Democracy, Governance & Attack Vectors Workshop Pre-Reading

Authors: @afromac, @iluscavia, @ncitron, @Pepperoni_Joe

Summary

The central remit of the Autonomy Group was to define a roadmap for Index Coop towards progressive decentralization. This roadmap has been agreed upon by members of Index Coop, DeFi Pulse and Set Labs and presented to the community on August 25th, as a series of workshops that will be open to participation for all community members. The goal of these workshops is for the community to collaborate in defining and designing the kind of DAO that we want to be, while also making the structural changes that will enable us to become more autonomous and decentralized. The outcome of the series of workshops will be a series of directives that the community produces that will ultimately be put to vote.

The five key themes to guide these workshops include:

  • Financial and Administrative Capabilities
  • Third Parties & Methodologist
  • Protocol Ownership and Compensation
  • Leadership & Strategy
  • Product & Engineering Autonomy

My co-authors and I have requested to facilitate a workshop on Democracy, Governance & Attack Vectors. This includes an analysis of both the soft power (current leadership structure) and hard power (token distribution and voting) that guides decision-making in the Coop today. We hope to use this opportunity to give the community the opportunity to evaluate the existing power structure in Index Coop, and to stimulate discussion of alternative systems that may be more effective or equitable.

The two questions that should guide us in these discussions are:

  • How do we ensure that the proper voices have influence?
  • How do we avoid bad actors from having improper influence?

To initiate these discussions, we shall demonstrate that the current system in place is inadequate for a number of reasons:

  • Unfavourable tokenomics has created a system that is extremely vulnerable to capture.
  • High level decision-making is opaque and unaccountable directly to the community.
  • Much of our governance happens on chain today. This already produces many procedural challenges, while granting much power to token holders. Decisions need to be made about the future of on-chain voting and how it should be implemented or redesigned in order to better optimize this situation

These workshops will be designed to empower the community to evaluate the risks that this current system creates, and to demonstrate some of the tools that we can use to solve these problems. Participants in the workshop will be tasked with applying these tools, and any others that they suggest, to try to design governance systems that are both safe and resilient, as well as being acceptable to the community.

The ultimate goal of these workshops is to deliver a series of directives to be voted on that enable contributors in our community to have influence over the direction of Index Coop, that make sure contributors feel that they have “skin in the game” and direct ownership of the outcomes of their decisions, and that the system we produce is less vulnerable to capture.

The topics that we are going to cover in include:

  • Why are we talking about INDEX 2.0
  • What is the status quo?
  • How vulnerable are we to capture?
  • What is democracy?
    • How can we use these ideas to solve our problems?
    • But what are the risks?
    • Are these proposals fair and equitable?
  • How resilient are these proposed solutions to attack?
  • What standards shall we (the facilitators) hold ourselves to and how should people evaluate our work?
  • What should this process look like?
  • What are we trying to produce as an outcome?

INDEX 2.0

In July of this year, the community agreed upon the creation of an Autonomy Kick-Off Group that would be tasked with the delivery of a roadmap towards decentralization. This was a cross-functional group, made up of members of Index Coop, DeFi Pulse and Set Labs.

The key deliverable of this group was the roadmap which was produced on August 25th. The roadmap identified a number of challenges which fell under the themes mentioned above. The proposed method for overcoming these challenges are a series of educational workshops, of which the outputs…

The mandate to the community is clear - we are responsible for designing the DAO that we want to be.

This challenge has provoked different responses in all of us, and raised questions that the community must answer:

  • What do we want Index Coop to be?
  • What does autonomy or independence mean to each of us and can we agree upon a definition that, if not perfect, is good enough?
  • Do we even want leaders, and what are the advantages and disadvantages of having leaders?

The Status Quo

The reality of the situation today is that we already have leaders but they are unelected and unaccountable to us. This has led to much friction in the community, and a breakdown in trust. The community has signalled a willingness to overcome these frictions, but while the exercise of soft power within the Coop is largely obscured from the community, rebuilding that trust may be untenable.

Similarly, we are highly vulnerable to governance capture by an external entity. Reaching a quorum on a normal IIP, based on today’s distribution of INDEX requires only ~100,000 votes. At today’s prices, that would only require $5M USD. Essentially, it would be a trivial exercise for an activist hedge fund (or similar entity) to begin seriously manipulating Index Coop policy. If a perception exists today that token-weighted voting is adequate for our decision-making, community members need to examine those assumptions, and evaluate how much impact contributor votes would have on a critical vote if bad actors decided to move against us.

