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Web3 Governance Models: An Introduction to the Decision-Making Process in Web3 Projects

Developers may be the ones who launch Web3 apps, but the community makes or breaks their success. And sometimes, in Web3, the community even has collective ownership of the app. This deeper level of involvement from Web3 users raises a few questions: who should make decisions about the project, and how can those decisions be decentralized and equitable? Web3 governance helps answer both questions.

Deep dive
April 11, 2023
Lead Content Manager
An Overview of Web3 Governance Models

While Web3 governance can help manage Web3 projects, it comes in many different flavors. Let’s look at the types of Web3 governance models that you can adopt for your project.

What Is Web3 Governance?

Web3 governance refers to the decision-making process for a decentralized system. More specifically, it dictates how consensus is formed and to what degree the community can be involved with the direction of a project.

The key considerations in Web3 governance include how decentralized you want governance to be and how you can properly incentivize community engagement to participate in the project’s best interest with a given governance model.

Why Web3 Projects May Benefit From Community Governance

When building a Web3 app, you can choose to make all the decisions yourself or bring the community into the decision-making process through a Web3 governance model. Here are some key reasons why it might be beneficial to implement a Web3 governance model in your project.

Decentralize Your Project

Web3 is a decentralized space, and you can further decentralize your project by embracing a Web3 governance model. Many Web3 users care a lot about decentralization, and by decentralizing your decision making process and letting your community help steer the direction of the project, you may be able to reach a wider audience, add more resilience to the project by empowering the community, and create a tighter feedback loop on what your users want.

That being said, you don’t have to hand over all the decision-making process to the community. As the founder, you can retain the amount of control you’re comfortable with, or what is best for the project, and only let the governance model weigh in on specific aspects of the project. 

For example, Gitcoin provides funding to open-source projects, which sounds simple. However, the implementation is a bit more complex: the Gitcoin community can make individual donations to projects, and then Gitcoin project will match those donations using quadratic funding, putting a higher % of funds behind projects that don’t necessarily have a higher donation amount, but behind projects that have a higher number of individual donations. In that way, the community guides which projects on Gitcoin get more funding without collectively owning the keys to the wallet.

Benefit From the Wisdom of the Crowd

The well-known ”wisdom of the crowd” theory suggests that groups of people can tap into their collective experiences, worldviews, and knowledge to make better decisions than an individual can. Without a Web3 governance model, your core team will be solely responsible for making decisions in areas where they may not be experts. 

Through the wisdom of the crowd, you can harness the diverse experiences and expertise of your community to solve problems. For example, VitaDAO leverages the collective knowledge of its members in different working groups to make decisions on things like which academic research projects to fund and how to legally protect its IP and assets. 

Improve Transparency and Accountability

Community participation in governance can also improve transparency and accountability in your Web3 project. When the core team or a community member proposes changes, other users can know who made each proposal. By knowing the source of a proposal, the community can assess and evaluate the intentions behind it. 

This can help keep you accountable with your community because there is a transparent record of the decision-making process. This can strengthen your bond with your community and make them feel more positively about your brand while also providing safeguards to prevent any abuse of power down the line.

Manage Risk and Ensure Stability

Web3 governance models can also mitigate risk by providing a straightforward process for dispute resolution. In fact, 65% of startups fail due to founder disagreements. If the project had a Web3 governance model, it could have provided a framework for determining how to move forward when the founders reached an impasse. And in the event that the impasse is not repairable, Web3 governance models are a way for a project so survive the departure of the founding team.

Foster Community Engagement and Growth

Active Web3 governance can foster community engagement by giving the users of a Web3 service a chance to contribute to the decision-making process. This participation could enhance community members’ sense of ownership of a project. And when community members have a deep sense of involvement, they are more likely to use your app, think highly of it, and recommend others to join.

Types of Web3 Governance Models

There is no one-size-fits-all model for managing governance—look at how many varieties of government there are in the world today. Different governance approaches across projects reflect the Web3 industry’s principles of innovation and the recognition that different projects have different governance needs. Depending on the size of your community, the depth of technical sophistication you intend to deploy, and the level of decentralization you want to execute, there are five broad types of Web3 governance models.

Direct On-Chain Democracy

Direct on-chain democracy is a Web3 governance model in which all members of a Web3 community can vote directly on proposals. The votes are immutably stored on the blockchain and secured from tampering. For example, Moonbeam uses a direct on-chain governance model to enable users to vote on proposals with their MetaMask wallets. 

In general, this type of governance corresponds to 1 token = 1 vote, or has a minimum token balance in order to participate. This means that Web3 projects that adopt direct on-chain democracy are at risk of plutocracy, in which the wealthiest community members have an outsized influence on the outcome of votes (larger token holders have more voting power). A Chainalysis report indicated that fewer than 1% of token holders control 90% of the voting power of DAOs. 

Direct on-chain democracy is considered the most straightforward approach to Web3 governance because all users can track and tally votes without any specialized computation. When implemented with a Sybil-resistance mechanism, it can be more transparent and secure than other forms of direct democracy, as all votes are recorded on the blockchain.

Direct Off-Chain Democracy

Direct off-chain democracy is a Web3 governance model that is the same as direct on-chain democracy with the simple difference that voting occurs off the blockchain.

