Do's and DAOnt's
Designing an Effective DAO Governance Model
Welcome to just another Tuesday, where we’ll try to soothe some of the pain from the regularly scheduled programming of market turmoil and war with:
And an attempt to design an effective DAO governance model.
But memes first.
Do's and DAOnt's
Designing an Effective DAO Governance Model
The history of humanity has been one of finding new, more efficient ways of organising ourselves in order to capture or make better collective use of our shared resources. For the majority of our history, these shared resources have been controlled almost unilaterally by kings, queens, generals, and commanders. Over time, democratic institutions have emerged that have begun to shift decision-making power to larger and larger swathes of the population. Execution power, however, regardless of how democratic a country or organisation is, remains fairly centralised. Presidents do not ask citizens for specific votes on whether to increase taxes, and CEOs do not poll shareholders about a potential acquisition – they make these decisions unilaterally. The control of our shared resources is, therefore, still in the hands of a select few, which creates execution risk and moral hazard since the cost of bad decisions is mostly borne by others. Decentralised Autonomous Organisations (DAOs) aim to solve this problem and represent a further evolution in the nature of how humans govern themselves. As pointed out in the Anticapture framework, DAOs decentralise the execution of decisions. This property is what makes DAOs special, as it theoretically allows as many people as possible to have a valuable say in directing the use of shared resources.
A DAO’s decision-making frameworks are trustless and make governance and execution accessible to everyone, rather than just a subset of individuals. Effective governance, however, is needed to grow a DAO like a distributed ‘company’, with all the associated metrics. In today’s world, large organisations are ‘governed’ by a select set of individuals. Shares provide nominal voting rights; almost all decisions are made at a board level to shape the strategic direction of the company and determine what the company’s resources should be allocated towards. DAOs are different in the most important way – the strategic direction is not meant to be decided upon by a select set of individuals, but rather by each member of the DAO who holds a governance token. This decentralised nature of decision-making allows each ‘employee’ (member) of the ‘company’ (DAO) to have a say in what they would want to work on and how they would like their organisation to grow.
Governance, therefore, is at the heart of a DAO. Effective governance, which allows a DAO to grow faster while enabling as many of its members to vote on as many proposals as possible, needs to be resilient to capture from centralised entities and scalable enough to grow and innovate as fast as its centralised competitors.
Achieving this balance is not straightforward and is the reason why many DAOs have faced myriad governance issues, such as voter apathy, coordination problems with their ‘employees’ (i.e., contributors/members), and the ‘whale’ problem, where voting power is concentrated in the hands of a few entities. Given how DAOs as a whole are at the very beginning of their development, these teething issues are expected and need to be mitigated through a blend of better tooling, onboarding, and communication, the provision of incentives to governance token holders to vote, and the optimisation of governance models.
Today, we’ll walk through the various issues DAO governance faces currently and attempt to find some solutions for these problems.
The Problems with Governance 🚩
Governing a dispersed, internet-native organisation like a DAO is a tricky proposition. Voter engagement is usually low, and the voting system is, in most cases, one-token-one-vote, which tends to concentrate power in the hands of whales. As a DAO scales and grows, moreover, the cost of participation increases as there is too much happening – too many Discord channels and too much knowledge to keep abreast of. This makes decision-making unwieldy, and a very decentralised DAO, which requires voting on each and every proposal, is not able to remain productive. While an ideal form of governance would involve all participants in discussion, in a practical sense this tends to reduce the ability of the DAO to scale, and the problem is exacerbated by disjointed processes and fragmented tooling that make governance inaccessible to the average user. Since in many cases this leads to decision-making and execution power becoming concentrated, the DAO ceases to remain decentralised.
The problems with DAO governance stem from three key areas: voting apathy, the whale problem, and inconsistent tooling and onboarding.
Voting Apathy 🗳️
The paradox of democracy is that while everyone of the voting-age population is entitled to a vote, participation in elections is not always high. Even as the number of countries that hold elections has increased significantly since the early 1990s, global average voter turnout has only decreased over that period. Low rates of voter participation mean that actors executing decisions gain more centralised control over shared resources.
This problem is replicated in DAOs, where as they scale (in terms of number of members), voter participation (measured as the number of voters as a percentage of members) falls.
The smallest DAOs boast 50% on-chain voter participation in comparison to the 5% attained by the largest DAOs. For example, Compound’s on-chain voter participation has averaged ~3% across the ~70 on-chain proposals that have been executed, which is an abysmally low number, and 75% of all $COMP delegates (to whom individual voters have delegated their votes) have never cast an on-chain vote. This has in turn intensified the whale problem, where a few whale delegates have disproportionate voting power.