The position of the authors of this piece is that resolving these issues of the status quo may not be possible through tokenomics alone, and that some hybrid form of governance that includes both on-chain and decentralized governance (DeGov) may be preferable, or even necessary.

Why Democracy?

The diffusion of power away from centralised entities is a fundamental tenet that informs both the value proposition, and ethical underpinning, of cryptocurrency and blockchain technology. We should never lose sight of this core value. However, as a DAO, we exist as a collaborative body of people who have come together around a set of common goals. Deciding exactly what these goals are, and how they evolve over time, needs to be a reflection of the will of the people. Otherwise it is likely that many contributors will simply decide to disengage from the community. One way to achieve this empowerment of the contributors, is to have directly elected leaders. We have begun implementing some of these ideas in our decision-making process already, and there is great potential to bolster and improve those systems. A properly designed democracy should produce the accountability and transparency needed to empower leadership, while putting checks and balances on that leadership, and protecting contributors from the tyranny of the majority (pure tokenomics).

A central goal of these workshops is that the community should design this democracy. We have many models of democracy to choose from. Strong democracies should reflect the underlying realities of the societies that they represent, and seek to address the difficulties and problems within that society. Strong democracies should also protect societies from capture by populism. We do this by ensuring the directives that come from these workshops, help to move us beyond an us vs them, or elites vs the people, narrative. This is not a trivial challenge, but it is something the community can rise to.

What Is Democracy?

Designing a democracy requires a realistic appraisal of what it actually is, and what we can hope to achieve in creating one. Direct Democracy, Liberal Democracy and Social Democracy (among others) are all valid models of democratic design with their own inherent advantages and trade-offs. We need not consider each of these in detail, but it is important to note that no one “correct” way of implementing a democracy exists. An idealised view of democracy is not helpful to us.

“government of the people, by the people, for the people…”

In reality, a democracy exists as an institutional arrangement in which people compete for votes.

This creates a number of risks and challenges:

  • Individuals are irrational
  • People are competitive
  • No one “truth” exists about what common goals we should pursue

Implementing a democracy creates a risk of capture by demagoguery and populism. In the case of nation-states, this often creates a need for a limited government that is held accountable to a charter or other governing documents. It is inevitable that varied perspectives will lead to varied perceptions and diffuse action. Informed decision-making and consensus building help us to safeguard against these risks.

How can this work in our DAO?

This is the challenge that we put to the community. Democracy is a flawed but effective means of governance that has existed for thousands of years. We know that we can apply features of these systems to our own circumstances. We can already see this happening in our own DAO as well as others. Whale DAO is one such example that is not too dissimilar from our own Decision Gate process, but has unique features that more closely resemble the bicameral legislature we see in many modern democracies, for example the House of Representative and Senate in the United States. Importantly, one vote is one vote. No single member can have outsized voting power.

Token holders of WHALE are able to stake their WHALE for Hold-2-Play roles that enable

them to participate in a 2-step voting process that covers the decision making processes on community, budget and assets.

Any member can create a proposal, but it must be sponsored by someone with a role before it can be put to the first vote (House of Representatives). If the vote achieves a >70% approval and meets quorum then it can advance to a second vote. In order to vote in the second vote (the Senate), a member needs to have staked a certain amount of $WHALE at an earlier stage.

This example is not meant to express a preference for this specific system, but is helpful as an example of how models of democracy have been applied in a decentralized system.

What are the risks and how can we address them?

One wallet-one vote creates a major risk for manipulation and exploitation via Sybil Attack, in which bad actors simply forge multiple identities by creating many wallets. There is no one obvious solution to this problem, and any decision we make here will have disadvantages and tradeoffs to consider.

Tying Owl Level to voting rights is one possibility. This helps solve the problem of bad actors forging voting identities directly, but introduces a number of complications which force us to make decisions about the long-term governance structure of the Coop.

An oversight committee could be appointed to make decisions about granting Owl Level. This can serve as a filter on bad actors spamming accounts. It also introduces the risk of granting outsized power to an individual or group within the Coop. Moreso, it requires off-chain analysis to function effectively, and could tie us into a future where full decentralization is not possible.

