In 2017, the common token model was the infamous "utility tokens", now they are called "useless tokens". This model fails for two main reasons. First, most projects do not provide any real utility and can be easily replaced by stablecoins. Secondly, because it looks more like a security token that promises to share revenue, it has been severely cracked down by the regulatory authorities.

Based on the above concerns, the current market token model mainly adopts the "governance token" model, because it is based on the characteristic network and is not a security token. As a result, more and more crypto projects are launching governance tokens and integrating DAOs into their models than ever before.

However, there are several issues that need to be considered at the beginning of the project:

• What is a good governance model?

• How to utilize token governance?

• What is their DAO for?

• How do we build governance systems?

This article is part of a series of articles that answer these questions. Today, we focus on what good governance models will look like in the future.

Token distribution

A key element of a good governance system is fair token distribution. This factor largely balances the interests of the core team, investors, community and incentive pool.

Ultimately, compared to other projects in the market, the distribution of tokens is firstly allocated to the core team to provide short-term incentives for creating projects, and secondly to investors, because they need to provide funds for project development. However, in order to ensure the long-term viability of the project, a large amount of funds need to be allocated to the community to take over governance and development, as well as to encourage real users to use the project.

In general, a good rule of thumb about allocation is to keep the combined core team and investors around 20-40%. This aspect ensures their real interests, while leaving 60-80% of the community to achieve truly decentralized governance.

It has gradually become a common practice for some protocol projects to have committees responsible for allocating some of the community funds. It looks like an appropriations committee that can efficiently pass smaller proposals and act as a working group to allocate budgets to specific projects. In general, these measures help reduce friction in the operation of community funds, simplifying the complex process of voting on every action.

Finally, the evaluation of incentives is equally important. For decentralization, if the core team and investors together get 40% of the shares, while also taking advantage of the 30% incentive pool, they have more than 50% ownership. A more common scenario is to acquire tokens by staking them in an incentive pool and then dump them to the community. As both of these scenarios undermine the drive for good governance, they can have extremely detrimental effects on the governance of the ecosystem.

voting model

The governance voting model is currently a very hot topic, and some major models have already been implemented. It is worth noting that each model has its pros and cons, and there is no perfect voting model. You need to do your research on each one and then decide which option is best for you.

• One Coin One Vote: This is the most commonly used voting model. Since those users with more tokens have a greater stake in the protocol project, it makes sense to give them more say in the direction of the protocol. Its biggest downside, however, is that it often results in large whales getting a disproportionate say in the agreement. Many times early investors and core teams have accumulated large stakes at lower valuations, and any latecomer faces a huge hurdle if they want to acquire more shares.

• One-person-one-vote system: While not many projects use this model, it is often considered a more egalitarian alternative to the one-coin-one-vote system. It gives all voices an equal voice in decision-making, but also leads to trolls and those who don't have much stake in the project to influence votes. Also, it can be tricky to implement as it is vulnerable to Sybil attacks as people create many wallets to get more votes.

• Representative system: The popularity of this model is due to the Compound Governor Alpha contract. The voting representation system realizes a republican democracy. Individuals can choose others to vote on their behalf, and can change their delegation at any time. One of the biggest criticisms of the model was that it started to centralize the voting system. The decentralization of the representation system can be assessed by evaluating the ease of representation, the concentration of voting rights (heads), and token voting participation. Especially for a large number of early participants holding a large number of shares in the project, the representative governance model will improve its decentralization.

• Quadratic voting: This model provides token holders with more voting power on the one hand, and limits the additional power due to the increase in the number of tokens on the other hand. For example, a wallet with 1 coin can vote 1, a wallet with 2 coins can vote 1.9, etc. Although there is no larger protocol to test and use this model, it tries to balance the advantages of one-coin-one-vote and one-person-one-vote system, so that whales no longer have too much say. The problem to be solved here is to create a curve to prevent whales from increasing their total voting power by creating more wallets.

