Key Considerations for LayerZero’s First Governance Proposal

Key Takeaways

• LayerZero, an omnichain interoperability protocol, is conducting a community vote starting from the 20th on a proposal regarding fee switching, marking the first instance of multichain governance.

• The fee switching mechanism proposed by the LayerZero team aims to enhance the scarcity of the ZRO token, thereby increasing its value while strengthening community cohesion.

• However, as this governance proposal could significantly impact all stakeholders of LayerZero by restructuring the fee model, careful consideration must be given to the entities directly involved in fee collection.

• Despite these concerns, the proposal carries substantial significances, and it is hoped that the lessons learned from this process will enable LayerZero to evolve into a truly decentralized cross-chain solution further, combining its exceptional technological prowess with outstanding community management.

1. Background - LayerZero’s First Multi-Chain Governance Proposal: The Fee Switch Referendum

1.1 The Introduction of Fee Switching Observed Across Various Protocols

Fee switching refers to a mechanism by which platforms modify or implement new structures for transaction fees or other revenue models. The primary goal of platforms, which previously did not share their own revenue, when introducing such fee switching mechanisms is typically to strengthen their existing community and foster a decentralized ecosystem for long-term development.

Source: X | Four Pillars

The approach of returning benefits to the community through fee switching can be explored using various mechanisms. As outlined in my previous post, these mechanisms can be broadly categorized into two types: 1) directly sharing revenue with token holders or 2) indirectly enhancing the value of native tokens through methods like airdrops, token burns/buybacks, or allocations to DAO treasuries.

For the former, notable examples (or attempts) include GMX (DEX, revenue sharing with escrowed and multiplier points), Lido (Liquid Staking, distributing a portion of staking rewards allocated to LidoDAO to token holders), and Uniswap (DEX, sharing protocol revenue with token holders who stake or delegate their votes).

For the latter, many projects have adopted this method, including a recent proposal by Jito (MEV & Liquid Staking), which suggests allocating 3% of all MEV tips generated on the TipRouter protocol to the DAO treasury and NCN network participants.

1.2 LayerZero’s Fee Switch Referendum

Source: LayerZero

In the omnichain interoperability protocol LayerZero, a governance proposal regarding fee switching has been introduced as the first instance of multi-chain governance - Multi-chain governance here refers to the ability for community members holding ZRO tokens across various chains supported by LayerZero—such as Ethereum, Optimism, Base, Polygon, Avalanche, BNB Chain, and Arbitrum—to combine their holdings and directly participate in governance as if all their tokens were held on a single chain*.

Source: LayerZero

This governance proposal falls into the latter category. The core idea is to impose an additional fee on the verification and execution that LayerZero charges for cross-chain messaging. The proceeds from this additional fee would then be used to buy back and burn ZRO tokens. For instance, if a specific application incurs a $0.01 fee for a bridging transaction between chains, an additional $0.01 would be charged by the Treasury Contract of LayerZero’s framework. This amount would be used periodically to purchase and burn ZRO tokens.

Notably, this governance proposal was not a sudden initiative by the LayerZero Foundation. On June 20, the foundation published a blog post detailing the token generation event (TGE) and tokenomics, where they committed to putting fee switching governance proposals to a community vote every six months. The upcoming vote on December 20 marks the first of these governance cycles. Essentially, ZRO token holders within the community will have the opportunity to signal whether to enable fee switching for the LayerZero protocol, following the same governance procedure every six months.

Voting is being conducted via this link from 12:00:00 AM UTC on December 20, lasting for one week.

*The multi-chain governance of LayerZero can be implemented through a data primitive called lzRead. For more details, please refer to LayerZero's blog.

2. Takeaway - Concerns and Implications of the Governance Proposal

2.1 Concerns of the Governance Proposal

The primary objective of introducing the fee switching mechanism proposed by the LayerZero team is to enhance the scarcity of ZRO tokens, thereby increasing their value and strengthening community cohesion. From this perspective, the proposal could be well-received by ZRO token holders.

However, this governance decision has the potential to significantly impact all stakeholders of the LayerZero ecosystem through the restructuring of the fee model. Therefore, the proposal must be carefully deliberated, taking into full account the entities directly involved in fee collection.

The key points to deliberate on are as follows:

2.1.1 High Fees and Reduced Predictability

Bridge solutions often tend to incur relatively higher costs compared to typical Layer1 and Layer2 transaction fees. Therefore, ensuring affordable and predictable fees, alongside factors such as the number of supported chains, the maturity of the development framework, and security, is crucial for users. In particular, for projects or end-users engaged in frequent or low-value bridging transactions, the sensitivity to fee levels may outweigh other considerations.

Moreover, the practice of voting on fee switching every six months—a relatively short cycle—can pose challenges for various token projects, blockchain networks, and applications utilizing the LayerZero framework. This could hinder their ability to predict bridging costs and optimize their operations effectively.

2.1.2 Who Are the Key Stakeholders of the ZRO Token Community at the Moment?

The primary beneficiaries of this governance proposal are the ZRO token holders. So, who are the main holders of this token at the moment? According to LayerZero’s tokenomics documentation, 57.7% of the total token supply is allocated to core contributors and strategic partners, while the remaining 38.3% is reserved for diverse stakeholders such as users, protocols, infrastructure builders, and community members. However, this allocation reflects the situation after the full token distribution is complete. To date, ZRO tokens have primarily been distributed to general users actively utilizing the existing network, following the TGE on June 20.

