Governance
Note: Data in this section last updated July 3rd, 2022
What is DAO Governance?
Corporate governance refers to the system of rules, processes and practices by which companies are controlled – in short, it’s how decisions get made.
Traditional corporations rely on hierarchical governance structures. Key decisions are made by the Board, CEO and Executive Team, passed down to middle managers who then relay orders to the rank-and-file workers.
DAOs, on the other hand, adopt a non-hierarchical, democratic governance structures, meaning that every member has a say in decision making. In practice, this is often decided by token ownership (i.e. “one token = one vote”).
While there are thousands of options for governance protocols, one of the simplest is a propose-discuss-vote-execute architecture:
Propose: Anyone who owns tokens can make a proposal such as “we should lower our fee from X to Y”
Discuss: Proposals are often discussed thoroughly amongst the team and amended based on feedback. To avoid unnecessary noise, many DAOs require proposals to pass several internal checkpoints before being finalized
Vote: Once a proposal is ratified, it is sent to the community to vote on. Communities can decide whether votes need a majority, supermajority, etc… to pass
Execute: If the vote passes, the decision is encoded in the smart contract to execute
A Simple Approach to DAO Governance
While the above graphic represents a good mental model for DAO voting, in practice, the process is often much more complicated as there are as many structures for governance as there are DAO types. For example, DAOs can choose several different voting mechanisms such as:
Weighting: Should voting be based strictly on the number of tokens held (risking plutocracy and bribery) or should additional factors – such as a member’s time in the DAO, reputation or past performance – be taken into account?
Delegation: Can users delegate their votes to other members?
Type: Should voting be based on a simple “one token – one vote” model, or should the DAO employ a more exotic mechanism as Quadratic Voting (where members can allocate all of their votes to one or several choices, but each additional vote will count less)
Dispute Resolution: In the event of a dispute, should the organization allow members to quit at anytime and leave with their proportional share of the assets (a process known as “rage-quitting”)?
In addition to the voting method, DAOs must decide how they will mechanically record and execute the results. There are currently two main ways of doing this, known as “on-chain” voting and “off-chain” voting:
On-Chain Voting: Votes are recorded directly on the blockchain
Off-Chain Voting: Votes are submitted to a third-party, who calculates the results and then executes the transaction on the blockchain
Both methods have pros and cons. On-chain voting is much safer and more secure, but often comes with a high cost because every transaction on a blockchain requires a fee (and the average fee across all transactions on the Ethereum network is ~$20.00). This risks lowering participation, especially among smaller token holders.
While off-chain voting solves this problem, it is much less secure as it relies on a third-party, which cuts against the Web3 ethos and ultimate goal of decentralization.
As you can see, DAO voting is a complex challenge, forcing members to weight the pros and cons of several options. Fortunately, there are several tools that exist to address these challenges and help organize and motivate participants.
How does DAO Governance Work?
To understand DAO governance better, let’s take a look at one of the most popular tools – Snapshot, a tool for off-chain, “fee-free” voting.
To use this platform, a DAO can link their ENS domain to Snapshot to create a “space” – a place where they can host all of their outstanding proposals. Members can then navigate to this space to find the proposal they want to vote on, connect their wallet and cast their vote.
Instead of recording the results directly on the blockchain, Snapshot aggregates these votes and stores them in a decentralized database hosted by IFPS.
Not only does this eliminate fees, but the use of decentralized storage also addresses some of the biggest concerns of off-chain voting. While not perfect, it’s relatively transparent (as anyone can easily access the database and verify the results) and secure (as decentralized databases can’t be manipulated).
Snapshot Spaces
Snapshot offers significant flexibility to users – it allows them to delegate votes, choose different weighting metrics (e.g. token-weighted vs. reputation-weighted) and supports several different types of voting methods including:
Single Choice: Each voter can select one option
Approval Voting: Each member can select (or “approve”) as many choices as they like, and the choice with the most approvals wins
Quadratic Voting: Members can allocate all of their votes to one or several choices, but each vote will “cost” more tokens (e.g. 1 vote will cost 1 token, 2 will cost 4, 3 will cost 9, etc…)
Ranked Choice Voting: Members can rank their choices. If one choice gets a majority of all of the #1 rankings, it wins. If not the lowest choice is eliminated and the process is repeated again.
The biggest problem with Snapshot – and “off-chain” voting in general – is that you still need a trusted third-party to actually carry out the decision and record it on the blockchain. As such, Snapshot is working on a solution known as “optimistic voting” which will use Layer 2 solutions known as optimistic rollups to count the votes off-chain and then automatically execute them on on-chain without any human intervention.
What are Popular DAO Governance Tools?
In addition to Snapshot, some of the most popular governance tools include Tally, Boardroom, Discourse and OpenLaw. Discord is also frequently used in governance.
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