The voting apathy problem has come about because of the lack of incentives for DAO members to vote, combined with the flood of proposals adding to the vast amount of information voters are expected to keep up with. Since small token-holders (which constitute a majority of members) only have limited influence on the outcome of each proposal, and they are not financially incentivised to vote, voter apathy becomes rampant. Governance tokens today are not utilised to their full potential because while they give the ability to govern, they do not incentivise it well enough. As we’ll explore later, adding voting incentives to governance tokens, or only rewarding them in a non-transferable manner to community members who actively participate in the DAO, could be potential solutions to this problem.
The Whale Problem 🐋
The most common method of voting for DAOs today is the one-token-one-vote system, or ‘token-based quorum voting’. Since governance tokens are transferable, however, votes can essentially be bought by whales, who look to control the operation of the DAO, not too dissimilar to today’s corporate world where the C-suite or board make all of the important strategic decisions for a company. This has also led to the creation of a sub-market where Protocol 1 aims to control voting power in Protocol 2 by holding or staking Protocol 2’s governance token. This is best exemplified by the Curve Wars, where Convex and [REDACTED] are in a battle to control the decisions made by the systemically important Curve protocol, and other protocols like Bribe are emerging which pay governance token holders for their votes.
Another problem with token-based quorum voting is that it limits scalability. Since high community participation is required to pass proposals, significant time and energy is utilised in campaigning, and it also becomes extremely time-consuming for average community members to vote on every proposal to meet quorum. Therefore, only a few whales vote for most proposals and end up controlling the strategic direction of the DAO.
Inconsistent Tooling and Onboarding ⚙️
One of the most persistent issues with DAOs today is how they onboard and engage with new members.
While Discord is the primary coordination tool used by most DAOs, many large DAOs, such as Uniswap, have fragmented ecosystems and governance decisions take place across too many public and private channels and platforms. This unduly benefits whales, who do not have an incentive to participate with smaller token holders as they do not need their votes to pass proposals. Moreover, the Governance channels on the Discord are not used appropriately, as they are not seen as places to obtain community support for proposals or for smaller token holders to voice their opinions.
When new members join a Discord, they are not sure about what to do or who to connect with. The sheer number of channels and asynchronous chats seem like a mountain to scale in terms of obtaining relevant information about the DAO, and the incentives for participation are not always defined or documented well enough. There is also an abundance of tooling, the uses of which are not always clear to DAO members; for example, Tally and Snapshot can both be used for voting, but the difference between the two (Tally is on-chain voting and Snapshot is off-chain) is not immediately obvious. The processes for being compensated or contributing full-time are also not clearly laid out, and the resources available for members to get up to speed with the DAO’s organisation and operation are not up to scratch.
The combination of all these factors can lead to members getting overwhelmed. This has a knock-on effect on their participation in the DAO and contributes to the voter apathy and whale problems.
Designing Effective Governance 🎯
For DAOs to grow further and attain a higher level of maturity, these existential chinks in the armour need to be ironed out. We’ll first go over how governance models can be constructed to achieve the optimal balance of resiliency and scalability, and how they can incorporate various voting mechanisms to add incentives to governance tokens. Then, we’ll explore ways to mitigate the whale problem, and lastly dive into the tools and processes that can make the DAO governance experience more accessible to as many members as possible.
Balancing Resilience and Scalability and Incentivising Voter Participation 🗳️
Successful DAO governance models do not need to rely on every member making every decision. In order to solve for the scalability problems that come with a million people making a million decisions, DAOs can create a system where voter incentives through governance tokens are combined with a structure of representative democracy. As depicted below, resiliency and scalability are a scale.
Complete resiliency is not needed for all proposals and decisions; in order to be on the optimal point on the scale, low-value, high-volume proposals should be decided upon by a group of community members elected to make decisions on those. High-value, low-volume proposals, on the other hand, should be voted upon by the community.
To ensure that the quality of proposals submitted remains consistently high, and to signal the relative value of proposals, proposal submitters need to indicate the ‘value’ of the submitted proposal to the network based on their own judgment. They need to stake a certain amount of the governance token to make the proposal, and if the community decides that the value of the proposal is less valuable than indicated by the proposer, the stake gets slashed. If the proposal is valuable, community members can tip the proposer to reward them for valuably contributing to the community.
For proposals that are deemed to be high value, proposers can also implement a system of Conviction Voting, where voters indicate their preferences by staking their tokens on specific proposals. The longer a voter stakes their token on a proposal, the more ‘conviction’ accrues, and after enough conviction accrues, the proposal passes. This can be done for several proposals in parallel and ensures that the most important proposals get enough votes. For lower-value proposals, the ‘Nudge Theory’ method can be used, where the decision can be challenged by an absolute majority of the community within a certain timeframe, for example 3 days.
