Web 3.0 cannot handle network manipulation using token-based governance

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Web 3.0 promotes community-driven ecosystems with decentralized, equitable and resilient governance.

Its goal is to disrupt traditional top-down organizational structures that suffer from centralization manipulation, insider control, strong arming, etc.

But it requires a radical change in the way we think about ownership, competence and decision-making.

Most Web 3.0 networks currently implement token-based governance. Their token holders get the right to vote that is, a word to say about the future of the project.

However, closer examination reveals that the “one token, one vote” approach of token-based models ultimately negates the fundamentals of Web 3.0.

Governance tokens like Curve Finance (CRV) or Uniswap (UNI) are generally tradable on open secondary markets.

This allows random people to vote without regard to actual contributions or reputation among community peers.

Wealth therefore translates into power and control. that’s not how we think about Web 3.0. But we have governance structures based on contribution and reputation as a solution.

DAOs and the baggage of centralization

DAOs (Decentralized Autonomous Organizations) are currently the dominant organizational model of Web 3.0.

The ability to manage business functions without intermediaries or centralized control is one of their Unique Selling Points (USPs).

They also replace inherited governance structures with community mechanisms, facilitating grassroots decision-making.

Decentralized Autonomous Organizations (DAOs) typically allow token holders to participate in on-chain voting for key decisions, either directly or by delegation.

Consensus execution is also automated using blockchain-based smart contracts. In theory, this is a significant improvement over the hierarchical authority frameworks common in traditional organizations.

But using token ownership as a condition of voting rights reintroduces risks of centralization and backdoor manipulation.

DAOs are susceptible to whales and malicious actors who can purchase massive amounts of governance tokens on secondary markets.

This gives them disproportionate influence, allows them to manipulate decisions according to their interests, and can even provoke 51% attacks.

Besides whales, inexperienced members of the community can participate in token-based voting, which reduces the quality of decisions and produces undesirable results.

Additionally, team members, advisors, and early adopters often receive large allocations of governance tokens, further threatening decentralization.

It can also inflate the valuation of a project by creating artificial demand via token acquisition.

These are some of the reasons why the St. Louis Federal Reserve found that “the majority of governance tokens are held by a small group of people.” And even with relatively even token launches, “the actual distribution often remains very concentrated.”

This increases the chances of pump and dump, among other results, as we have seen with the so-called SushiSwap exit scam.

Put reputation and contribution before wealth

Web 3.0 must innovate alternatives that support its quest for decentralization, autonomy and transparency. Wealth cannot be the vehicle of power and control here, as it was until Web 2.0.

Because all the effort then becomes futile and worthless in this scenario. And Web 3.0 fails the users it is supposed to empower.

There will be no single leader in Web 3.0. This is a crucial factor in limiting corruption while ensuring healthy competition and collaboration.

But for this to happen, we must realize that not everything that is purchasable can form the basis of sound and robust governance.

There should be no possibility of buying or selling votes with money. Instead, community members must earn their voting and decision-making rights.

We need governance models where local reputation and real contributions matter more than a person’s wealth or purchasing power.

The DACs (decentralized autonomous companies) are thus innovating an unprecedented system. Only those who have a verifiable reputation for their positive contributions to the network are granted voting rights in this system.

DACs operate with the insight of Peter Kropotkin that “competition is the law of the jungle, but cooperation is the law of civilization.”

They derive value from member contributions, rather than the market capitalization of governance tokens.

Instead of small groups of insiders or whales, network contributors can participate effectively and equitably in governance as a whole.

Although DACs can still use dedicated tokens to facilitate governance, they cannot have any monetary value or be tradable.

These tokens are then linked to Non-Fungible Tokens (NFTs) demonstrating reputation, which can be earned through contributions such as increasing Total Value Locked (TVL), generating transactions or trade leads, assistance with technological development, etc.

The number of tokens in the user’s wallet does not play a role.

Towards meritocracy and equity in Web 3.0

DACs and their reputation-based governance structure promote meritocracy in Web 3.0. They create an environment where active contributions receive due recognition.

Above all, they create free governance from the dynamics of the market, encouraging members of the community to cooperate for common interests.

Web 3.0 is meant to be a domain where individuals are empowered to participate autonomously on their terms.

Reputation-based governance is a key enabler in this regard, limiting collusion between wealthy or vested-interest users.

Unlike token-based models with predefined vesting schedules, it also minimizes risks such as token dilution and insider trading.

Equity is therefore one of the main advantages of using reputation to determine voting power in Web 3.0. The other result is effective decentralization.

These two elements are crucial for the adoption and long-term relevance of Web 3.0.

They deliver on the promise of a world that is truly people-centred, resistant to manipulation and just. i.e. the progressive principles for which we believed in Web 3.0 in the first place.

Elena Sinelnikova is a co-founder of Metis, growing the project from startup to successful and sustainable business. Prior to Metis, Elena founded CryptoChicks, an educational center and accelerator for women in blockchain in 56 countries, and served as a solutions architect for the Government of Canada.

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