A quick guide to the Optimism governance structure

If something makes Optimism Collective stand out from other DAOs, it’s their unique governance model designed to address the shortcomings of coin voting.

On April 26, Optimism, a Layer 2 Optimistic Rollup functioning on top of Ethereum mainnet, announced the launch of Optimism Collective, a new model of digital democratic governance. The mission of this large-scale experiment was to sustainably fund public goods that benefit the Collective and, beyond that, the rest of the crypto community.

“Cyberspace today suffers from a monumental market failure because it has inherited economic rulesets built for the physical world. Yet unlike the old world of flesh and steel, cyberspace is built on information, a substrate which can be freely replicated. This means public goods are far more important to the growth of cyberspace but our markets are ill-equipped to nurture that growth,” the Collective outlined the challenges to the public goods funding in a statement titled “The Optimistic Vision.”

Public goods can be profitable – and Optimism Collective aims to prove it. To do so, it employs a unique governance structure tasked with balancing the short-term incentives with long-term goals in accordance with the Vision.

The Optimistic Collective is governed by two separate and co-equal chambers, the Token House and the Citizens’ House. The former was established by distributing OP tokens to about 250,000 addresses that have engaged in “community-oriented” behavior, including active DAO voters, Gitcoin donors, and multi-sig signers. The Token House is focused on the distribution of project incentives, protocol upgrades, and treasury funds. The voting power in this chamber is transferable, and anyone can acquire it through purchasing OP.

The diagram of two Optimism chambers and their functions.
Image: Optimism

Such a token-based model is quite common for DAOs, but it has its disadvantages. “Too often today, simple token-based governance systems deteriorate due to misaligned incentives or excessive consolidation of power,” the Working Constitution of the Optimism Collective reads. To balance the shortcomings, the Citizens’ House was introduced.

The Citizens’ House is tasked with distributing retroactive public goods funding. Citizenship is conferred by “soulbound,” non-transferable NFTs, and the number of citizens is expected to grow over time. The exact mechanism of distributing citizenships is yet to be determined by the Optimism Foundation and the Token House.

The establishment of Citizens’ House, along with the community proposal to make OP the protocol’s fee token, gained enthusiastic endorsement from Vitalik Buterin, who saw these improvements as the way to achieve “explicit representation of non-token-holder interests.” The Ethereum co-founder has long emphasized the need to move from coin voting governance, pointing out that it favors whales and disincentivizes small holders from voting due to their insignificant influence. “Even if there are rewards for voting, there is little incentive to research and think carefully about what they are voting for,” Vitalik wrote.

“Influence in governance must extend beyond financial stake to value humanhood and intelligent life. The centralizing force of plutocratic token governance is a risk to the health and effectiveness of the Collective, and must be balanced with Citizenship,” Optimism stated.