Therefore, this proposal may face criticism regarding fairness or being too premature, as the party bearing the fees and the party benefiting from them are not entirely aligned.

2.2 Significance of the Governance Proposal

Despite the aforementioned concerns, this governance proposal holds clear points of significance worth noting.

2.2.1 As an Experiment in Gauging Community Sentiment and Setting Appropriate Fees Amid a Changing Fee Model

While bridging costs are heavily influenced by the types of source and destination chains, research on user price sensitivity and willingness to pay (WTP) remains in its early stages. This revision of the fee mechanism presents an excellent opportunity to observe how changes in fee structure impact supply and demand for various users and projects utilizing LayerZero bridges or frameworks.

2.2.2 Revitalizing DAO Governance and Exploring the Evolution of Future Governance Frameworks

Governance tokens are fundamentally designed to enable decentralized network operations. However, LayerZero's governance framework is still in its nascent stages. Key questions—such as the scope of governance and the most suitable participants for it—remain largely unexplored.

Given the intricate web of stakeholder relationships tied to this governance proposal, it provides the LayerZero team with an opportunity to identify the key players exerting influence over governance. This, in turn, could serve as a foundation for refining the framework, including defining the scope of governance more concretely.

2.2.3 Expanding Cross-Chain Messaging Use Cases

This governance proposal represents LayerZero's first multi-chain governance case leveraging lzRead. As an increasing number of applications and infrastructure networks adopt multi-chain strategies to secure greater user bases and liquidity, LayerZero's multi-chain governance initiative stands as proof of the team's technical expertise and ability to deliver stable, successful use cases. This success could serve as a catalyst for various projects to develop more use cases by leveraging cross-chain solutions with LayerZero*.

*As a reference, the LayerZero team has previously collaborated with the Aragon team to successfully build a gasless multi-chain governance tooling.

2.3 Closing Remarks

Having built a robust and broad ecosystem, LayerZero team is now taking a step further toward decentralization by introducing multi-chain governance. By drawing on the valuable lessons learned from this governance proposal, I look forward to seeing it evolve into a truly decentralized cross-chain solution that combines its existing exceptional technical expertise with outstanding community management capabilities.

3. Others’ Opinion

3.1 Ingeun Kim from Four Pillars - Ultimately, Voter Engagement is Key

The recent LayerZero fee-switch governance proposal has provided ample opportunity for analysis based on its merits and shortcomings. In particular, its accessibility, a hallmark of multi-chain governance that allows participation across diverse chains, underscores the significance of governance itself.

This governance vote is a broad referendum, often referred to as a "general vote," which enables participation from all eligible members of a specific group. In this case, anyone holding $ZRO tokens is entitled to cast their vote on the proposal.

However, this inclusiveness could pose challenges when handling significant proposals. A general vote reflects the full electorate's intent only when voter turnout reaches 100%, yielding the most legitimate results. Conversely, declining voter turnout dilutes the electorate's voice and weakens the proposal's legitimacy.

If a vote concludes with low turnout, it risks overrepresenting minority opinions or disproportionately reflecting the interests of specific groups. This undermines the fundamental democratic principle of "majority rule," central to decentralized organizations like DAOs. Consequently, low turnout could lead to resistance during policy implementation, emphasizing the governance responsibility to enhance voter engagement in the process.

To address these issues, many systems employ delegated democracy, where token holders can delegate voting power to individuals or institutions. While this approach mitigates low participation, it may create a disconnect between the delegated voters and the electorate's true intent.

Source: LayerZero Foundation

LayerZero has implemented safeguards against such pitfalls in its fee-switch governance proposal. These include quorum requirements (e.g., 66 million $ZRO) to ensure a minimum turnout and semi-annual repetition of the proposal, allowing for flexibility and adjustments.

Nevertheless, for individual opinions to be accurately represented and for the proposal to gain robust legitimacy, active participation from $ZRO token holders is paramount. LayerZero is actively promoting the vote through various channels. Therefore, if $ZRO holders cast their votes here, it could steer the governance proposal in the right direction and offer a meaningful experience that embodies the essence of DAO governance.

4. Resource

Related Articles, News, Tweets etc. :

• Aragon - Homepage

• Four Pillars - : : [Issue] Can We Expect Revenue Sharing for Token Holders?

• Four Pillars - Launch a Project and Get Connected - Recent Strategy of LayerZero

• GMX - GMX Docs

• Jito Governance Forum - JIP-8: Adopt TipRouter NCN (Protocol Development)

• LayerZero - Fee Switch Preview

• LayerZero - Fee Switch Referendum

• LayerZero - Introducing ZRO

• LayerZero - LayerZero Fee Switch Referendum

• LayerZero - lzRead: Power Your App with Omnichain Data

• Lido Governance Forum - Activate Lido Protocol Governance with Revenue Share Staking

• Lido Governance Forum - Proposal: Introducing $LDO Staking

• Uniswap Governance Forum - [Temperature Check] - Activate Uniswap Protocol Governance

Related People, Projects :

• Aragon ( @AragonProject )

• GMX ( @GMX_IO )

• Jito ( @jito_sol , @JitoFDN )

• Lido ( @LidoFinance )

• Uniswap ( @Uniswap , @UniswapFND )

• LayerZero ( @LayerZero_Core, @LayerZero_Fndn )

• Four Pillars ( @FourPillarsFP , @FourPillarsKR )

• Heechang ( @xparadigms )

• JayLovesPotato ( @JayLovesPotato )