Governance Concepts and Challenges
The DAO has revolutionized the web3 landscape since it hit the headlines in 2016, when funds were stolen from the first and original DAO — essentially a decentralized hedge fund with no ridiculous premiums, entirely powered by Members vote in proportion to their holdings – the estimated value locked in these collectives is estimated to be around $15.2 billion.
Humans are social animals and nothing is more human than being part of an organization or collective, and many visionaries in the cryptocurrency space are looking to “solve” one of humanity’s longstanding problems: governance.Before diving into the details of this key part of DAO, let’s explain again what DAO means and its features:
- Decentralized: Means collective governance and multiple participants. Therefore, no one participant should have a disproportionate amount of governance. This will ensure fairness and impartiality when members vote.
- Autonomy: Defined as being independent and having the freedom to govern itself through community participation.
- Organization: Refers to a group of people working together in a structure suited to a specific common purpose or set of goals.
The goal of DAOs is to implement frictionless direct democracy, where decisions are made directly through certain forms of community voting (aside from delegated voting, where individuals can delegate their voting rights to others), without intermediaries or administrative barriers, DAOs take Any decision should directly reflect the preferences of DAO members.There are some rules coded into some underlying DAO smart contracts and technical tools that support the full DAO stack, but are transparently accessible to the community and in some cases can be changed if the right proposal is made and modification.
Because governance is enforced autonomously, the entire process does not require cumbersome bureaucracy or managers charging huge premiums or fees. However, the operation of such a truly autonomous and distributed dream is a formidable challenge and has given rise to many debates about voting, fiscal design, incentive design, and governance tools. This article aims to shed light on some recent developments in the DAO governance space.
Bitcoin and Governance
Governance was never part of Satoshi Nakamoto’s original white paper. In contrast to most modern blockchain ecosystems, the protocol never envisions a Bitcoin treasury. Instead – Bitcoin’s governance just decides the protocol parameters and the codebase, which is maintained on the Bitcoin Github.
The process of initiating change begins with a researcher investigating a problem and proposing a solution. The researchers then share what they want to improve with the wider community via the Bitcoin developer email list, a Bitcoin Improvement Proposal (BIP), or a formal white paper. However, there is no governance protocol, which means the process of changing the code is informal and largely based on some vague notion of consensus between core developers and other key stakeholders such as exchanges, nodes, and block explorers.
Possibly due to the undefined process of changing the Bitcoin protocol, the decision lacked legitimacy in the eyes of dissenting developers. This may be the reason why some members choose to fork protocols (such as Bitcoin XT, Bitcoin Cash, and Bitcoin SV), sometimes wanting exchanges and other stakeholders to accept their forks as “real Bitcoin”. Since forks maintain the same blockchain history until the point of fork, if the process of changing the code base is undefined and therefore informal, it is not always clear which is the “real” Bitcoin. No cryptocurrency has any inherent value, instead, value comes from people believing and accepting that it has value, and accepting it as payment for goods and services. In this case, exchanges have a lot of power because their choice of trading symbol “BTC” makes a huge difference in the wider acceptance of any given fork as “real” Bitcoin.
What does decentralization really mean?
Many, if not all, organizations are decentralized to some extent. Shareholding has voting rights at shareholders’ meetings, citizens of democratic countries have voting rights, and members of local neighborhood committees usually have some voting rights. Are DAOs fundamentally different from the tools of these social organizations, or is DAO just another buzzword that really just refers to the governance of decentralized protocols?
In our opinion, the key distinction stems from two characteristics, an organization can be considered a DAO if it can adequately satisfy either of these characteristics. First, the rules governing the DAO are encoded into the organization’s blockchain. This means that the governance of protocol changes is encoded into the blockchain itself, and those rules can only be changed through the mechanisms specified therein. Second, it is decentralized and self-directed. The second feature can be tricky to grasp, so let’s make the following analogy.
Imagine that organization can be represented by a tower made of bricks. Now, decentralization is not a binary concept, but more fully embodied in a scope. To measure how decentralized an organization is, you have to ask yourself: how many bricks can we remove before the tower falls? The greater the impact of removing specific parts of this tower, the less decentralized it will be. The more pieces you can remove from this tower, the more decentralized and autonomous it will be. If ETH 2.0 goes to a full shutdown without Vitalik Buterin, then it will show how decentralized Ethereum is.