Tools like Snapshot make it easier to conduct voting off-chain, and after the voting is complete, the final vote can be recorded on-chain to enforce the decision. The community may also use a multi-sig consortium of trusted entities to record the outcome of the ballots on-chain to further secure the outcome. Ethereum uses a variation of off-chain governance to manage its protocol changes before implementing the decision on-chain.

From a usability standpoint, direct off-chain democracy can be easier, quicker, and more accessible for many voters—they won’t have to pay (potentially high) gas fees. However, taking the vote off-chain introduces risks: what centralized entity is handling the voting process? Who is recording the verdict on-chain? It introduces a requirement to trust someone or something, and that ultimately is less secure than a process that happens entirely on-chain.

Representative Democracy

Representative democracy is a Web3 governance model similar to the US government in which elected representatives vote on-chain to make decisions for the community. The community members typically elect representatives by delegating voting power to them.

In a direct democracy, educating all community members enough to make informed decisions might be logistically complicated (and at the end of the day, not all community members will participate—you see that in shareholder behavior in the US today; retail investors don’t participate in shareholder votes). 

The representative democracy model balances efficient decision-making with community participation. In a representative democracy, fewer people cast votes based on consultations with the larger community. For example, Cardano is experimenting with representative democracy by electing dReps, who vote on proposals within its Project Catalyst system. 

To curb the power of representatives, some projects will offer ways to collect more community input. For example, Uniswap’s Temperature Check measures how the community feels about a potential decision before selecting reps to vote on it, and Kleros offers an on-chain arbitration service when the community disagrees with the representatives. 

Athenian Sortition

Athenian sortition is a Web3 governance model in which the decision-making power is randomly assigned to some community members. This model aims to prevent the concentration of power in the hands of a few individuals and promote fairness and decentralization. For example, Synthetix uses a variant of Athenian democracy called the Spartan Council to manage its governance during a set period of time, and then a new council is chosen for the next period.

The people with decision-making power are often randomly selected from a pool of eligible or pre-qualified voters using cryptographic techniques, such as random number generators, and the duration of their tenure could be as short as a single vote or for a pre-determined period of time.

The aim is to capture the diversity of perspectives and interests of the community without centralizing power in the hands of a few members. While Athenian sortition may prevent centralization, it comes with its own issues because the selection of voters is randomized. For instance, the chosen voters may not be active in the project or well-informed, meaning they are not the best candidates to vote in the first place. A randomized group of voters may not evenly represent the various perspectives of the community either.

Quadratic Democracy

Quadratic democracy is a Web3 governance model that considers the number of votes for a proposal and the number of unique voters. This model prevents individuals with the largest number of tokens from wielding an outsized influence over decisions.

In quadratic voting, a user with more tokens has more voting power than someone with fewer tokens, but voting power doesn’t progress linearly with the number of tokens held/staked. For example, holding 1 token corresponds to one vote, and holding 4 tokens corresponds to two votes (and the token threshold increases quadratically from there)

As mentioned earlier, Gitcoin uses a quadratic funding mechanism that adjusts its donation matching, based on the number of individuals that donated to a project (not the total amount donated). Axelar is another example that uses a quadratic voting mechanism to reduce the concentration of power in its decision-making process. 

The quadratic function helps level the playing field and ensure that the richest participants don’t have an outsized voice in decisions. Quadratic democracy promotes fairness and decentralization in Web3 governance by recognizing all voices in the community. 

How To Choose the Right Web3 Governance Model for Your Project?

You can decentralize the decision-making process of your project by implementing a governance model. However, there are situations when it may be better to delay the implementation of a governance model. For instance, suppose the project hasn’t acquired product-market fit.

In the early stages of a project, the current users may not fully understand what is at stake (or ultimately be the users the project is intended for)—and that’s if you even have enough users that you could successfully launch a governance model in the first place. In those early days, it can be helpful for the founders to be the sole decision makers, so they can build their vision, innovate, and pivot their way to a project that eventually does have an engaged and thriving community.

Implementing a governance model also means prioritizing that development: building a governance model could distract your engineering team from building important features or functionality in your project that your community has asked for. There are some other technical limitations to keep in mind as well: a governance model will introduce overhead and reduce your ability to move quickly.

If you are convinced that community participation will benefit your project, the next step is to find the right Web3 governance model for you. Each has its strengths and weaknesses. Here are some things to keep in mind as you make your decision:

  • Pick a level of decentralization: Different governance models offer varying degrees of decentralization. How much do you want or need? For example, representative democracy is less decentralized than direct on-chain democracy. 
  • Consider the size of your community: Direct on-chain democracy may be more feasible for smaller communities, while representative democracy or Athenian sortition may be more effective for larger communities.
  • Choose a level of security: How much security do you want or need? On-chain voting will be more secure than its faster and cheaper off-chain counterpart, and certain governance models may introduce more complications to your codebase.

Remember that governance models may also evolve as the Web3 industry matures. Stay open to changing your governance model as your project grows. 

Get Started With Your Web3 Project Today

Now that you have become familiar with the different types of Web3 governance models, are you ready to start building in Web3?  Download our comprehensive—and free—guide that breaks down the basics of Web3 development, including new Web3 ecosystems, programming languages, infrastructure, and app tooling.

Download Our Guide to Web3 App Development
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