Regardless of the value of the proposals, voters still need to be incentivised to vote. This can be done through delegation. Each address that holds the governance token will get slashed for every vote their token does not participate in. To reduce the friction of voting, each address has the ability to delegate its governance tokens to a Delegated Voter. Tokens can be batch-delegated, i.e., tokens can be delegated to the same delegator for x votes in a row until they are prompted to delegate again or vote themselves. Delegated Voters stake or lock their tokens which are slashed if they do not vote for every proposal and they receive rewards for every ‘streak’ of votes they participate in – e.g., 2% for 5 in a row, 5% for 10 in a row, 10% for 15+. The streaks feature can also be combined with a gamification angle, where the voting interface is structured like a game, further incentivising individual token holders or Delegated Voters to vote. Individual voters can also be incentivised to vote without delegating their votes via consistent notifications from the Voting app and the promise of higher rewards (i.e., more governance tokens) for voting individually.
In effect, such a governance model has a good chance of landing on or near the optimal point on the Resiliency / Scalability scale, but the whale problem still needs to be solved. Creating governance tokens as non-transferable NFTs would go a long way towards this, as would implementing a one vote per wallet address method.
Neutralising Whales 🐋
The incentive structure underlying a DAO’s governance token needs to be one where governance power accrues to community members that participate actively in the DAO, essentially making the ‘employees’ of the DAO its true owners.
This can be implemented via non-transferable governance tokens that are NFTs, as suggested by Vitalik Buterin. Such a method would make DAO governance tokens accrue only to community members that participate actively in the DAO in some way and are not just passive observers. When a task for the DAO is performed successfully, for example in a DAO working group like the Treasury function, the contributor would get rewarded with an NFT signifying that they have contributed to the DAO. This NFT would hold governance rights and would not be transferable to anyone else or sellable on any marketplace. If the wallet address of the original token-holder does not match the wallet address of the current token holder, the token would essentially lose all value and would not be able to vote on or create any proposals. Such a solution would mitigate the whale problem but would need to be done in tandem with the delegation and representative democracy solutions described above to simultaneously resolve the voter apathy (i.e., resilience) and scalability problems.
Another way of solving the whale problem would be via a one vote per wallet address solution. Each wallet where the governance token is held would get only one vote. This can mostly avoid the whale problem but is dependent on whales not spreading their tokens to multiple wallet addresses pseudonymously (Sybil Attacks). To avoid this, it needs to be implemented alongside a proof of personhood system, like that of BrightID, which uses a social graph to ensure the uniqueness of individual identities. BrightID enables users to create self-sovereign digital identities out of their digital identifiers, by generating a trust score from connections between members of groups. When a new connection is created, a QR code is generated that is scanned, and the user selects their connection level to the new person. The number of connections that an identity has is positively correlated with that identity’s trust score. A BrightID-like system combined with the one vote per wallet address solution could make sure that only wallet addresses above a certain trust score are allowed to vote.
Once the whales have been neutralised and the DAO’s governance procedures are both resilient and scalable, the attention must turn to the tools and processes the DAO should use to interact with its members.
Using Better Tools ⚙️
To ensure more consistent engagement from DAO members and reduce member churn, DAOs need to revamp their onboarding processes. A first step would be consistent how-to-do videos and better documentation for key functions like voting processes, organisational structure, and treasury management. A structured team, led by the group of elected community members, would go a long way in standardising the DAO experience for both current and new members. For example, the Friends with Benefits (FWB) community doubled in size, contribution rates increased 7x, and the team size grew significantly when it moved from a token-gated Discord into a structured team.
Secondly, to increase efficiency and scalability of the DAO’s operations, Orca Protocol’s Pod solution can be implemented by the DAO. Pods are small working groups centred around one area of expertise, like Community Management or Marketing. Each pod has its own multi-sig wallet that controls its treasury and can be seen as akin to a sub-DAO, with contributors needing to apply for memberships to a pod. Being created around an expertise enables pods to codify rules and responsibilities more clearly, giving contributors clarity about what their exact roles are, while the delegation of operational decision making to smaller working groups increases the efficiency of the system. The pod model also efficiently directs contributors to the specific areas where their talents are most effectively utilised, increasing engagement from contributors and adding value to the DAO.
Closing Thoughts ⌛
Today, DAOs are similar to a baby clambering out of a womb, full of promise but very immature. For DAOs to reach their full potential and get to the next stage of their evolution, all of their growing pains must be identified and effectively dealt with. Currently, the biggest problems faced by DAOs stem from poorly designed governance systems and difficult user experiences. Once these problems are addressed and DAOs are sufficiently resilient, scalable, decentralised, and organised, they will be magnitudes more likely to attain widespread adoption as a way in which humans organise themselves.
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