The DAO Trilemma – Scale, Quality and Access
In a small DAO, all members have enough energy to read all proposals and vote on them. Simple voting methods are sufficient here. Such as the absolute majority mechanism, 1 coin 1 vote. However, as the DAO grows, more and more proposals need to be processed and decided upon, and this approach raises a number of problems because not all members of the DAO will be able to understand all proposals. A supermajority principle with simple voting, quality, and access can be maintained, but cannot be scaled. A large DAO cannot operate in a constantly changing environment if all decisions require a supermajority.
An ideal approach would be to lower the threshold for approving proposals, requiring only a majority (relative majority) of voters. Scalability and accessibility are achieved because more proposals can be considered and the system is easy to understand, but the quality of proposals can be compromised by the high volume, meaning members cannot consider all proposals. This also leaves the DAO in a state that is vulnerable to malicious attacks that could allow proposals to be approved while only taking a small stake in the protocol.
Figure 1: Two out of three: scale, access, quality
To achieve both scale and quality, DAOs can employ more sophisticated preference acquisition or voting weighting mechanisms, such as holographic voting or liquid democracy. This increases scalability while maintaining quality, but it is harder for voters to fully understand and support, which reduces accessibility and therefore legitimacy of decisions. They are also more difficult to implement, especially when voting takes place entirely on-chain.
Throughout this article, we’ll explore various governance systems designed to address the trade-off between scale and quality through various approaches. We will make a broad distinction between governance aspects related to member voting weights and methods of eliciting preferences.
Neither Bitcoin nor Ethereum have a vault embedded in their protocols. However, most if not all modern protocols have a vault controlled in some way by the community. Therefore, we will distinguish between protocol governance, which involves changing the codebase itself, and treasury governance, which involves decisions about how a DAO should use its resources. The main focus of this article is to outline the mechanics, design decisions related to DAO governance, but we will first illustrate how protocol and financial governance are in practice as they are so that we have something to contrast the many innovations.
Protocol governance example
The protocol change process for the Ethereum protocol follows five steps. Each proposal is called an Ethereum Improvement Proposal, but most other blockchain ecosystems have similar naming conventions and processes (see here).
- Draft – The EIP editor merges the EIP into the EIP repository after it is properly formatted
- Review – The EIP author marks the EIP as ready and requests peer review.
- Final notice — EIP is ready for more reader review.
- Accepted – The core EIP has been in Last Call for at least two weeks, and the author has addressed any technical changes requested.
- Ultimately – EIP: The core developers decide to implement in various clients and release in a future hard fork or have already released.
As shown in the previous step, the core developers of the Ethereum blockchain have the discretion to implement these changes.
Treasury governance example
Traditional treasury governance mechanisms follow a continuous “proposal-vote” structure, where token holders can submit project proposals, and if the community approves, funds are withdrawn from the treasury. BitDAO – the largest DAO-managed treasury in the world – can be used to illustrate some of the parameter considerations that are usually involved:
- Proposal threshold: 200.000 BIT. To submit a proposal for consideration, the proposer must hold (including delegates).
- Polling Duration: At least 7 days. This refers to the length of time between the start and end of voting.
- Voting threshold: 1% of token supply (100M BIT). This refers to the minimum quorum in BIT tokens for the proposal to pass.
Some protocols allow proposals to go through several stages before being finalized. For example, the governance process of the Uniswap protocol is divided into three stages, each of which contains feedback received from the previous stage:
- Temperature Check After a two-day window period, a majority of votes of at least 25k UNI can allow the proposal to enter the consensus review stage.
- Consensus Check. This stage allows the proposer to include feedback from a “hot review,” which, if the proposal involves a partnership, signifies the start of a formal discussion.
- Governance proposals. The proposal should come with executable on-chain code. Submitters must have at least 2 million UNI delegated to them and at least 40 million UNI upvotes to pass.
Community building, proposal discussion and idea formation
Another problem some DAOs face in optimizing incentivized participation is that for effective DAO governance, one needs a high level of user engagement and a vibrant community to ensure good ideas are developed and refined. In practice, there are many work steps to ensure this. Discord and online forums are often good platforms for engaging the community in idea-forming discussions or so-called “heat reviews” to gauge interest and reaction to a vague suggestion.Yearn finance, for example, requires at least 3 days of discussion on their forums before any proposal is submitted to Snapshot, to ensure that only things that are well thought out and discussed can actually get a community vote.
