From responsibility to accountability, resource management to regulatory changes – many considerations need to be made in the formation of a DAO governance system. DAO design is still new to us. But, is there an ideal design that DAOs should be using?
DAO governance, the hot topic of 2022.
DAO governance is exactly what it sounds like; the process of conducting policy and actions of people in a DAO. Despite all the DAOs emerging, it’s still early days for the Decentralized Autonomous Organizations. Even the more established DAOs are still testing governance models. And, as these governance models evolve so do the tools.
It is simple to decide what you want the purpose and branding of your DAO to be. But, it is difficult to plan out how to ensure that your DAO is able to deliver on its purpose. How will it maintain its operations? How will it cultivate a healthy ecosystem which genuinely benefits every member? How will it encourage growth?
Common areas of DAO governance
Governance is essential for every DAOs circumstances and needs. It is necessary to build trust, cultivate culture and also to regulate risk and reduce corruption in a DAO.
For the DAO, common areas of governance are: ownership and management of collective assets, asset risk management and asset curation.
These are all factors that members need to collectively decide on. For a decision to be made, a proposal needs to be given and then followed by votes from the members.
How do members acquire this voting power and how do we actually get them to participate?
Incentivization keeps members aligned with the overall goal of the DAO and promotes participation. Nobody wants to spend countless hours of their time and energy working without being compensated. So, incentivization is important to acknowledge people’s efforts and encourage them to continue participating.
What are some incentivization models?
Yield-farming: this involves performing actions such as lending, borrowing or staking in exchange such as in exchange for tokens representing ownership in the DAO.
Airdrops: this is the rewarding of tokens to current and former users’ wallets for their actions.
What participation is required for the main governance tasks?
- Collective asset management: The process of maintaining, maximizing and spending financial resources should be managed collectively.
- Asset risk management: The process of identifying and analyzing potential threats or risks to assets, such as volatility and other market conditions.
- Asset Curation: The process of organizing and maintaining assets – whether it be collected art or collateral for lending.
DAO governance shortcomings
While allocating incentives is equitable and fairly simple, DAOs currently face a lot of imbalance with the allocation of governing power.
DAOs do governance today using tokens. Those who have tokens have governance power and that power is weighted by how many tokens are held. If the more tokens we have = the more voting skin we have, it recreates the same system where capital influences governing system in society. This establishes plutocracy as not only can tokens be earned, they can be bought. Unfortunately, not everyone has equal access to the amount of tokens they can buy.
Balancing the interests of capital providers vs. active contributors is a great challenge.
Potential voting models to resolve this are:
Quadratic voting: Quadratic voting is a collective decision-making procedure that involves individuals allocating votes to express the degree of their preferences, rather than just the direction of their preferences. ~ Wikipedia
Conviction voting: "Rather than relying entirely on majority rule decision making, resource allocation decisions are regulated by staking on proposals to accumulate conviction over time. This allows resources to be allocated fairly, while minimizing the political and divisive process of coming to consensus on a single course of action" ~ P2P foundation
There are also different models for governance tokens, the existing ones are:
Company model: One token represents one vote. These tokens can be transferred and traded on the open market.
Membership model: Each member gets assigned only one vote via a membership token. These tokens are non-transferable and, in most cases, even revocable.
Reputation model: One token represents one vote. These tokens are non-transferable.
Currently, votes by DAO members are publically visible. This is problematic as it creates the risk of social manipulation. The knowledge of how someone voted can be used as a reference to coerce or bribe them to vote in your favor.
The other dangers of public voting are that individuals can be targeted and harassed for their votes.
Other things to decipher when designing a governance system:
Leadership: Who should lead DAOs?
It is fair to assume that DAOs do not have leaders. However, this is untrue. Leadership and decentralization are not mutually exclusive, so DAOs can maintain a flat structure despite having leaders.
Leadership is about setting direction through leading by example and being accountable.
Leaders help to shape vision.
Leaders can be members who are close to the “source” of DAOs origin and are responsible for its initial design or members who onboard to the DAO at a later stage. As the DAO grows, it will be shaped by a larger community.
With a minimum viable DAO, you can establish a DAO with a very basic structure which then evolves with the evolution of the community.
Different shapes, different governance models
No governance model is one-size-fits-all.
Governance models differ to fulfill the unique needs and objectives of a DAO. These different governance models may also require different governance tools.
Only through trial and error will a DAO discover its grand design.