Introduction
Governance is a central concept in the history of human coordination. The practice of how things are controlled is applied arbitrarily broad, from monarchies to the USSR, from neighbourhood associations to the United Nations. The principle however stays the same: who has a say in the decisions that impact the many and how is it decided?
In contrast to corporate structures and modern nation states the blockchain industry has always been obsessed with inventing new novel governance designs. A warranted obsession because so much of what the industry hopes to achieve relies on building effective governance structures for decentralized systems where traditional structures often fall short because of technical and product reasons.
Bitcoin is always a great starting point to explain a concept as it is always a boundary case. The Bitcoin network does not have a formal governance structure. Changes to the system practically requires universal agreement between all the participants.
Bitcoin’s lack of centralized governance is considered a strength because it ensures that its monetary rules, especially its fixed supply, remain resistant to change.
This article explains key nuances in decentralized governance and presents a five-phase decentralization roadmap drawn from a recent Lemma engagement.
Designing Governance
From the perspective of a cryptoeconomics practitioner the hardest part of designing a system is implementing decentralized governance.
Governance touches technology, economics, strategy, and participation. The challenge intensifies under uncertainty because future decisions are unknown.
The complexity fully forms if you combine this broad impact space with:
1) unknown future problems that the governance structure must decide on
2) the process of iteratively decentralizing governance is a one-way function.
We realized early on that our clients face challenges when it comes to governance strategy, not fully appreciating the nuances and complex decision space. What started off as tangential advice quickly grew into dedicated problem solving that over time formed as a focused service offering. We have drafted DAO constitutions for the largest DAOs, designed phased decentralization strategies for complex protocols, and participated as delegates to strengthen decision quality.
Decentralized governance
Decentralized governance structures come in many different forms; it is easy to heuristically think of token-based governance (DAOs) when the topic comes up. Decentralized governance as a concept was around long before anyone gave a token the right of governance. For example, Neither the Bitcoin nor Ethereum blockchains have token-based governance, but still there are complex decentralized governance structures that govern these systems.
The Bitcoin blockchain governs by a process that could only be described as extreme alignment by all participants, whether it is nodes, miners, exchanges, ETF issuers, token holders or Michael Saylor. The Bitcoin blockchain introduces changes through software updates that full-node operators must install. For an update to take place a level of consensus across the network is required that is arguably not possible in 2025. The recent stagnation of implementing OP_CAT to greatly further the network’s use cases are a perfect example of Bitcoin’s practically non-existent governance process that emphasizes stability above evolution.
The first crypto project’s “immutable” governance design is arguably a core part of its product, but also a limitation from the lens of long-term economic security. Programmatic reductions in mining rewards present the risk that if transaction fees do not make up for mining rewards, then miners will not be incentivised to spend resources to secure the network. The concern from a governance perspective is that there is no formal route to solve the problem, at least in the near term.
Ethereum has a more active governance structure but is considered too rigid for a smart contract blockchain by many community members who think it needs to be more effective to compete. Ethereum’s governance structure relies on open, off-chain social consensus as a starter. Anyone can draft an Ethereum Improvement Proposal (EIP), circulate it in public forums such as Ethereum Magicians and GitHub, and present it on fortnightly All Core Dev calls where client teams, researchers, application builders, and community members debate its merits. Once a set of EIPs wins rough consensus, client developers embed them in new software releases, and the change only becomes “law” when a super-majority of validators and node operators voluntarily upgrade and run that code. Meaning ultimate authority rests with the diverse set of network participants who decide which version of Ethereum they will accept.
Slow and difficult-to-change governance is a strength for something that gains its value from being rigid, like bitcoin, but this approach is a non-starter for systems that need to evolve and adapt. Finding the balance is part of the challenge.
Governance DAOs
DAO governance is an approach that empowers token holders as the project’s decision makers and the system with a clear and direct process to governance. Fundamentally this approach to decentralized governance offers greater predictability in governance input as the rules and participants are clearly defined. This is one of the underappreciated strengths of tokens in any cryptoeconomic system, the functionality (utility & rights) you give the token is measurable.
However, over the years we have come to realize that DAOs have several short comings that negatively impact the value they offer projects. Irrelevant of the design details the negative effects can be attributed to:
- Token holders are not a direct representation of the participants in a system; in most cases the primary participants are developers and users of the system (supply and demand-side), not token holders.
- Token speculators create long-term alignment concerns by often supporting strategies focused on short-term value extraction.
- Token holders are not willing to participate in governance due to required effort and detailed complexity.
DAO governance can be a powerful tool, but without careful design and implementation, its limitations can quickly outweigh its benefits, as demonstrated by the many projects struggling with inefficient bureaucracy.
Governance decentralization roadmap, a case study.
We recently took it upon us to develop an iterative decentralization strategy for a client willing to share the insights with the public. The project is an infrastructure subsector leader that secures billions in value for thousands of applications.
The founding team values decentralized governance. They believe it is core to their long-term strategy. Concerns were raised by how a non-central governance structure can handle both technical complexity and the ability to navigate a competitive, in the near and long-term.
