As we write, thousands of online communities created for a wide variety of purposes — everything from providing crypto financial services to crowdsourcing art collecting — are building new democracies rapidly evolving systems for discussion, debate, voting, and representation. This movement, often known as Web3, has created an explosion of interest in giving ownership and decision-making power to community participants rather than to a small number of business executives.
This phenomenon highlights a critical challenge for traditional platforms like Amazon, Meta, Google’s play store, and Apple’s app store, gaming platforms like Roblox or Steam, and even for newer centralized crypto platforms like Coinbase and OpenSea. Historically, as platforms became dominant in their domain, they have raised fees and changed rules to their benefit and their producers’ loss. They could do so because those producers — they be software developers, small retailers, game designers, or content creators — had nowhere else to go. But once learned, twice a fool: How can platforms keep producers making new investments in building for environments whose undemocratic governance systems cannot credibly promise to reflect their interests in the long run?
There is a way. By granting governance tokens To producers that give them the unbreakable right to vote on key decisions about fees and rules, platforms can give producers the ownership and assurances they need to unleash their innovation — to the benefit of the platform, its users, and its creative partners.
We are academics who study democratic systems of governance, and we are also advisors in the tech sector who think about the future of decentralized governance. In this essay, we’ll explain the challenge platforms are facing in maximizing the efforts of their producers, we’ll show how insights from blockchain governance can help, and we’ll discuss some specifics of how to implement a governance-token system that Avoids common pitfalls that democracies have been grappling with for thousands of years.
The Lock-in Problem
In the early days of Web 2.0 — the movement that gave us mega platforms like Amazon, Facebook, and Uber — producers flocked to build for new platforms because that’s where the users, and thus the profits, were. But as some platforms failed and others became dominant in their spaces, the producers’ outside options dwindled, and so did their market power.
Today, it’s all but impossible for an app developer to succeed without selling to iPhone users. A handicraft company that doesn’t list on Etsy loses access to a huge pool of potential buyers. A person who specializes in creating content that builds a large following on Instagram cannot easily replicate their success on another social media platform. And so on.
In all of these cases, the creators’ bargaining position vis-à-vis the platform is substantially weaker than it used to be. And the platforms leveraged this weakness, raising fees and changing rules in ways that benefit the platforms at the expense of the producers who helped them become dominant. This is what economists call “the hold-up problem”: When creators become locked-in to dominant platforms, those dominant platforms can hold them up.
In the short run, the hold-up problem harms producers. But in the long run, it actually hurts platform owners, too. Because producers anticipate that platform owners will exploit increasing market power, they are less willing to invest in making the products that bring users to the platform in the first place. And that makes the platforms themselves less valuable.
How Decentralized Governance Can Help
Decentralized governance models pioneered in the crypto space can reassure producers that they can invest their efforts without fearing future expropriation. These models hold great promise, and they underpin the way that Bitcoin and Ethereum run their blockchains, as well as the way that decentralized autonomous organizations (or DAOs) with billions of dollars’ worth of commitments, like MakerDAO or Uniswap, operate their protocols.
Applying decentralized governance to major platforms is straightforward conceptually. If a major platform owner made a credible commitment that their fee structure could not be changed without a vote of the platform’s producers, then those producers would be reassured that their profits would not be eroded in the future, even as the platform became more successful and increased in market power. Thus the producers would be more willing to invest, attracting users and benefiting both themselves and the platform owner.
How would this work in practice?
Taking inspiration from blockchain governance, platforms can create a system of democratic governance built around a governance token that assigns voting rights to producers. In this model, each token that a person holds guarantees them one vote on key decisions governed by this decentralized system. To make these votes especially secure and credibly protected from interference by the platform, the token itself could live on a major layer-1 blockchain, like Ethereum, which would make it impossible for the platform to unduly alter token ownership or interfere with the outcomes of on-chain votes.
A few details are important. First, tokens are granted for value creation, so the more value a producer has brought to the platform, the more power they have over governance decisions. Second, tokens are transferable — that is, a tokenholder can give some agent their proxy or can sell their vote (perhaps within certain limits). Third, there are many possible voting systems (among them, majority rule, super-majority rule, and voting approval) with various costs and benefits. The voting system itself would have to be specified upfront, though it might also allow for a procedure for considering changes to the voting rule itself. Finally, the platform owner would continue to hold proposal power: although the token holders would have the right to accept or reject proposals, the proposals themselves would come from the platform owners. Platform owners would thus know that changes couldn’t be forced on them.
