Disclosure: You may already be a winner of the $OP token sweepstakes. I am serving as a delegate for the Optimism Token House.
This week Optimism dropped the $OP token, initiating Optimism Governance. Optimism’s governance system presents an exciting opportunity to study the latest thinking in governance design and helps us focus on shaping the next era of Web3 through its focus on public goods. With the launch of the token, Optimism created the Optimism Collective, an ecosystem that will govern the distribution of public goods funding derived from the revenue the protocol generates. The Optimism Collective is governed by three bodies: the Token House (holders of $OP), the Citizens’ House (select NFT holders), and the Foundation. Optimism’s structure is notable for its balance of power between the three governing bodies, the use of multiple voting styles (token-weighted and one-person, one-vote), and the Collective’s commitment to experimentation.
What is Optimism?
Optimism is a layer 2 scaling solution for Ethereum. It is an optimistic rollup: it is optimistic, because it assumes transactions submitted to it by users are valid; it is a rollup, because it sequences transactions off of Ethereum and periodically submits a merkle root of the transactions to Ethereum to create a resulting state change. Given that Optimism’s sequencer does not ensure the same security as Ethereum, Optimism creates a dispute period after its sequencer publishes a batch of transactions, during which a party can challenge a state change with a fault proof (for a reward) which will prevent the state change from being committed to Ethereum. Optimism is the first layer 2 to achieve EVM equivalence, meaning that there is no difference between how smart contracts are executed on L2 and L1, which makes deployment on Optimism easier.
The Optimism Collective — Mission
The Optimism Collective is guided by a vision of “sustainably fund[ing] those public goods that improve upon the well-being of the Collective and beyond.” In essence, Optimism is devoting protocol revenue tokenholders and trusted stewards of the community to fund public goods projects that create compounding value for Optimism and eventually Web3 and broader society. The Collective was created with a view toward making public goods creation profitable, meaning “impact=profit.” The Collective seeks to achieve its mission by funding public goods both proactively and retroactively. Proactive funding encourages innovation and risk-taking in the pursuit of public goods; retroactive funding ensures that impactful projects are rewarded.
Balance of Power
Optimism seeks to balance the short-term and long-term views of the community by balancing power between the Token House, the Citizens’ House, and the Foundation.
The Token House is entrusted to make determinations about project incentives, protocol upgrades, and the appropriation of treasury funds to the Foundation. By leveraging the collective knowledge of the Token House, the Collective is able to improve the predictive power of its grants and adjust to the specific needs of the Optimism community. The democratic aspect of the Token House ensures that the users of the protocol have representation in determining the future of the protocol’s mission and function.
The Citizens’ House will focus on retroactive public goods funding. Citizens will be selected from the community; their citizenship is non-transferrable. By selecting individuals who have demonstrated value to the Optimism ecosystem, the Collective will increase the likelihood that retroactive funding represents true value provided to the community. Having a consistency of identity creates continuity in criteria and makes long-term decision-making possible. The method for selecting Citizens will be determined by the Foundation in consultation with the Token House.
The Optimism Foundation is the steward of the Collective. It oversees the administration of governance, allocates treasury assets (including the distribution of $OP), vetoes malicious proposals, and has the power to amend the Constitution. The Foundation has many stabilizing powers for the community, yet its capabilities remain in check by the Token House. The Token House can remove directors from the Foundation and veto changes to the founding documents that would materially impair tokenholders’ rights.
Mixed Voting
The Token House and Citizens’ House have different forms of voting to suit different functions. The Token House votes on a token-weighted basis. As in any token-weighted system, Token House voting is susceptible to plutocratic concentration of power and voter apathy. The Token House permits tokenholders to delegate their votes to stewards who have made public commitments to act as stewards for the Collective. Delegation may mitigate the power of individual holders who have high concentrations of power by enabling smaller holders to pool their votes through a delegate. Delegation also ensures that there are members of the community who are dedicated to participating in governance, mitigating the chance that small groups can collude to pass self-interested proposals with a quorum.
The Citizens’ House will operate through a one-person, one-vote system. Presuming that Citizens are chosen based on their specific insights and dedication to the ecosystem, the one-person, one-vote structure is sensible: newly minted citizens will have equal footing with incumbents for decision-making. In addition to preventing plutocratic domination, a non-transferrable one-person, one-vote system will avoid the volatility that accompanies rapid transfer of liquid governance tokens.
Bringing a token-weighted system together with a one-person, one-vote system creates a balance between the short-term and the long-term as well as between the prospective and retroactive. Both Houses come together to determine the Optimism network parameters, which affects the balance between transaction volume on the Optimism network and funding supply for retroactive public goods funding. This balance keeps the present and future health of the protocol fairly represented: tokenholders are not unfairly called upon to subsidize large-scale infrastructural projects, while citizens have a voice in projecting long-term funding needs to improve the Optimism ecosystem.
Experimentation
Optimism’s Working Constitution is brief, but the first principle is “a commitment to experimentation.” Projects that have a need for a complex beginning also have a need for flexibility. At the point of initiation, the Optimism community can only match an understanding of their needs with governance theory and the knowledge of how other DAOs have succeeded and failed. To ensure the success of the governance process, the community needs to commit to a flexible system in order to test theory with community-specific data. By focusing on experimentation, Optimism will collect important data on what principles and rules best suit the mission of funding public goods and use that data to create a better fit between the Collective’s mission and its procedure.
Early experimentation mitigates path-dependency. By maintaining a commitment to testing theories, the community encourages honesty about the value of the governance systems it tries. A collective mindset of flexibility also encourages the community to innovate, as the cost of failure is lowered and the value of the data collected is high. If early rules are rigid, systems may proceed despite inefficiencies and flaws in the early design, and the longer the flaws linger, the more difficult it becomes to remedy them in the future.
The results of the Collective’s experiments will be public goods in themselves. Optimism will be highly visible given its critical role in scaling Ethereum, which means that its governance process will be on display for other communities that are working hard to discover the appropriate mission-governance fit. Each pitfall and success will update the Web3 community’s knowledge of how to construct a long-term sustainable system of ordering the relationships between tokenholders and their rights.
Moving Forward
For those who are looking to design governance systems for their own projects, it is worthwhile to observe Optimism’s governance process as it proceeds. The Optimism Collective combines the learnings of the last few years of DAO design and adds new structures that may succeed or fail. As you observe Optimism’s experiment, as with your own, watch for whether its structure progresses in line with its mission. See whether the balance of power remains stable or whether power collects too heavily in one place. Consider whether the community takes advantage of the opportunity to try different structures, and whether the experiments result in the community taking tangible actions based on their findings.