This article is part of our DAO series aimed at simplifying the complexities of decentralized governance and empowering individuals to participate in the future of decision-making.
Decentralized autonomous organizations promote transparency and fairness by allowing a broad cross-section of members to vote on issues affecting the project’s future — and suggest improvements. They’re a refreshing change to traditional alternatives where power is concentrated in the hands of a few.
But running one isn’t easy — and their success hinges upon having an efficient governance model. These systems should allow decisions to be made quickly without shutting anyone out, and have safeguards in place to eliminate the creeping threat of centralization.
In this latest part of our series on DAOs, we’re going to focus on the different methods used to keep decentralized communities moving — and examine the pros and cons of each.
The Significance of Governance in DAOs
Done right, DAOs can foster the creation of close-knit and engaged communities — a place where everyone has a stake in their success. All too often, centralized businesses and charities risk disenfranchising customers and supporters by failing to take feedback on board and address their needs.
Decentralized governance can deliver true diversity by inviting users of all genders, geographies, ethnicities, and incomes to make their voices heard. Back in 2015, there were more chief executives in S&P 1500 companies called John than there were women — and although the picture has improved over the past decade, there’s a lot more work to be done.
Another perk relates to transparency and accountability, as all of a DAO’s actions can be publicly verified through smart contracts that exist on the blockchain.
Common Types of DAO Governance Models
Existing DAOs have deployed a diverse range of voting systems — and just like in the world of politics, each has upsides and downsides. The most frequently used are:
Token-Based Governance
In many decentralized autonomous organizations, the right to vote hinges upon ownership of a specially created governance token. These tokens are cryptocurrencies with monetary value, meaning investors have a financial incentive to act in the DAO’s best interests.
This governance model typically works on a “one token, one vote” basis. Although the biggest benefit of this approach lies in its simplicity, this does mean DAOs can be dominated by the very wealthy — and a plutocracy starts to form. Why? Because someone who owns 100 tokens would have 100 times more of a say than a person with one.
MakerDAO and Uniswap are two big names in the DeFi space that use this governance model.
Reputation-Based Governance
One way of preventing whales from having a disproportionate sway over the voting process is to rely on reputation-based governance. This is where DAO members are given an on-chain score based on the contributions they’ve made in the past. It effectively rewards those who make the community a better place, deters malicious actors, and spreads power more evenly.
But yes, this method isn’t always perfect either. Establishing a system to reward DAO members can be complex, there’s a risk of reputation scores being manipulated, and new users with little history could be shut out of making valuable contributions. Plus, if someone loses access to their profile, the record of their hard work could be lost forever.
While not a DAO, the best example of this in action can be found on Reddit, where users in r/CryptoCurrency are awarded moons based on the upvotes they get for posts and comments.
Liquid Democracy and Delegative Voting
This governance model for DAOs sees a member delegate their vote to someone else, who will then act on their behalf. It’s not all too dissimilar to selecting a local politician — because once elected, they represent your area when national laws are being decided.
Three big advantages come into play here. For one, it’s ideal for DAO members who don’t have the time to cast a ballot on every single issue. Second, delegates can be held accountable by their voters — and removed from the position if their performance is unsatisfactory. Third, it can speed up the democratic process.
Gitcoin is a good example of a platform that deploys delegate voting.
Quadratic Voting
Other systems rolled out by DAOs are a little more technical… including quadratic voting.
Here’s an example of this governance model in practice: a vote is taking place with three possible outcomes. DAO members could be given 30 credits — and can allocate them across each option as they wish.
Alice, who has strong opinions on the best approach, allocates all 30 credits to Option A. But Bob, who is relaxed about the outcome, gives 10 credits each to all three options. Chris, who hates Option A but likes the other two choices equally, spends 15 credits on Option B and C respectively.
This is a novel approach because it also gauges how strongly someone feels about an issue. A “one token, one vote” system would tell you that Dave would like a sandwich. But what quadratic voting would tell you is Dave really wants a ham sandwich, and definitely not cheese.
Ethereum co-founder Vitalik Buterin has spoken at length about the potential of quadratic voting — with Gitcoin using “quadratic funding” when deciding the value of grants that projects should receive.
But there aren’t all that many DAOs that have fully embraced this model yet. That might be a reflection of the fact it’s not as straightforward for voting members.
Source: Sybil-Resistant Quadratic Voting
Hybrid Models
Some DAOs serve as a halfway house between Web2 and Web3. This means that, while the community may get to vote on certain matters affecting the organization’s future, other decisions may be decided by a small committee of elected representatives on a committee.
Decentralized autonomous organizations may also introduce a blend of these voting systems in their day-to-day operations, depending on the issues at hand.
Challenges and Innovations in DAO Governance
While successful and productive DAOs have been established, the concept of decentralized communities is relatively new.
Some major sticking points that have emerged include scalability, and preventing the process of casting on-chain votes from becoming prohibitively expensive. The security of the smart contracts at the beating heart of DAOs also matters a great deal. And apathy is another potential risk. While members may be passionate about the organization’s cause, they may not wish to spend hours reading over countless proposals and submitting endless votes.
There’s no shortage of innovation in the crypto space as builders strive to make DAOs more intuitive — and new use cases are emerging all the time.