All of these, and other risks, must be considered in light of a central value proposition of the INDEX token itself - the ability to buy votes in ours and other DeFi protocols. Diminishing the voting power of the INDEX token devalues our treasury.

What will this process look like?

The process that we intend to develop in these workshops should look like the above examples. As a community, we will:

  • Identify governance problems that we need to solve
  • Analyse case studies and theory to develop solutions
  • Evaluate the inherent risks and downsides of that solution
  • Iterate

The key step is to iterate. Anyone who participates in these workshops can expect to spend time suggesting systems and processes, as well as trying to break and exploit them. As we identify potential exploits and weaknesses, we will try to develop better solutions. If we are successful, we should arrive at a robust framework that we feel we understand what the risks are and we can live with them. We cannot let perfection be the enemy of good.

What should the outcome look like?

The outcome of these workshops should be a set of directives that lead to a multifaceted structure with overlapping mechanisms of decision-making and oversight. If done correctly, this can help to reduce points of failure and create a system that is resilient to attack. Equally importantly, the entire community should be aware of the decisions that were made and why they were made. Ultimately these directives must be acceptable to the community so that they can be voted upon and become a central part of our governance process.

What values do we hold ourselves to?

As the facilitators of this process we believe that it is important to clearly define what we see as our own goals for this process, and what the bounds of our actions should be.

As the facilitators, our goals are to:

  • Inform the community of the current state of affairs
  • Create/run workshops to convey and receive feedback
  • Solicit community input in creating the next evolution of Index
  • Synthesize a way forward to present to current leadership and broader community

Crucially, we are part of the problem if it is just us pushing a narrative. We are here to provide evidence and facilitate debate. We will strive to be dispassionate and objective in all of our actions. This process belongs to the community.

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@afromac and team - thank you for putting this together! I’m excited for the first workshop on this topic.

I am going to leave some high-level thoughts and questions on the topic.

Firstly, I would amend this bullet:

Amendment: Set Labs and DFP have both hard and soft power over Index Coop by design from launch with the goal of progressively decentralizing over time. Regardless, the present state is control by two legal entities. See my comment here for more detail. This details of that analysis have changed somewhat after the investor sale, but the overall conclusion is still the same.

I would also amend this bullet.

Amendment: Too much of our governance happens on-chain. It is crazy that hiring, strategy, product, and mechanism design decisions are subject to a democratic vote of tokenholders.

In my view, one of the primary reasons Index Coop is the market leader for decentralized indices/ETFs is because of governance minimization. Unlike Indexed.Finance, PieDAO, PowerPool, etc. the token weights within our products are determined by a single accountable entity, a Methodologist, rather than a democratic vote of tokenholders.

Overall View on Index Cooperative Governance: When I first joined Index Cooperative, and sought to become a Methodologist, I viewed it as a true cooperative of methodologists.

I have learned in the past 10 months that this is an aspirational goal, not a present reality.

Index Cooperative succeeds or fails by the quantity and quality of the methodologists it attracts and retains to build the best decentralized indices/ETFs in crypto.

As a Methodologist, why do I choose to build and launch a product with Index Cooperative instead of somewhere else? Why is a Methodologist willing to give up some portion of their product’s revenue instead of keeping 100% for themselves?

From my perspective, it boils down to the just 3 reasons:

1. Distribution from Community: Get preliminary data on product-market-fit from contributors and direct distribution to a large community of crypto index investors.

2. Rebalancing-as-a-Service (i.e. Control as Liability): Methodologists are solely data providers. They determine which tokens are included or excluded as well as the token weights for their product, but do not have custody or access control so are not liable for product failure (i.e. funds being drained) or regulatory risk (i.e. methodologist is not a custodian).

3. Protocol-level Engineering Enhancements: Engineering work on various feature enhancements (i.e mint & redeem fees, intrinsic productivity, etc.) benefit more than just a single Methodologist’s product. Cost and benefits of engineering enhancements are spread across Methodologists and their products.

TL;DR: Index Cooperative mechanism design should seek to minimize and delegate governance decisions to facilitate onboarding and retaining Methodologists and their products.

CC: Leadership and Working Group Accountability Group: @Metfanmike, @gregdocter, @mel.eth , @LemonadeAlpha , @jcooper

Resources:

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Hi, do forum posts count as a document for “pre-reading”?
If so, I’d be happy to link a few here.

Absolutely. That would be great thank you.

