Agency Risk Mitigation

Agency Risk Mitigation refers to the measures taken to ensure that delegates act in the best interest of the token holders who empowered them. This is a classic principal-agent problem where the agent may have different incentives than the principal.

To mitigate this, protocols use techniques like revocable delegation, where users can withdraw their power at any time, or legal contracts that define the duties of the delegate. Additionally, some systems require delegates to stake their own tokens as collateral, which can be slashed if they act maliciously.

These measures align the incentives of the delegate with the success of the protocol. By creating clear rules and consequences, protocols can foster a more reliable and trustworthy governance environment.

Effectively managing agency risk is essential for the widespread adoption of delegated governance models.