Most DAOs run Discord servers and/or dedicated online forums to try and moderate discussions in specific channels. This is also often a person’s first point of contact, and in order to successfully onboard a new member, it is important that the new member is treated with enthusiasm and respect. Community managers can also play an invaluable role here to ensure effective communication between members and to ensure that any discussions are constructive. This usually has a code of conduct or a set of community guidelines that members need to follow
Information dissemination and communication is another key cornerstone of effective DAO governance. In the case of quorum-based voting or any system that requires a lower bound on voter participation, the lack of voter participation can paralyze the DAO, as no further action can be taken on any proposal if there is a lack of participation in a particular vote.This can be mitigated by clear and effective communication, reaching out to members in the event of any proposal and voting, and clear timeframes through all processes involved in proposal development and voting. It’s also a smart idea to leave voting open for a few days (eg, 5 in the yearn’s case) to ensure people have a chance to participate. Also, having a lively discussion before submitting an actual proposal often ensures high engagement, as voters know that voting could happen soon, and given that people have taken the time to think about the ideas, it’s possible that they will eventually exercise their right to vote. Sex is greater.
The DAO has conducted multiple experiments in governance, which has led to the emergence of some alternatives to the simple “1 coin 1 vote” (1T1V) design. The 1T1V design is rooted in the same logic as proof-of-stake – conducting a governance attack requires an evil actor to control a very large stake, at which point if it does break the network, it will also hurt itself. This section will explore the advantages and disadvantages of the traditional 1T1V model and then explore the various alternatives that have emerged in the DAO ecosystem.
Stake-based voting – 1 coin 1 vote (1T1V)
The most commonly used weighting scheme for voting is the simple “1 coin 1 vote” system. Assuming that a significant percentage of token holders do participate in governance decisions, the system would be a costly sybil attack. It also ensures that incentives and actions are aligned – if you hold a lot of tokens with monetary value, you will want the protocol to succeed, so you will participate in governance accordingly. From this perspective, the ideal conclusion is that the greater the stake, the greater the incentive for you to participate, so governance decisions will improve.
Obviously, having no stake means you have a weak incentive to participate, as it means you have no real ability to guide any decisions in a particular way, but similar incentive issues can arise on the other end of the spectrum. Individuals with large stakes in a particular DAO may be “too rich and busy” to care deeply about participating in a DAO, since the percentage of total assets they represent in a DAO will only be a fraction of their total wealth. Therefore, while their absolute stake in the system is large, these stakes may represent a much smaller share of their total wealth than very small token holders. This relationship between optimal stake and governance participation is shown below.
Maker DAO Optimal Participation Incentive (Source:
Stake-based voting has at least three major drawbacks
- Plutocratic rule constitutes a significant concentration of power. Many blockchain protocols have “whales,” people who hold large amounts of tokens. This effectively means that DAO decisions are made by a small group of people, invalidating the promise of distributing governance to the masses.
- People who hold many tokens don’t necessarily make the best decisions. For example, developers or other contributors may not hold as many tokens as early wealthy investors. Finally, using the number of tokens to measure a person’s stake in the system is a rough measure that may not capture the other effects of token-based voting.
- Participation is low. As the number of DAO members rapidly increases, the marginal influence of a particular voter decreases and the sense of meaningful participation decreases. This is one of the many reasons why the number of people participating in governance is often very low in many DAOs, and one of the reasons for setting a minimum quorum requirement (eg BitDAO requires 1% of the total token supply)
In what follows, we will introduce various weighting schemes that address some of these problems in different ways. In the next section, we also introduce voting mechanisms that indirectly address these issues.
Single vote with minimum threshold – 1 person 1 vote (1P1V)
Given concerns about chaebol rule and this centralization, some advocate a “one person, one vote” system. The idea is generally that members must prove that they do have an interest in the ecosystem and that everyone who holds at least X amount of DAO governance tokens has the same voting power. However, in this system, evil actors can circumvent the rule requirements by creating multiple addresses. Therefore, each address must have a minimum number of tokens. This has led to the emergence of innovative solutions such as blockchain-based registries and ERC-20 proof-of-existence tokens.