• Time-weighted voting: Time-weighted voting is used by a small number of communities, including Frax Finance. In this system, voters need to lock their tokens. The longer they lock up their tokens, the more the return on their long-term investment will be, and thus their voting power will be multiplied. This model does not necessarily solve some problems of one coin, one vote, but it does help motivate long-term participants. Two issues to consider here are: how to find the optimal multiplier curve and how to solve the situation where tokens are locked but new votes are opened. To a large extent, this mode favors ongoing voting, such as setting protocol parameters.

Elements of Good Governance

Now that we've seen the initial distribution of tokens and some of the ways to enable voting rights, let's take a closer look at the elements of good governance. Because there are trade-offs in the selection of these elements, we will discuss how each element should be prioritized over the life of the project.

transparency

Transparency is one of the most important components of good governance as it helps build trust in the system. Without truly transparent public discussion, voting and funding, communities could face oligarchy or systemic fraud. In the governance of crypto projects, it includes tying and tracking discussion speeches to individual-specific wallet addresses. In addition, it includes thorough discussion and communication of all activities undertaken by the community and its leaders.

As the project grows, so does the need for transparency. In the early days, core community members could act without excluding anyone, and while the forum was public, not every address could be traced. When the number of members increases to 50-100, the establishment of transparent forums and communication channels becomes very important for the development of the project.

easy access

One of the biggest issues in crypto and crypto governance is ease of access. Many people don't know how to buy cryptocurrencies or set up a wallet, let alone browse governance forums, snapshot voting, and on-chain governance. What's more, many communities set token requirements for creating proposals. Additionally, the gas cost of on-chain voting is sometimes prohibitively high.

A good analogy is traditional voting in the United States. Many states require government ID cards, early registration to vote, voting at specific polling places, and more, and each of these additional requirements can skew results. For example, those who have to travel long distances to get to work often cannot vote because polling stations near their residences are only open during business hours.

The community needs to actively think about all the factors that hinder ease of access and come up with solutions to make the UI/UX design of crypto governance more user friendly. In the early stages of a project, closing the governance entry for external contributors can hinder the growth of important early members. As the project continues to grow, removing barriers is critical to increasing the size of the community and the number of contributors.

voter efficiency

For the governance system to work, voters need to believe they can change the status quo by participating. Communities should continuously monitor voter effectiveness through turnout and community surveys.

Looking back at American politics, the power of the bipartisan system (Republicans and Democrats have large strongholds across the country) combined with the power of money in politics has resulted in inefficiencies for voters. Billions of dollars are spent on each presidential campaign, which also largely affects swing state voters. As a result, many chose not to vote and became indifferent to governance.

The cryptocurrency space is currently facing this problem, especially when whales or big players have far more voting power than community participants, leading community participants to believe that their votes have little effect. In addition, many discussions are conducted in private chat groups, and forum information is fragmented, newcomers' voices are drowned out by noisy discussions, and it becomes difficult for them to join community discussions.

It can be difficult to join community discussions when many discussions take place in private conversations, forums are fragmented, and newcomers are drowned out by noisy discussions.

Accurate and fast results

Finally, a good governance system needs to quickly implement the will of the community. This includes transparent and adequate discussions before voting. Once voting is over, voting results are executed accurately and quickly.

Currently, the community uses multi-signature for ambiguous changes and cheaper voting, or on-chain for specific code tweaks. But these processes only apply to certain stages from voting to execution, and there are many other factors that need to be addressed.

If governance discourse does not have a proper structure, there can be delays in moving from discussion to voting to implementation. Voting usually has a quorum requirement and a number of tokens. Setting requirements too high can cause delays, sometimes requiring re-voting, or simply waiting for whales to participate.

Also, the conversation can get lost in the midst of numerous discussions, or bogged down by "too many cooks in the kitchen" to vote in a timely manner. The community needs to actively and limitedly discuss projects before they are put to a vote. They also needed a way to keep track of all mentions so they wouldn't miss any issues.

Overall, the governance system needs to be thought through in the setting process, and its high quality is maintained through ongoing analysis.