The Exchange Theory of Web3 Governance

Abstract

Blockchains have enabled innovation in distributed economic institutions, such as money (e.g., cryptocurrencies) and markets (e.g., decentralised exchanges), but also innovations in distributed governance, such as decentralised autonomous organisations (DAOs). These innovations have generated academic interest in studying web3 governance, but as yet there is no general theory of web3 governance. In this paper we draw on the contrast between a ‘romantic view’ of governance (characterised by consensus through community voting) and the ‘exchange view’ of governance (characterised by an entrepreneurial process of bargaining and exchange of voters under uncertainty) from public choice theory. Our analysis is the first to argue that the latter ‘exchange view’ of governance is best to understand the dynamics of governance innovation in web3, and provides the foundations for a new general theory of governance in this frontier field. We apply the exchange lens of governance to three case studies (Curve, Lido and Metagov), exploring how these projects enable pseudonymous, composable, and permissionless governance processes to reveal value. The exchange lens also helps illuminate how this emergent polycentric process can generate robustness in decentralised systems.

Keywords: blockchain, governance, public choice, innovation, entrepreneurship

JEL Classification: D02, D72, D82, H40, L26, O31