Kleros has developed an ERC-20 registry called “proof of humanity”, whereby a specific offline identity is linked to an Ethereum address. This requires you to submit a video and endorsement from someone already on the registry to confirm that the individual wishing to register is indeed a real person and not already on the registry. Checking that a person’s address is indeed on Kleros’ Human Proof would be a way to whitelist individuals with unique real-world identities.
Governor DAO proposes another solution, issuing unique personal non-transferable ERC20 “Proof of Existence” tokens based on biometrics. They do this by hashing hundreds of data points collected in their onboarding portal, which are then linked to the wallet indefinitely. Those who pass the identification test receive the aforementioned “Proof of Existence” tokens, which are connected to their wallets indefinitely. This token represents a unique source of identity, as sensory data from the same user will yield the same hash, thus precluding the user from generating another proof-of-existence token attached to a different address.
Reputation based weights
One of the concerns with 1T1V governance systems is that they are vulnerable to governance attacks if voting participation is low. Malicious actors may borrow assets from lending markets to conduct governance attacks, voting for any outcome they like. We define a reputation system as an ownership weight system in which members can gain non-transferable voting weight through their actions. We describe two such reputation systems below.
The first is a governance token reward based on r/cryptocurrency contributions. The community allocates MOON tokens for contributions. These contributions can be anything from analytics, links to interesting articles and comments to other posts. While MOON tokens can be bought and sold, the voting rights of such tokens cannot be transferred. A key challenge with these types of systems is that it can lead to centralized voting power and can be easily manipulated unless the community is very large. For example, if there are no restrictions on likes and comments, users can set up multiple accounts and like their own posts in the subreddit to increase the amount of MOON tokens they receive. The Oxford Blockchain Association DAO addresses these issues by setting a cap in which members of society cannot hold more than 10% of the total (non-transferable) supply of governance tokens at any given point in time. However, in order to preserve incentives, contributions beyond the cap will be rewarded with tradable tokens (monetary incentives).
The second is the lock-in period. This helps prevent attacks based on borrowing funds just to participate in nefarious attacks. The Polkadot ecosystem uses such a mechanism that unlocked tokens only have 0.1 times the voting power of tokens locked for 2 days, which is 50 times less voting power than tokens locked for 32 days.
A major weakness of all the weighting systems mentioned earlier is low engagement, and it does not give more weight to people with more expertise. Many DAOs have introduced voting incentives to encourage participation, but this is a costly and often ineffective way of increasing participation. Another approach is to allow voters to delegate their voting rights to other individuals who may have more time to investigate proposals. Like representative democracy, this allows organization members to participate in governance through agency.
The main benefit is that reps may have more time or domain expertise to make better decisions. Proponents of delegated voting argue that such a system allows active community contributors, experts and others of merit to receive greater weight. However, as we know from any representative democracy, the people who get the votes are not always the most capable people, but the ones most able to attract voters. Additionally, delegates may not vote based on the preferences of the token holders delegated to them. This can still happen over time, as token holders can “vote with their feet” by re-delegating to other delegates if they want to.
This refers to voting that combines elements of direct voting with proxy voting. Under liquid democracy, individuals can vote directly as they wish, or they can vote in full with their voting rights in some areas, while delegating their voting rights to representatives in other areas.
Liquid democracy is being implemented in the governance of the Cardano ecosystem. Although still in an experimental state, the Cardano community plans to introduce a version of liquid democracy called absolute liquid democracy. This means that token holders can divide their voting rights into potentially different shares, each of which can be delegated to one or several different “dReps”, and they receive rewards proportional to the number of votes delegated to them proportional. This authorization can be revoked at any time, increasing accountability and delegation. In the long run, dReps will represent token holders in protocol governance decisions, but in the current experimental phase, dReps will only be able to vote on Catalyst proposals on behalf of voters.
There are many possible deviations from the simplest preference-inducing mechanism (“yes, no and abstain”). We will propose some alternatives and compare them with the benchmark mechanism.
Benchmark: Quorum-Based Direct Voting
This is the most basic voting protocol, where each member can cast a vote to express their preference for a particular proposal or decision. There are three possibilities; yes, no or abstain. The requirement for a vote to pass is an absolute majority. Weights can be assigned in any of the ways described in the previous section, but there are usually other restrictions.
