Coordinated efforts to form decentralized internet institutions that own assets are sometimes viewed as a “wild west” of uncharted territory. But many of the problems and solutions found in traditional systems — where humans also coordinate — can inform and guide DAOs; they’ve been pressure-tested for centuries, and can be adapted for this new world. In many ways, learning both from the past, and the recent history of DAOs, may help new builders find and adapt ideas for the future of online institutions.

DAO Governance is an interesting idea even from an academic lens and for a number of reasons. Some of them being:

  • Incentive Innovation Rules All. Bitcoin provided a practical solution to the Byzantine Generals Problem by introducing an incentive innovation. In fact, much of crypto is about remixing existing technology with new incentives to create powerful new paradigms. DAOs are the natural frontier of incentive design in web3.
  • Capital Power. The DeFi ecosystem, with $250bn total value locked (TVL), is the current “super-app” of web3. While only ~$10bn of DeFi TVL (~4%) is currently held in DAOs, this number will likely increase exponentially as more and more DeFi protocols progressively decentralize governance. More money, more power – DeFi Treasury DAOs have the potential for massively influencing web3 in 2022 and beyond as capital power grows.
  • Web3 Promise. If the promise of web3 (versus web2) is to reduce centralized power in private, opaque corporate structures, then functional, community-led DAOs are a key prerequisite for the web3 promise to be fulfilled.

Governance-Token DAOs

Some DAOs employ governance tokens, which are permissionless, mintable tokens that holders can trade on decentralized exchanges (DEXs). Other protocols issue governance tokens when users provide market liquidity or participate in network security — such as Proof-of-Work (PoW) consensus mechanisms. Regardless of how governance tokens enter circulation, they tend to provide holders with voting rights. In many cases, these tokens give holders the ability to partake in the decentralized governance of protocols or even in the governance of the tokens themselves.

Proposals & Voting Processes: Governance Models At Work

As DAOs mature, there is an ever-growing number of ideas around voting, proposals and governance that aim to not only push the envelope but test academic concepts in life-altering events(somewhat). And there are tactics that can reduce complexity (not really) within DAOs and allocate resources more efficiently. Some of them being:

Token-Based Quorum Voting: The token-based quorum is among the most basic DAO voting mechanisms. For a proposal to pass, a certain number of DAO members must participate in the voting process. If the threshold has been met, the decision that has received the most votes wins. Failing to reach the threshold means that the proposal fails.

Although token-based quorum voting tries to encourage active member participation and consider mass opinion, there are some challenges. It’s often a challenge to pinpoint the appropriate quorum. Requiring more members to vote may mean that the majority of proposals fail due to multiple problems including poor participation, inefficient communication and logistics and the sheer effort of bringing members together. However, setting a low quorum poses risks of bad practices and makes passing a proposal extremely easy, which might not be the best thing for the community.

Regardless of the set quorum, encouraging members to participate is a time-consuming and expensive challenge for most DAOs. Some may prefer to remain inactive to sabotage a proposal being passed or they could simply not be interested in the decision-making process. Furthermore, as a token-based voting model, this mechanism ties in financial stability with voting power, as members with more tokens could manipulate and bribe others, potentially turning DAO voting into political activity.

Permissioned Relative Majority: In a permissioned relative majority DAO voting mechanism, the key factor is how many voters have voted ‘for’ and ‘against’ a proposal. There is no minimum voting requirement, and even one member can be the sole participator in the decision-making. The voting process is easy and straightforward, making it less expensive and less demanding. However, the mechanism allows a single DAO member to gain too much power and choose how to manage DAO funds. Additionally, the mechanism makes proposal passing a risky endeavour as it is a very easy process that doesn’t require too much attention or involvement from the other members.

One way to overcome these challenges is to require proposal sponsorship from DAO members. This way After submitting a proposal, it will enter the Unsponsored Proposals section. This means someone with shares (which could be also you) must Champion the proposal in order for it to be moved to voting. Another layer of check & balance might be the capping proposals and sponsorships members can make within a certain time frame.

Rage Quitting: The rage quitting voting mechanism is one example of how sponsorship has been utilized to increase security in the DAO voting process. The mechanisms could potentially offer a solution to the relative majority challenges. Before a proposal can be voted on, it must be sponsored by members. If the majority approves the proposal, it enters a grace period, where voters can reconsider and withdraw their support from the vote or from the DAO. If the proposal no longer receives enough support after this stage, it is discarded.

