more protocols, acting as a delegate or supporting a protocol in developing their governance structure and frameworks.
Get in touch,
If you would like to support us in our governance efforts,
If you and your team need guidance on governance related matters, or
If you are a founder who is building something interesting in web3