- Quorum threshold. The percentage of governance rights (in the case of weighted voting) or the percentage of voters participating in the vote is required to meet a minimum threshold to pass. A very common scheme is called quorum-based voting, which requires 60% of the total governance tokens to vote. For example, for a DAO with 1,000 circulating governance tokens, a total of at least 600 tokens would need to be voted by users to pass.
- Special majority requirement. This refers to the majority requirement for anything other than 51% of the voting power. For example, it may be required that the votes in favor of a proposal must be greater than 15% of the votes against the proposal, or at least 75% of the votes in favor of the proposal.
In a Q&A on DAO voting, Clement from Kleros argued that quorum-based voting “results in tactical voting” — where people lie about their true preferences and the best decisions don’t actually act. Additionally, the point of a DAO is lost when a large number of proposals fail to reach quorum weight, which can lead to a situation where only very popular proposals pass. Given the large number and variety of proposals likely to be voted on, this voting scheme is vulnerable to the disillusionment of some voters. Some people may care more about certain proposals than others, and cannot express those preferences, prompting the introduction of holographic, quadratic, or belief-based voting.
Holographic voting was first proposed by DAOstack to balance meaningful participation with scale. In a small DAO, all members can consider all proposals, but without some additional mechanisms, this is not possible as the DAO grows, as shown in the diagram below.
To understand how the GEN token works, first assume that X-DAO (it can be any DAO) has a ground rule that all proposals must pass by an absolute majority, which is more than 50% of the total governance token supply. Now, if this DAO chooses to use GEN to predict the community, the prediction can signal their belief in the proposal by using GEN tokens to “support” or “against” it. To be clear, GEN tokens can only be used for staking, i.e. governance tokens that cannot be used for voting. A good prediction is to predict that the community “supports” proposals that the DAO ultimately approves, and “opposes” proposals it rejects. To incentivize “good” predictions, correct bets are rewarded with more GEN tokens, while wrong bets result in a loss of GEN tokens.
As mentioned, the general rule of X-DAO is that proposals must be passed by an absolute majority. However, this is not easy to achieve at scale, which is why “boosting” was introduced. If a sufficient number of GENs predict that a bet proposal will pass such that the dynamically adjusted “boosting” condition is satisfied (the more proposals that are boosted, the harder it is to boost), then the threshold of requirements is lowered from a supermajority requirement to a relative majority ( more than 50% of the voting participants), and the voting time for proposals will be greatly shortened.Here’s how the governance process of DAOstack itself looks like. The following is the process of governance by DAOstack itself.
- initiate. To submit a proposal, the proposer must have a minimum reputation.
- enhanced. GEN holders (forecasters) make bets by betting on (against) proposals that they think voters will approve (disapprove).
- vote. People with voting rights vote on proposals. Predictors are rewarded if they correctly bet that a proposal will be approved/disapproved.
- On-chain execution. Approved proposals are executed on-chain.
Note that there is a strong incentive for forecasters to identify proposals that are most likely to be promoted and approved by the DAO, as this will not only reward forecasters for correct predictions, but will unlock their GEN tokens so they can bet on other proposals. This voting scheme rewards those who have a good understanding of the atmosphere of a particular DAO and correctly predict the outcome of the vote, which creates a utilitarianism where those with more knowledge and experience will soon overthrow those knowledge, skills and inexperienced people. On the other hand, it’s a clever way to avoid quorum-induced deadlock, and a highly scalable solution that can handle many proposals and reach a decision.
Under quadratic voting, voters can use their voting power to vote multiple times on a proposal. However, each additional vote on a proposal becomes exponentially more expensive (in terms of voting rights): $cost = votes²$. This means that voters are incentivized to spread their votes across multiple proposals, rather than casting all their votes for the proposal they like. For example, 1 vote for the same proposal will cost 1 token, 2 votes will cost 4 tokens, and 3 votes for the same proposal will cost 9 tokens. This system is being used in Gitcoin and Hackerlink funding decisions.
Such a system can be combined with many of the weighting schemes described in the previous section. For example, it can be directly applied to a 1T1V system. Alternatively, it could be embedded in a 1P1V system, meaning that DAO members who meet the minimum token holding requirements and have unique identification can allocate an equal set of voting power budgets, which they can allocate to competing proposals.