The decision was made to follow an iterative process that would gradually handover control of technical and economic decisions. Ensuring long-term security, regulatory compliance, and operational stability by balancing community empowerment with foundational oversight.
What follows is an overview of the decentralization roadmap broken into five phases.
Each phase has a distinct objective, degree of system governance input from the DAO and necessary milestones which must be achieved before progressing to the next phase.
Phase 1: Foundation-Led DAO Initiation
The object of the initial phase is to establish a foundation for the DAO. The primary goal is to catalyse community participation and give potential high value DAO participants opportunities to make themselves known.
DAO governance:
- All technical, economically material and strategic governance decisions are held by the foundation.
- Limited community treasury deployment: Proposals are limited in terms of size and usage. Proposals are restricted to structured funding requests, with clear KPIs and oversight. Proposals must be approved by foundation.
Milestones to progress to next phase:
- DAO effectively manages grant distributions, ensuring high-quality projects emerge and funds are not misallocated.
- Community participation increases in structured proposal discussions, indicating readiness for further decision-making authority.
- DAO participation KPIs are reached.
Phase 2: DAO-Led Ecosystem Growth & Grant Management
The object of the second phase is to expand decentralized decision-making input from the DAO but still focused on community development proposals while keeping core technical, economic and strategic decisions centralized.
Key Actions:
- Introduction of delegate system: Enable token holders to delegate voting power to others.
- Expanded Treasury Usage: DAO gains greater control over funding new ecosystem integrations with a broader mandate and larger nominal value, but treasury disbursements remain controlled through structured proposal approvals.
Milestones to progress to next phase:
- Proposals follow structured funding guidelines with clear KPIs.
- Initial funding requests have presented verifiable results.
- Delegate set meet KPIs based on participation in forum discussions and votes.
- DAO involvement in economic governance expands but remains within structured parameters.
Phase 3: Formation of economic and technical committees
The third phases Objective: Gradual delegation of governance structuring (excluding core technical development).
Key Actions:
- Introduction of delegate incentives: A portion of the treasury would be made available as a non-structured incentive for delegates. Incentives are ad-hoc and distributed by the foundation.
- Fully expanded Treasury Usage: The DAO has full authority to spend and manage assets in the community treasury. The only limitation is the amount of assets that are spendable in a specified time frame.
- Implementation of economic committee: A committee consisting of foundation members and community representatives (DAO proposal approval) are appointed to make decisions the impact economic parameters of the system e.g. fees.
- Implementation of technical committee: A committee consisting of foundation members and community representatives (DAO proposal approval) are appointed to make decisions that impact technical direction of protocol i.e. integration with other systems.
- In both committees the foundation retains final decision through a majority representation.
Milestones to Progress to Next Phase:
- DAO successfully manages governance-related decision-making without harming protocol stability.
- Community participation in economic and technical discussions increases and able to provide wishes to committees, even if actual decisions control remain foundation led.
- Economic Committee proves effective in economic parameter management and not limited by committee representatives.
- Technical Committee proves effective input to technical decision making and not limited by committee representatives.
Phase 4: Transition to DAO led governance.
The objective of the fourth phase is to handover governance control to the DAO on technical and economic aspects. It is possible to separate this phase into A and B that selectively deals with control of technical and economic decisions.
Key Actions:
- Handing Over Technical Decisions to the DAO: Token holders gain primary influence over technical decisions.
- Handing Over Economic Decisions to the DAO: Token holders gain primary influence over economic decisions that include protocol parameter setting, treasury management and all token considerations.
- Foundation transitions to executor and compliance: The foundation becomes responsible for executing the passed proposals of the DAO, but retain certain safeguards to protect the integrity of the overall system (e.g. regulatory compliance).
Milestones to Progress to Final Phase:
- Foundation directorship decisions based on regulatory compliance and perception of DAO maturity.
Phase 5: Final Decentralization
The objective of the final phase is for the foundation to handover all governance decisions to the DAO (including metagovernance). The phase fundamentally changes the role of the foundation as it transitions from an oversight entity to a participant in the system.
Key Considerations:
- DAO becomes primary governance structure: The DAO gains control of all technical, economic and strategic decision making. All committees are filled by members elected by the DAO.
- Metagovernance: The DAO can implement changes to how it functions by taking control of governance of the governance system, fundamentally altering the constitution of the DAO. For example, this allows absolution of committee as guardians of technical and economic decisions.
Conclusion
Governance is complex, because it introduces collective human decision making into systems that are already technically and economically complex. Governance design is a specialized field within the broader cryptoeconomic design practice.
Founders are faced with the challenge of coming up with a governance design and an implementation roadmap that fits their goals. The most important consideration when solving this these challenges is to understand the product’s requirements and translating them into a strategy.
Lemma is in a unique position to provide our clients with high impact design and consulting services. An expertise that is the result of having practical experience working with some of the industry’s largest foundations and DAO but also practice defining researchers in house. If you want to learn more about this topic, please don’t hesitate to reach out to us.
