The Governance of Optimism
Introduction
Optimism is one of the leading scaling solutions for Ethereum, and according to DeepDAO as of the 28th of February, Optimism is the largest protocol in terms of treasury volume (7.9 billion dollars).
Fifteen years ago, it was unimaginable that such sums could be managed by groups of pseudonymous individuals on the internet, however this has become common practice for many Web3 protocols.
In this article, we will examine Optimism's innovative governance system.
Optimism Collective
The Optimism Collective is a new model overseeing, governing and driving sustainable growth of a decentralized ecosystem. It is a system based on two pillars: The Token House and the Citizen House, token-based voting and per-person voting. Both are represented by different stakeholders and have different governance responsibilities. The Token House comprises OP holders and their delegates, while the Citizens' House utilizes a one-person-one-vote system based on reputation.
It therefore combines token-based plutocratic governance with democratic governance. This aims to ensure good decision-making while avoiding the typical pitfalls of traditional token-based governance. Ultimately, it should ensure that the protocol remains censorship-resistant by not giving power over the protocol to one or a few entities. Secondly, it should ensure that resources are distributed efficiently and fairly to promote the growth of the ecosystem.
Token House
All OP token holders and delegates are part of the Token House. It is assumed that they act as rational economic agents with an incentive in maintaining or increasing the economic well-being of the Optimism Collective. The main purpose of the Token House is to propose, discuss and vote on governance proposals. Voting can be carried out either by voting directly with one's own OP (after delegation to the voter's personal address) or by delegating the OP to a third party, a delegate.
Proposals that fall under the Token’s House responsibility include, but are not limited to:
Governance Fund: Supporting the development of the Collective and/or growth of the ecosystem.
Protocol Upgrade: Improvements to the smart contracts comprising the mainnet Optimism protocol.
Inflation Adjustment: Changes to the inflation rate of newly minted OP (currently capped at 2% annually)
Director Removal: Removal of a director of the Optimism Foundation
Treasury Appropriations: Deciding on the amount of OP the Optimism Foundation may spend or distribute annually, beginning in Year 2 of its existence.
Rights Protections: OP holders must consent to any changes to the founding documents of the Optimism Foundation if those changes would materially reduce their rights.
Collective Council or Advisory Board Member Removal: Collective Council or Advisory Board members may be removed from their position for failing to uphold the responsibilities outlined in the relevant Charter or to act with honesty, integrity, and transparency.
Council Dissolution: A persistent Council may be dissolved if it is no longer fulfilling its Charter.
(Source)
Citizen House
The Citizens' House is a large-scale experiment using a one-person, one-vote system to decide on the allocation of retroactive funding of public goods. Citizens are intended to embody the individual human stakeholders of the Collective, including builders, users, and community members who share the project's values and seek the Collective's long-term advancement.
As of the time of this article, the Citizen House’s sole responsibility is to vote on the allocation of Retroactive Public Goods Funding (RetroPGF). In the future, the Citizen House might decide along with the Token House on certain proposals, such as deciding about the allocation of the excess protocol revenue.
Individuals who received a voting badge (symbolizing citizenship) in the past RetroPGFs are part of the Citizen House. Until round 3, which took place in fall 2023, 303 citizenships were allocated to elected community members. Importantly, holding a voting badge does not guarantee voting rights in future rounds of RetroPGF.
RetroPGF is an integral part of Optimism's growth strategy. At Optimism, creating impact is synonymous with creating profit (comp. Vision). The chart below shows how the creation of impact by individuals lead to increased demand for the use of Optimism, creating a flywheel.
Voting Process
Each governance proposal undergoes a three-week cycle, with each week running from Thursday at 19:00 GMT to Wednesday at 19:00 GMT.
Proposal Draft
The formal voting process starts with submitting a proposal draft as a new discussion thread on the Governance Forum in the appropriate category. Community Members have sufficient time in the first two weeks to thoroughly discuss the submitted proposals and leave their feedback. Before Week 3, a governance administrator will initiate a Voting Cycle Roundup thread in the forum to gather all proposals eligible for voting in Week 3.
Initial Approval
For a proposal of the Token House to be eligible to move to Week 3, four of the top 100 delegates must give explicit approval on the discussion thread. For proposals of the Citizen House, four Citizens must give explicit approval on the discussion thread.
After receiving the corresponding approval, the author of the proposal changes the status in the title from [DRAFT] to [FINAL] and adds a summary of all feedback.
Voting
The voting takes place in Week 3. For a proposal to pass the vote, certain thresholds must be met, depending on the type of proposal. For proposals relating to the Governance Fund, 30% of the “total votable OP supply” must have participated and at least 51% of the votes must be in favor of the proposal. For proposals to remove a director, again, 30% of the “total votable OP supply” must have participated, but 76% of the votes must be in favor of removing the director. The full list of requirements that a proposal must meet in order to pass voting can be found here.
A similar system exists for proposals from the Citizen House, but as they currently only vote on the allocation of retroactive funds, there are no examples that can be mentioned.
Veto
The Citizens' House has an important veto function on two types of proposal: protocol improvements and inflation adjustments. After a proposal in either category has passed the Token House vote, the Citizen House has a veto period of one week immediately afterward. The veto is voted on in the Citizen House Snapshot Space and requires a 30% threshold to take effect.
Implementation
Accepted governance proposals will be directed to the Optimism Foundation for execution. Upon receiving an approved proposal, the Optimism Foundation will assess its safety, security, alignment with the Foundation and Collective's objectives as well as legal compliance.
If the proposal fails any of the checks, the Foundation may either withdraw the proposal for resubmission or implement it with specified safeguards at its discretion. Additionally, the Foundation will provide an explanation to the Collective regarding the rejection or limitations imposed on the proposal.
(Source)
Retro PGF Rounds
The process of how the RetroPGF rounds is conducted differs from the general proposal cycle and can be broken down as follows:
Scoping: The overall amount of rewards to be allocated and scope of impact are defined at the outset of the round.
Application creation: Projects are invited to create an Application in the RetroPGF Application Manager.
Application Review: Applications are reviewed for adherence to the application rules
Voting: Votes are collected from the citizens with the requisite AttestationStation entries and tallied.
Disbursement: Based on the simple weighted average of the Citizens’ House vote, the overall reward amount for the round is divided among the winning projects.
Compliance: The Foundation will collect information from projects to distribute the grant in a legally compliant manner (including completing KYC).
(Source)
Conclusion
Optimism introduced a governance model that consists of two pillars, or better said houses. Namely the Token House and the Citizens’ House. The Token House consists of the holders of the OP tokens and the delegates, whose responsibility is to govern the day-to-day operations of the protocol. The Citizen House governs the RetroPGF rounds and decides which projects are receiving funding. It also has an important veto function to block certain proposals passed by the Token House governance.
Optimism's governance model is, as they themselves say, an experiment to avoid the typical pitfalls of plutocratic, i.e. "classical", governance models. It is possible that the role of the two houses will change over time and that the Citizens' House in particular will have more influence on the proposals of the day-to-day operations.
Optimism has one of the most (if not the most) advanced governance systems in the Web3 industry. It is clear in terms of structure, setup and documentation, and their commitment to transparency is evident.