The problem with quadratic voting is that it can be difficult to understand and thus limit participation. If voters are unclear about the benefits of quadratic voting, it may face a lot of resistance that negates many of the theoretical benefits it can offer. Additionally, people can play the system by spreading their funds across multiple addresses, making it cheaper to buy additional votes for themselves. Unless there is human proof or proof of integration exists, this is vulnerable to such a bad attack.
vote of faith
A belief vote is a unique proposal in which someone’s share of voting weight is proportional to the amount of time they hold that particular voting preference. As such, proposals are judged based on the overall preferences expressed by community members over a specific time span. In contrast to voting that occurs at discrete points in time, time suddenly becomes a continuous variable. This does not prevent members from changing their preferences, but it incentivizes people to hold long-term beliefs as their voting weight increases proportionally to it. As a result, people with consistent, long-term preferences accumulate more governance influence, and it becomes more difficult for new funds to guide the governance decision-making process.
Leaving aside the question of how exactly this works in practice – let’s briefly outline the advantages of this voting scheme.Conviction voting is extremely resistant to short-term voting volatility and collusion, as impulsive short-term change of mind can result in a huge loss of voting power. Furthermore, those who just want to buy short-term governance rights for themselves through tokens will encounter difficulties, as this requires so-called “voting rent seeking.”
DAO voting tool
There are a plethora of tools aimed at simplifying DAO voting, and in general one must distinguish between on-chain and off-chain voting. In particular, we’ll discuss some of the different voting tools and discuss the trade-offs in security, cost, and flexibility.
The Voting Tool Trilemma
Off-chain voting using Snapshot and IPFS
Snapshot is a protocol that handles DAO off-chain voting via the decentralized file storage medium IPFS (Interplanetary File Storage System). It is an “off-chain gas-free governance client with easy-to-verify and hard-to-question results”.(Snapshot). If a particular DAO wanted to use Snapshot to process their proposal votes, they would need to create an ENS (Ethereum Naming System) domain where they could add a record on ENS to allow votes to be viewed at that particular address. Users only need a wallet address with the currency required by the protocol to participate in voting. There is a ton of customizability and flexibility in how users are whitelisted for voting, they may only need to hold the governance tokens they need, perhaps a membership NFT or through interaction with a contract. Snapshot supports a variety of voting systems; quadratic voting, direct voting, etc. Users can vote by connecting their wallets to Snapshot’s website, which will link them to any public proposal. This level of flexibility is especially useful for protocols that adjust their voting patterns over time and require high customizability.
The reason Snapshot is free of fees is its lightweight stack, which does not rely on consensus from a group of distributed nodes operating the same ledger to record votes, but handles votes as signed information that is easy to verify online because they is uploaded and stored on IPFS. Off-chain voting has the huge advantage of circumventing the transaction fee issue, which is currently particularly vexing for Ethereum users. Charging users high voting fees is, in the first place, a huge disincentive to participate in governance and severely restricts the scaling and growth of any DAO. A potential downside is that one has to put some trust in Snapshot in handling votes honestly, correctly implementing the required vote weighting scheme, and uploading the correct signature information. Of course, there will inevitably be some mistakes here. Additionally, poll creators must be provided with a trusted, correct interface to display poll results. The snapshot.io website that users interact with must also be secure. Snapshot outperforms any on-chain tool in terms of low cost and is currently the most widely implemented DAO voting tool.
On-chain voting tool
There are various smart contracts designed specifically to handle on-chain voting. The most widely adopted is “OpenZeppelin” or “Compound Bravo”. These on-chain voting schemes are usually associated with front-ends such as Tally or Sybil, which point to a specific contract address when a user submits a vote. The degree of flexibility and customizability of a full on-chain implementation is rather limited, and the cost remains high. For example, the Compound Alpha implementation has some shortcomings, including difficulties in implementing upgrades and parameter changes. Several new features have been added in the Bravo version, overcoming previous limitations, outlined below.
On the one hand, Governor Bravo supports upgrades and parameter changes. Previously, Governor Alpha contracts were deployed as fixed values for all key governance parameters such as proposal submission thresholds, quorum thresholds, or voting periods. Bravo, on the other hand, allows governance to adjust parameters after deployment. This simplifies the workflow for interfaces such as Tally, as interfaces do not need to update their site in case of parameter changes, which previously required contract migrations.
Despite the improvements that Governance Bravo brings, there is still very limited flexibility and support for implementing more personalized voting programs such as holographic or belief-based voting. Additionally, the cost of on-chain voting, especially on Ethereum, remains high.
