Networks and protocols that are governed by their token holders are subject to all governance decisions, including malicious ones.
Token Holder Distribution
Token holder distribution is the single most important variable when assessing the governance risk of a protocol. A protocol whose majority of tokens is held by a single entity is completely reliant on this entity. We are analyzing the on-chain token holders/hash rate distribution of a network in order to determine how centralized it is.
Governance System
The governance system that a protocol uses decides when a protocol change takes place. It can also pose significant risks, e.g. when only low participation in governance votes is needed to force a change in the protocol.
Execution of Governance Decision
Who is executing governance decisions on-chain and who has access to a protocol’s treasury are essential questions here.
Governance Track Record
Risk Analysis
Item
Weighting (Total of 12)
Token Holder Distribution
6
Execution/Access
3
Governance System
1.5
Track Record
1.5
Token Holder Distribution
We do an on-chain forensic investigation of token holders, and token vesting schedules and determine how well-distributed a token’s holder base is. Based on this assessment, we give out 0-6 points.
Execution of Governance Decision
We determine who has access to a protocol’s treasury and executes decisions.
We do a qualitative assessment of the governance system implemented and how it relates to the current token holder distribution: 0-1.5 points
Track Record
We assess the participation of a protocol’s community in discussions around governance, and their participation and do a qualitative analysis of how previous governance votes have played out and whether there have been any incidents: 0-1.5 points