The main advantage of this voting mechanism is that it tackles the risk of majority voters gaining an advantage over minority voters. However, the voting process is extremely long, which may not be a viable option for all DAOs.

Quadratic Voting: Under the quadratic DAO voting mechanism, voting power is directly linked to financial power. Every member has the right to repeatedly vote on a proposal, where the cost of the vote is the square of the number of votes a member wishes to acquire. For example, if a single vote costs one token, two votes will cost four tokens, and three votes will cost nine tokens. This enables members to show how strongly they believe in a proposal, especially on decisions that they’re strongly passionate about.

This model of voting offers a solution to the risks of relative majority votes and clearly shows how strongly opinionated the DAO community is on certain topics. However, participation of a fake identity in the voting process could lead to unfair results, which is why proof of identity is a key necessity with quadratic voting.

Conviction Voting: As one of the newer DAO voting mechanisms that is still experimented with, conviction voting is based on the community’s aggregated preference and uses time as a utility. Members can vote on different in-progress proposals and the longer their vote remains the same, the stronger the power of the vote becomes. The increase of the voting utility slows down gradually as it inches ever closer to a set maximum point. Voters can make changes to their vote at any time, in which case the voting utility of their previous vote will eventually diminish.

This mechanism is a great way to display how interested voters are in a proposal and perhaps how their opinions are influenced by internal or external factors. There is no need for a majority vote in order to pass a proposal, but rather the community’s beliefs are at the core of decision-making. It’s also an efficient way to eliminate the risks of new DAO members gaining too much power in the DAO protocol.

On the downside, the mechanism requires significant time for a verdict to be reached, making it inappropriate for DAOs in need of time-sensitive decisions. It is likely that if conviction voting is adopted by more DAOs it could be used in combination with another, quicker mechanism.

Holographic Consensus

The holographic consensus DAO voting mechanism is designed to screen out and focus attention on proposals that are most likely to be passed in a DAO. This model of voting aims to solve the governance scalability-resilience problem in decentralized organizations. Under the mechanism, members can predict whether a proposal will pass or fail and bet on the ones they believe will be successful using tokens. If the prediction is correct, the predictor receives a reward in the form of tokens and if it fails – they lose tokens.

This ultimately allows for a small group of DAO members to help present the beliefs of the majority. And although the mechanism can be successful in expanding scalability and reducing the chances of attacks as foul proposals need to be funded, a voting protocol of this kind can be financially demanding and difficult to adapt and maintain in the long term.

Liquid Democracy: Liquid democracy or vote delegation shares the core principles of political democracy. In this case, a DAO assigns specialists to participate in an electorate that has the power to make decisions on behalf of DAO members. Members delegate their votes to trusted experts of their choice, who are better prepared to make the right decisions regarding the DAO’s future. This approach is more centralized than some of the other methods, but to counter that, DAO members have the power to transfer delegation at any time and assign new participants to the electorate.

The benefits of this form of DAO voting mechanism are that it is likely that better and more informed decisions will be made in the best interest of the DAO. However, as with the political democracies that we are familiar with in our world, bribery and corruption could manipulate decision-making.

Are there any demerits to the DAO Governance structure?

A DAO structured organization is perfect by no means and can even lead to a natural death when efficiency and execution becomes an issue. Some of the demerits are in the decision-making process which is super slow and frustrating. By the very nature of a DAO venture or structured organization, decision making has to be based on consensus/votes by a significant number of the stakeholders involved in order to form a quorum or for the final decision to be valid. If this is not achieved as at when due, projects/proposals get delayed and the team/individual putting forward the proposal gets frustrated especially when it is a time-based proposal.

The apathy during voting and decision-making is another demerit of a DAO. If no well-thought-out game theory that puts all participants in check, ensuring that those who fail to participate actively are penalized, it is as good as running a centralized organization because decisions will majorly be voted by a few thereby making it a lopsided organization were few works for the majority to reap its benefit. However, this could actually be avoided by rewarding those who engage actively and penalizing those who remain docile in the system.

DAO Governance is still very much about trial and Error

DAOs are still a relatively new form of entity and as such, no voting mechanism has yet proved to be fully efficient. While each voting model has its advantages for certain types of DAOs, there are still a number of key challenges that call for attention. As blockchain technology continues developing and decentralized autonomous organizations become more popular, it is likely that we’ll see new forms of DAO voting mechanisms arise or perhaps different voting models combined to offer a successful solution.