The OpenZeppelin implementation is a modular system of Governor contracts that allows deployment of an on-chain voting protocol similar to that described in Compound’s Alpha & Bravo, but also allows for a greater degree of customizability in different aspects of the protocol. For example, it allows delegated voting to be implemented. However, the downsides regarding high fees are similar (at the time of writing, the average gas fee for the past 7 days on crypto.com is around $23). This is substantial and cannot be ignored.
Snapshot has promised to combine the advantages of on-chain and off-chain; by resorting to layer2’s on-chain voting and nearly gas-free execution. Snapshot X (previously called StarkVote) is a project in collaboration with the StarkWare team, which is a voting framework built on StarkNet (the second layer ZK-Rollup). Voting is completely secure and on-chain, but Snapshot claims that voting on Snapshot X costs about 1000 gas, or about 50x to 100x cheaper than on native Ethereum.The core innovation is the use of proof-of-storage to verify balances, these computations are quite expensive at layer 1, but can be greatly reduced by adopting layer 2 technology. If this is what the Snapshot team promises, it will prove beneficial on all fronts; first, the process is completely decentralized and trustless, requiring no intervention from intermediaries that move votes to IPFS like this file storage platform. Also, this is completely open, anyone can interact with it on-chain, no need to go through a Snapshot client, but at the same time one can integrate Snapshot X with an existing Snapshot client, while implementing the DAO governance protocol Offers a high degree of customizability and flexibility. Layer 1 on-chain voting tools, while secure, trustless and open, are severely limited due to the costs they incur, and Snapshot X appears to offer a promising, cost-effective alternative. This seems to satisfy all three characteristics of a great DAO voting tool: security, low fees, and flexibility.
Innovative DAO Financial Protocol and Governance Model
Most blockchain protocols follow traditional funding decision-making mechanisms through a centralized process in which applicants send applications to the company that developed the protocol. Many also allow proposers to submit project proposals and budget requests to the community, which are then voted on in one or more rounds using platforms such as Snapshot. However, some protocols go even further when it comes to money management. Here, we will focus on two innovative financial governance models.
Yearn Finance: Workflow and Multi-DAO
Yearn considers itself a “multi-DAO” structure, governed by restrictive delegations. As such, it aims to eliminate overly bureaucratic protocols while staying true to its principles of decentralization. The purpose of this is to strike the right balance between decentralization and executive efficiency. In Multi-DAO, several Decentralized Autonomous Organizations (DAOs) contribute to the protocol in unique ways. These organizations include:
- “YFI holders voted for changes to the protocol or protocol governance structure
- yTeams focus on specific aspects of the protocol or related operations
- Multi-signature members enforce or veto any on-chain decision” (Yearn Governance)
Token holders are the foundation; they have the final say on which yTeams exist, what kind of work is done, and who owns Multisig rights. They can vote on any proposal, thus controlling the decisions made by the protocol. This is the point of yearn being governed by a restrictive mandate – it’s token holders delegating their power to different groups that enact whatever the community expects, and improve and govern yearn.
Token holders create and vote for proposals including Yearn Improvement, Yearn Signaling, and Yearn Empowerment proposals, which are used to make decisions of any kind. For example, this could include proposals to use treasury funds, change multi-signature rights, change specific smart contracts, or change the standard fee structure in the Yearn protocol.Within this framework, there are also many teams with specific roles and powers, some examples are as follows:
This means that expertise is optimally distributed by giving yTeams very specific tasks and keeping one person’s responsibilities as narrow as possible. Therefore, power is also distributed among different teams.
yTeams (from Yearn docs)
Operationally, Yearn has revolutionized by utilizing independent workflows to efficiently deliver high-quality work. These workflows are usually run by a specific yTeam. Therefore, the entire ecosystem can be seen as a collection of independent projects with specific goals and workflows, which in terms of governance structure means it is highly decentralized and scalable.
Cardano: Project Catalyst
Catalyst is the name of the Cardano ecosystem governance sidechain, and Catalyst is the name of a series of experiments aimed at advancing on-chain governance of the Cardano ecosystem.
The first difference between the Catalyst and benchmark models is that proposals cannot be submitted on a rolling basis.Conversely, some funding rounds can only submit proposals within a specific time frame to address the challenge of community voting decisions.
