Part I : DAOs x Governance - A Match Made in Heaven!

What is DAO governance?

Decentralized Autonomous Organization (DAO) governance can be best defined as determining how decisions are made in a DAO, and who is the decision maker. The purpose of the ‘decentralized’ autonomous organization is to create an ‘organization’ that is ‘autonomous’ in nature. What this means is that, the need is to democratize the governance and prevent centralization that is present in the traditional web2 governance structures.

Who votes?

The first decision you probably need to make is, who votes? Is it everyone who’s part of the DAO? Is it a select few? If it is a select few, how do you choose these people? So many questions. 😲

The usual differentiation for this answer is that, either (i) token holders vote, or (ii) authorized wallets vote. The first choice will only be applicable if your DAO has tokens. If it does, then in that case, you could either allow all token holders to vote, or make it a stake-based system wherein, whoever holds the most tokens, holds the most decision making power. With respect to the second choice, you can add a layer of gating, by allowing only certain authorized wallets to hold the decision making power. This choice also automatically usually becomes the go-to when the DAO does not have tokens of its own.

How can they vote?

Now that we have broken down the possible candidates for ‘who votes?’, let’s simplify the possible ‘hows’ of voting in a DAO. ⬇️

(i) Proportional voting - This essentially translates to 1 token = 1 vote which means that an individual token holder’s voting power is directly proportional to the number of tokens that he/she/they hold. So for instance, if Alexander holds 10 tokens out of a total 100 tokens, then he has 10% of the voting power! 🤝🏼

This method would usually be relatively sybil-resistant and is most definitely well-suited for investment DAOs where the decision of where to invest the treasury, would lie in the hands of those who have the most skin in the game. This only ensures efficient decision making for the overall benefit of the DAO.

However, proportional token-based voting also has its own issues that one must consider while choosing the DAO governance model. For example, the ‘whales’ of the DAO can choose to hold most of the tokens, and thereby control the decision-making power. This would mean that even if the other members of the DAO who are token holders, put in the effort to hold these tokens, they would still have a very small say. This would reduce their engagement with the DAO. Additionally, since the votes can simply be purchased through the purchase of the tokens, groups of people may choose to manipulate the system by purchasing most of the tokens, to push their malicious agenda. This is also often referred to as the ‘Dark DAOs problem’. This is precisely why choosing the right governance model is extremely important! 🚀

(ii) The allowlist method - This essentially refers to 1 authorized wallet = 1 vote. This means that even if 1 authorized wallet, let’s call it ‘A’, holds 7% of the tokens, and another authorized wallet, let’s call it ‘B’, holds 28% of the tokens - both of them still hold the same voting power! While this sounds super rosy, this method may sometimes be prone to sybil attacks because the same person could go ahead and make multiple authorized wallets, thereby holding the majority of the voting power. 😔

Why is governance the foundation of a true DAO? 💭

Choosing the right governance model can be the make or break for a DAO. This is because governance is the foundation of a true DAO. Governance can actually have many positive impacts on your DAO, if chosen rightly. 💯

For instance, -

(i) The engagement in your DAO will be determined by the respective roles played by the members, contributors and stakeholders in the DAO. Let’s break this down for you. If the ‘core’ members of the DAO are the ones that hold the maximum decision making power, then they are automatically likely to engage with the DAO more. This is because their stake is much higher and engagement will only benefit them! 🤝🏼

(ii) The decision-making process of the DAO might either be slow or fast. This would depend entirely on the governance model chosen for the respective DAO. Let’s break this down for you. If the governance model requires multiple approvals before a decision is finally determined, that’s likely to be a slower process than one that requires no approvals and relies on the primary decision making. ⌛

(iii) The security of your DAO will also largely depend on the DAO governance model that you opt for. Let’s break this down for you. If the governance model that you’ve chosen allows easy approval of possibly malicious proposals because of an inefficient governance model, then that vulnerability could be manipulated by anyone who understands the ins and outs of your governance model! 🔓

The different governance models that you can choose from -

While the following list of different governance models that you could choose for your DAO can never be exhaustive because DAOs are constantly experimenting with newer models; we hope to cover the basic foundational models for you! ⬇️

1. Direct on-chain democracy - This governance model is where members vote on a certain proposal directly on-chain. This voting is done on the basis of a threshold that must be met in order to ensure that the motion is approved. Usually, it is 51% and above for any motion to pass. The voting method that is often used in this governance model is token-weighted voting which is essentially the 1 token = 1 vote model. 📖 2. Direct off-chain democracy - This governance model is where the DAO conducts voting off-chain using snapshots. Similar to the direct on-chain democracy model, a threshold must be met here as well, in order to pass the motion. While most direct off-chain democracy based models also utilize token-weighted voting, they add a caveat in requiring a multisig of trusted entities to push the proposed change on-chain. This therefore, requires an element of trust that the multi-sig holders will definitely vote in alignment with the snapshot results. 🤝🏼 3. Representative democracy - This governance model is where the DAO uses the representatives to approve proposals. These representatives are elected by the DAO itself, similar to democratic governments in the world. In order to ensure that these representatives do not hold too much power and there is no malicious intent involved; it’s pertinent to have security measures in place as well. 🗝️ 4. Quadratic democracy - This governance model is where the structure is established on the basis of quadratic voting. Let’s break it down for you. In a DAO that’s implementing the quadratic model, 1 vote for a proposal may require only 1 governance token, however, 5 votes may need 50 votes. Therefore, this method aims to ensure that the DAO votes are not determined only by a few members.

Conclusion - How can we improve DAO governance? 🤔

While DAO governance has evolved quite a bit, there is still miles to go for us to ace the game. Couple of ways that DAO governance can improve is through delegated voting, i.e., a voter can delegate the voting power to a person in the DAO who has expertise in the said matter. This method would ideally work because not every voter is interested in the decision making process since DAOs are often a part time activity for most people. This is also called liquid democracy and is often successful because the voting power is then based on a person’s reputation and expertise, instead of their token holding. There are many ways to make this full proof, such as allowing delegators to withdraw delegation whenever they want to.

Another idea to improve DAO governance is through holographic consensus which refers to only putting up very relevant proposals for voting by all members. This is because if every small proposal is put up for voting then this could result in voter fatigue, reduced interest in the process, and lesser engagement, ironically. Focussing on targeting the proposals that are relevant and putting them up for voting, is a much more effective process! 🚀