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Hi Thomas

Thanks for the thoughtful post. Here are a few of my thoughts on your points.

I intend to keep my original statement here as it is - for now. Reason being that while DFP, Set and Community Treasury hold - or will hold - the majority of tokens, none of those addresses use their INDEX to vote. They have agreed to opt out of voting and instead allow tokens distributed by other means - liquidity mining, contributor rewards etc, to determine the decision-making process. This situation is purely a social norm and essentially exists as a gentleman’s agreement. The entrance of one of these wallet addresses into the voting process, could provoke the entrance of the others, and would fundamentally alter the nature of governance in the coop. This is a scenario that should be considered in the workshops, but I do not think it represents the current state of INDEX voting in the Coop.

What I would consider a more accurate depiction of voting power is the INDEX that has been distributed since genesis outside of these addresses that either is eligible to vote, or is already actively voting. @jackiepoo and @Matthew_Graham have doing a lot of excellent work uncovering this info and I think now would be a great time to share what has been discovered with the community. If it is possible to provide that detail now I will happily update my original post.

This is actually a very good point. In this circumstance maybe I am pushing my view instead of opening things up for a proper discussion.

How would you feel about:

Much of our governance happens on chain today. This already produces many procedural challenges, while granting much power to token holders. Decisions need to be made about the future of on-chain voting and how it should be implemented or redesigned in order to better optimize this situation

I share your view that the Coop’s long term success is contingent on attracting and retaining excellent methodologists. I would add though, that equally important (at least) is attracting and retaining excellent contributors. I think working together from these differing perspectives is going to be crucial for arriving at a set of directives that will be considered fair enough and acceptable to all stakeholders.

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Appreciate the thoughtful comment, @afromac ! My intention was to further the conversation, not suggest that you needed to amend your pre-reading.

Two quick thoughts:

The point I was trying to make is that the presence of hard power, regardless of whether or not it is exercised, incentives and alters human behavior.

It’s worth noting that DATA would not have passed quorum [Snapshot] without the support of a single voting address that represented ~51% of all voting INDEX. While I am happy that this benevolent entity voted in my favor in this particular instance, the fact stands that a single entity had more influence than the other 105 voters combined.

I actually think the INDEX token democracy disempowers both tokenholders and contributors. Anyhow, looking forward to continuing the dialogue in the upcoming workshops.

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Happy to make a change based on a good observation.

This is the crux of the matter, in my eyes. Analyzing the circumstances that lead to these kind of outcomes is essential for the community to make informed decisions about what being an INDEX holder actually means and should entitle you too.

Looking forward to hearing your thoughts on this too.

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Adding this in here as essential pre-reading for workshop tomorrow:

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Great summary of some central problems. I just have a few thoughts after reading. Firstly, I think it is important to take care with analogies when trying to create intuition pumps for these kinds of arguments. “Nation state” is a risky analogy because it pushes an implicit assumption of disparate institutions working against each other. In a single state there is no single economy. In theoretical political economy studies (mostly by Hayek) the reality is described as a Catallaxy - not an Economy. That is, a situation with multiple economies needing to be coordinated. This is apparent in everyday life (Hayek prefered is we studied Catallacics and not Economics). So if you think of a state as multiple economies with multiple internally consistent cultures (that often clash intractably) with multiple institutional arrangements with their own power games and struggles then it should be more clear why this is not the optimal analogy for discussing corporate organization (no matter how currently undefined the contours of the corporation are). I would recommend that any intuition pump about “DAO governance” should be focused on “Org Management” to restrict potentially distracting analogies. It is seductive to retreat into high theory but it is also usually not optimal for progress. What exactly are we trying to maximize?

Second, the other key frustration it seems to me is the level of “decentralization”. This word means many things to many people. In an ideal world we would all have a preamble to our arguments with a list of definitions for words we intend to use. But let’s push to the extreme position: suppose everyone in the Coop is unaccountable to anyone else and everyone has the exact same power and control of Coop resources (broadly conceived) trying to optimize only (and strictly) their personal ends. I hope it is clear why this Individualist Anarchy is not productive for corporate group activity. So then it is not “IF” decentralization should exist but “what amount” and where. We should be able to be very precise about this before we make further arguments in either direction. For a fun example, there are some empirical papers that show China is the most decentralized government. How? Because that paper measures fiscal policy decentralization.

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