Harvard Case - Tezos: Governance in the Cryptocurrency World
"Tezos: Governance in the Cryptocurrency World" Harvard business case study is written by Samir K Barua, Jayanth R. Varma. It deals with the challenges in the field of Finance. The case study is 17 page(s) long and it was first published on : Jan 19, 2020
At Fern Fort University, we recommend that Tezos adopt a hybrid governance model that balances community participation with efficient decision-making. This model should prioritize transparency, accountability, and long-term sustainability, ensuring the platform's continued growth and adoption within the cryptocurrency ecosystem.
2. Background
The case study focuses on Tezos, a blockchain platform aiming to address the limitations of existing cryptocurrencies through its unique governance model. Tezos utilizes a liquid democracy system, allowing token holders to delegate their voting rights to representatives, enabling more efficient decision-making. However, the case highlights challenges related to community engagement, decision-making speed, and the potential for manipulation by powerful stakeholders.
The main protagonists are Arthur Breitman, the co-founder of Tezos, and the Tezos Foundation, responsible for managing the platform's development and governance. The case study explores their efforts to balance community involvement with efficient decision-making, navigating the complexities of decentralized governance in the rapidly evolving cryptocurrency landscape.
3. Analysis of the Case Study
The case study can be analyzed through the lens of corporate governance and decentralized finance (DeFi) principles.
Corporate Governance:
- Transparency and Accountability: Tezos's governance system aims to be transparent, with all proposals and voting records publicly accessible. However, the case highlights concerns regarding the potential for manipulation by large stakeholders and the need for clear mechanisms to address conflicts of interest.
- Decision-Making Efficiency: The liquid democracy system aims to streamline decision-making by allowing token holders to delegate their voting rights. However, the case raises concerns about the potential for slow consensus-building and the need for mechanisms to ensure timely responses to market dynamics.
- Stakeholder Engagement: Tezos's governance model emphasizes community participation, but the case highlights the challenge of engaging a diverse and geographically dispersed community. The need for effective communication channels and tools to facilitate informed decision-making is crucial.
Decentralized Finance (DeFi):
- Security and Trust: Tezos's governance model aims to enhance security and trust by decentralizing decision-making. However, the case highlights the need for robust security measures to prevent attacks and manipulation, particularly in the context of a rapidly evolving and complex technological landscape.
- Scalability and Efficiency: Tezos's governance model aims to be scalable and efficient, but the case raises concerns about the potential for bottlenecks and delays as the platform grows. The need for innovative solutions to address scalability challenges is critical for long-term success.
- Innovation and Adoption: Tezos's governance model aims to foster innovation and adoption by empowering the community to shape the platform's future. However, the case highlights the need for a balanced approach that encourages experimentation while maintaining stability and security.
4. Recommendations
Tezos should adopt a hybrid governance model that combines elements of direct democracy and liquid democracy, ensuring a balance between community participation and efficient decision-making. This model should incorporate the following key elements:
1. Enhanced Transparency and Accountability:
- Publicly accessible blockchain explorer: This will provide a transparent and verifiable record of all transactions and governance actions.
- Independent audit of the Tezos Foundation: This will ensure accountability and mitigate potential conflicts of interest.
- Clear conflict of interest policies: These policies should be established and enforced to ensure fair and impartial decision-making.
2. Streamlined Decision-Making:
- Tiered voting system: This system would allow for faster decision-making on less critical issues while reserving more complex decisions for broader community participation.
- Automated voting mechanisms: This would streamline the voting process and reduce the potential for delays.
- Time-bound proposal review: This would ensure timely decision-making and prevent proposals from languishing in the system.
3. Enhanced Community Engagement:
- Multi-lingual communication channels: This will ensure that all stakeholders, regardless of their location or language, can participate in the governance process.
- Educational resources and training programs: This will help to empower community members to understand the governance system and participate effectively.
- Community-driven initiatives: This will encourage active participation and foster a sense of ownership among stakeholders.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: The recommendations align with Tezos's mission of providing a secure, transparent, and efficient blockchain platform.
- External customers and internal clients: The recommendations aim to enhance the platform's appeal to developers, businesses, and users by fostering trust and confidence in the governance system.
- Competitors: The recommendations aim to differentiate Tezos from competitors by offering a more robust and responsive governance model.
- Attractiveness ' quantitative measures if applicable: The recommendations are expected to improve the platform's security, efficiency, and user adoption, leading to increased value for stakeholders.
- Assumptions: The recommendations assume that the Tezos community is committed to the platform's success and will actively participate in the governance process.
6. Conclusion
By adopting a hybrid governance model that prioritizes transparency, accountability, and community engagement, Tezos can solidify its position as a leading blockchain platform. This model will foster trust, encourage innovation, and drive adoption, ensuring the platform's long-term success within the evolving cryptocurrency ecosystem.
7. Discussion
Alternatives not selected:
- Pure direct democracy: This approach could be challenging to implement effectively due to the large and geographically dispersed nature of the Tezos community.
- Centralized governance: This approach would undermine the core principles of decentralization and could lead to concerns about transparency and accountability.
Risks and key assumptions:
- Risk of manipulation: The potential for manipulation by powerful stakeholders remains a concern, even with a hybrid governance model.
- Community apathy: If the community is not actively engaged in the governance process, the model may not be effective.
- Technological challenges: Implementing a complex governance system requires robust technological infrastructure and ongoing maintenance.
Options Grid:
| Option | Advantages | Disadvantages |
|---|---|---|
| Hybrid Governance Model | Balanced approach, community engagement, efficient decision-making | Potential for manipulation, complexity |
| Pure Direct Democracy | High community participation, transparency | Challenging to implement, slow decision-making |
| Centralized Governance | Efficient decision-making, clear accountability | Lack of transparency, potential for abuse |
8. Next Steps
- Develop a detailed proposal for the hybrid governance model. This proposal should include specific details on the voting system, decision-making processes, and community engagement mechanisms.
- Implement the new governance model in phases. This will allow for testing and refinement of the system before full deployment.
- Monitor the performance of the governance model. This will ensure that the system is meeting its objectives and identify areas for improvement.
- Engage with the community throughout the process. This will ensure that stakeholders are informed and involved in the development and implementation of the new governance model.
By taking these steps, Tezos can create a robust and sustainable governance system that will ensure the platform's long-term success and contribute to the growth of the cryptocurrency ecosystem.
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Case Description
In November 2017, Arthur and Kathleen Breitman, the founders of Tezos, confronted a governance crisis that threatened to destroy their project and expose them to serious legal risks. All developmental activities in Tezos were stalled after Breitmans lost access to the funds raised through an initial coin offering (ICO) four months earlier. Moreover, a series of class-action lawsuits in the United States alleged that the USD 230 million ICO of July was an illegal security offering. The case provides a fascinating situation for discussions on the principles and the frameworks for governance.
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