3. Decentralized Governance based Decisions

Another key point is the implementation of decentralized decision-making within the network, which refers to the collective process by which participants shape the network's future evolution. It ensures active participation of token holders. Involving token holders in governance mitigates concentration of control, reducing the likelihood of meeting the “Common Enterprise” criterion of the Howey test. It demonstrates that the success or failure of an investment relies on the collective efforts and decisions of a decentralized network, rather than relying solely on a central authority.

Token holders vote on various matters, including parameter upgrades, protocol updates, and the addition of new features which can include critical changes to token economics or revenue models (such as fees and their distribution) that are crucial to the network’s trajectory.Additionally, the community typically also votes on fund deployment from funds that are controlled by the community, such as the community pool or the strategic reserves. Funding is commonly allocated to development teams, grants programs, and independent projects within the community. A growing number of protocols attempt to increase the decentralization of development efforts by:

1. deploying funds to an increasing amount of entities through proposals from different developer teams or entities over time

2. doing so through a transparent governance process that includes the network’s community in the decision-making process

Besides funds that are directly controlled by token holders, blockchain networks generally have a foundation with a treasury for grants. This treasury is often spent in a more centralized fashion, in order to fund core development, marketing, and work.

The two models can exist simultaneously.

While the community model through governance facilitates decentralization, the centralized foundation helps drive faster deployment of critical funding to development efforts in the early stages of the network (this can include service agreements with the initial developer company that started the protocol). It’s able to fund more effectively and precisely on critical tasks and responsibilities the community and on-chain governance is unable to execute at an early stage.

Decentralized decision-making as a whole is still ensured through a balanced distribution of voting power, which we’ll touch on in the next section.