Risks and Challenges
Such a system offers substantial benefits but also raises questions. We focus on four that have cropped up in both blockchain governance and democracy in the physical world.
Will giving producers voting power solve the hold-up problem better than other approaches?
Perhaps the most obvious approach to solving the hold-up problem is a traditional contract between platform owners and producers that locks in fee structures or veto rights. But such a contract only solves the hold-up problem to the extent that producers believe they can afford to enforce that contract against larger and more deep-pocketed platforms.
By contrast, a smart contract implemented on the blockchain can make it impossible for platform owners to implement a change of rules for on platform business unless a sufficient number of token holders have approved that change. Thus tokenized governance creates the commitment needed to solve the hold-up problem even if the two sides aren’t equally matched in court.
Even with tokenized governance, a platform could choose to shut down the entire voting system in the future. While this risk can never be fully mitigated, such a public and large-scale contractual breach may be more easily litigated than the specifics of fees and rules. And the public nature of the voting system would also make doing so reputationally costly, especially for public-facing platforms.
What if producers vote in their own narrow self-interest and harm the platform as a result?
Giving producers veto power over changes to the rules of commerce on the platform creates the risk that the platform might not be able to make critical changes to its business model. Making a credible commitment to producers necessarily entails at least some business risk.
But tokenized governance offers safeguards against the most worrying downsides for two reasons. First, as we’ve pointed out, producers who have the most stake in the success of the platform will have the most voting power. Second, governance tokens can be traded. This means that if the platform needs to make a change that producers oppose, it can buy the necessary votes from those producers. In this way, the governance system provides exactly the right kind of safeguard — it allows platforms to make critical changes that might harm producers, but only if those changes are so important that the platform is willing to compensate the producers for their losses by buying their votes.
Of course, not every producer who opposes the new rule will be compensated, since the platform only needs to buy the bare minimum of votes necessary to get approval. Under simple majority rule, the platform only has to buy half the total votes. Under more stringent super-majority rules, the platform must buy a larger percentage of votes. Thus one important consideration in the choice of a voting rule is how to balance the trade-off between a system that provides broad compensation for producers who are harmed by rule changes and a system that provides enough flexibility that platform owners will not be stymied in making necessary changes to the business model.
What if participation in governance is too low?
Giving governance power to producers won’t work if they don’t use it. Getting people to participate in democracy is an age-old problem, and it has predictably cropped up in blockchain governance.
A well-designed token for platform governance can address this problem in several ways. For example, large tokenholders — who possess the most voting power — will care a lot about the policy decisions they are voting on, and so will have strong incentives to participate. The token itself can also provide direct incentives for participation, by providing tokenholders dividends in exchange for participating, or by revoking (“burning”) their tokens if they fail to participate too many times. There are still other ways to participation — by building easy electronic-voting systems that reduce the cognitive and time costs of voting, by performing outreach around important votes, and by creating norms that encourage tokenholders to participate.
In addition to working to participation, the system could also have built-in safeguards such as quorum rules that mean votes of the tokenholders are only binding on the platform when a sufficient level of participation is reached.
What if the voting process is corrupted through bribery or other means?
Instituting votes over decisions with real economic stakes immediately raises concern about governance attacks. Blockchain governance has seen many issues like this. Malicious actors have bought up voting power and used it to line their own pockets, and even hacked insecure smart contracts to take over protocols.
A governance attack by a competing platform that bought up voting rights to block important policy changes would be particularly worrying. Thoughtful design is required to mitigate these risks.
One strategy would be to restrict the transferability of tokens so that votes could only be cast by verified producers, or the platform itself. Of course, this wouldn’t prevent more standard vote buying by malicious actors. But it would substantially raise the costs of a governance attack by requiring malicious actors to make separate arrangements with many decentralized voters and solve their own commitment problem vis-à-vis those voters.
A second strategy, which does not require restricted transferability, involves imposing a lock-up period prior to voting during which governance tokens could not be transferred. Such a lock-up period would ensure that platforms are not taken by surprise by a governance attack.
The blockchain/crypto space is frothy at the moment, and there is no doubt that many experiments in democratizing online platforms will prove to be dead ends. But Web3 has momentum: People want more control over the online communities that they belong to and that they often depend on for their economic livelihoods. In the coming years, it will be crucial to understand where and how it makes sense to democratize the governance of a wide variety of business enterprises. Major platforms have an opportunity to lead the way, while benefiting both themselves and those who operate in the ecosystems they create.