Can any organization possibly exist without governance? Absolutely not! Going on the same tangent, let’s explore an extremely important element of DAOs- Governance!
What is DAO governance?
A DAO's governance model is the framework used in its decision-making process. This could be as straightforward as a democratic vote or as complicated as a multi-step process incorporating input from numerous stakeholders!
Fast Fact: In 2013, the first DAOs, or Decentralized Autonomous Companies (DACs), as they were then known, debuted. This gave rise to the DAO governance token. The DACs had carefully detailed regulations and business standards in the source code before entrusting bitcoins as the company's shares!
Like any other company or institution, the governance model of a DAO must ideally keep in mind a few factors:
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- Firstly, it must ensure that the model represents the values and goals of the DAO.
- Secondly, it must ensure that every stakeholder has a say in the functioning of the DAO.
- And thirdly, it must ensure that its work is transparent and accessible to every member of the DAO.
Why is governance necessary anyway?
Imagine a company, or an organization, with no governance- no hierarchy, no distribution of power, no laid down rules or regulations. How can the organization work? There's bound to be chaos, conflict, and disapproval in all likelihood. Further, the organization is bound to collapse without a mechanism to deal with these issues.
It's the same case for DAOs as well- They are decentralized autonomous organizations, after all! But this has us wondering about the next obvious question. If it's a decentralized organization, then who votes? And how does a DAO work?
How does a DAO work?
Decentralized Autonomous Organizations are virtual organizations built with blockchain technology. Users can determine the DAO's future course of action because they control it rather than any private entity or individual.
The governance of DAOs is built on smart contracts, which provide the guidelines and criteria for conducting transactions. A blockchain-based network component would guarantee transparent documentation of all DAO rules and transactions.
It's crucial to remember that DAO governance depends on the members who make vital decisions about the project's future. Through a core community of participants, smart contracts aid in defining the DAO's rule set. Any member may gain an understanding of the protocol's operation at various moments with the certainty of available documentation, audits, and verification.
Who can vote in a DAO?
There are two broad categories when it comes to answering this question. Firstly, some token holders can vote. Anyone who owns a governance token to a DAO can ideally vote! Of course, these options can hold good only if the DAO has tokens in the first place. If your DAO has tokens, only the first option will apply. If it does, you can make it a stake-based system, where the person with the most tokens has the most voting power, or you may give all token holders the ability to vote.
The other system is one in which only authorized wallets get the power to vote. This system naturally adds a level of security. It is applicable either when the DAO does not have tokens of its own or when the DAO wants to introduce an additional level of gating.
How does voting take place?
Again, there are two ways in which the voting mechanism is broadly categorized: token-based voting and authorized wallet-based vote.
Token-based: 1 token = 1 vote
Does it ring a bell? In civics/political science, we learned about how in a democracy, one person gets one vote!
In a token-based voting system, a person's number of votes directly relates to how many tokens they own. Thus, for example, if you own four of the eight tokens, you have 50% voting power!
PROS:
- Relatively resistant to Sybil: In contrast to wallet-based voting, token voting avoids the "Sybil-attack dilemma," in which one individual can have greater power if donors don't link their identities to a wallet.
- Ideally suited if you wish to link a person's voting power to their level of financial investment in the DAO: For instance, people who own more tokens would have a more significant vote on where the DAO should invest. This is sometimes described as putting more ‘skin in the game.’ The more tokens you own, the greater your stake is!
CONS:
- Plutocracy issue: in DAOs with an unequal distribution of tokens, the large token holders control the vote, while tiny token holders have limited influence. The desire to participate among those who have lesser tokens may be lower. Furthermore, it's possible that the whales will only cast their votes in a way that benefits the smaller token holders or will need access to the same information they do.
- Dark DAOs: The issue with dark DAOs is that because votes can be bought, there is a possibility that votes could be manipulated, such as when a person or group buys tokens to pass a motion. This might be something to think about for DAOs that have sizable treasuries and potentially be the target of such attacks.
Wallet-based: 1 authorized wallet = 1 vote governance
Every wallet has the same voting power on the allowed list in a wallet-based voting system. This means that wallet X owns 2% of the tokens, and wallet Y owns 16% of the tokens. They'd still have the same voting power!
PROS:
- Easy to comprehend
- It avoids the plutocracy and vote-buying problems, in contrast to the token voting system. That's only true if you can successfully prevent one person from carrying many authorized wallets.
CONS:
- Sybil-attack issue: Assuming everyone has an equal voice, you risk being subjected to Sybil assaults because people may create many wallets. There are, however, ways to reduce this risk, like connecting donors to wallet addresses.
- It might only sometimes seem fair to token holders who have made more significant financial commitments.
Now that we've understood how voting in a DAO takes place let's move on to understand the different governance models that exist!
The different governance models
- Direct on-chain democracy: Direct on-chain democracy is a form of government where members vote directly on the blockchain. This vote is based on a predetermined threshold that must be reached for the motion to pass. Token-weighted voting, which is effectively the one token = 1 vote model, is the voting technique that is frequently utilized in this governance paradigm.
- Direct off-chain democracy: Under this form of government, the DAO uses snapshots to perform voting off-chain.
Hold on, snapshots? Snapshot is a type of off-chain voting system created for DAOs that are built on multiple blockchain platforms.
Like in direct on-chain democracy, a threshold must be reached for the motion to pass. Although most direct off-chain democracy models likewise rely on token-weighted voting, they are constrained since they demand a multisig from responsible parties to push the proposed change into the blockchain. Therefore, there must be some confidence that the multi-sig holders will cast their votes on the outcomes of the snapshot.
- Representative democracy: A representative democracy is a government in which the DAO uses representatives to ratify legislation. Like democratic governments around the world, the DAO itself elects these representatives. It is essential to have security measures in place to make sure that these reps don't have too much power or are acting maliciously.
- Quadratic democracy: In this kind of governance, the structure is decided by quadratic voting. Let's simplify it for you. In a DAO using the quadratic model, one vote for a proposal would only need one governance token, whereas three votes might need thirty. Therefore, the purpose of this strategy is to prevent a small number of members from controlling the DAO votes.
Nearly done!
Like any other institution, DAOs need governance to work efficiently. When choosing a governance model to suit your DAO, there cannot be one suitable model that fits all. The model you would prefer for your DAO would depend on a number of factors, like whether your DAO has tokens, the number of tokens it has, the voting mechanism it employs, and so on. Although DAO governance has come up with commendable ways to satisfy users’ needs quite effectively so far, we still have a long way to go!
Now that we've understood how DAOs essentially work and the different governance models let's move on to understanding a DAO tooling system!