Challenges correspond to priority areas identified by the community and include a description of the types of proposals that can be submitted, objectives, key performance indicators, and total amount. In the current iteration (fund8), there are 22 challenges that address specific priorities identified by voters in the previous iteration, such as “Growth in Africa, Growth in Cardano” ($250.000) and “The Great Migration of Ethereum” ($500.000 Dollar). Leveraging Cardano’s unique multi-asset capabilities, the native protocol can launch “Catalyst Natives” challenges within Catalsy, allowing the community to submit proposals to solve specific challenges, as well as challenge jars where teams compete.
According to Cardano’s radical inclusivity philosophy, holding ADA is not a requirement to be a proposer or to receive rewards for reviewing proposals as a community advisor. The process from submission to funding decision is described below.
- Proposers submit draft proposals to a suitable challenge through the platform. The proposal outlines the problem, solution, team members, and budget requirements. They can only submit within a fixed window and must meet a certain deadline.
- A Community Advisor (CA) is anyone who registered as a CA by the last submission deadline. CAs write comments on proposals they like along three lines. Relevance, Feasibility and Auditability. For each dimension, CA provides a score (1-5 stars) and a short rationale.
- Veteran Community Advisors (vCAs) who have done CA work in past funds rate reviews written by CAs in this round.A proposal can be rated “filtered”, “good” or “excellent” based on a majority decision, which determines the reward given to the CA that wrote the review. The total budget allocated to auditor awards is shared based on the share of ratings made by an auditor. New initiatives have been taken to create a system where well-done CAs and vCAs can build reputations over time.
- Voters enter a voting application, where all project proposals in the challenge are ranked from top to bottom by CA’s average review star rating. Voters cast a “yes” or “no” vote for any proposal they like, using 1T1V direct voting, with no minimum quorum.
- After voting closes, the proposals with the largest difference in “Yes” and “No” votes receive their requested funds from the Challenge Prize first. Project proposals are funded in order until the Challenge funds are exhausted.Additionally, Community Advisors (CAs) who write comments on proposals that are ultimately approved are rewarded with a bounty — similar to how holographic voting is rewarded for successful staking.
- Approved proposals that were not funded in the challenge they submitted (received at least 15% more “Yes” than “No”) may be funded according to the same mechanism as in 5 if there is remaining funding from other challenges .
It is worth noting that the above process only involves financial management. The Cardano ecosystem is still working out the details of their expected protocol governance, although there are some signs that it will utilize a parliamentary system similar to a bicameral system. One chamber will be composed of the Cardano Circle with representatives of various user groups and stakeholders, and the other will be composed of a technical committee – all elected by the community directly or through dReps. For a change to an agreement, both chambers must reach a consensus.
The DAO landscape is rapidly changing, and in this review article, we place the emergence of DAOs in their historical context and describe some of the key challenges and innovations surrounding the governance of such organizations.Humans have always worked in groups in various ways throughout history, and in many ways DAOs have not had a fundamental breakthrough in the context of human organization development. DAOs are united by embracing the fundamental idea of decentralization and the desire to innovate autonomous, democratic, and collective decision-making.We have outlined and compared different voting schemes and preference incentive mechanisms. We also evaluate DAO voting for on-chain and off-chain governance, and present many examples of procedures, tools, and governance models from the existing DAO space, with a particular focus on yearn and Cardano. Governance is a longstanding issue that may never be fully resolved, but thanks to the rapid development of DAOs, we are certainly closer than ever. We believe that some of the ongoing research on the governance of DAOs may even spill over and help develop better traditional governance.
- Nakamoto, Satoshi. “Bitcoin: A Peer-to-Peer Electronic Cash System”, 2008. https://bitcoin.org/bitcoin.pdf.
- Encointer — Money by the People, for the People. https://encointer.org/. Accessed 9. March 2022.
- “A History of Bitcoin Hard Forks”. Investopedia, https://www.investopedia.com/tech/history-bitcoin-hard-forks/. Accessed March 9, 2022
- Rochard, Pierre. “Bitcoin Governance”. Medium, 16. November 2020, https://pierre-rochard.medium.com/bitcoin-governance-37e86299470f.
- “How Does Ethereum Governance Really Work? — Everything You Need to Know by Cryptotesters”. Cryptotesters.Com, https://cryptotesters.com/blog/website-2jk0tzuj5-cryptotesters.vercel.app/blog/ethereum-governance. Accessed 9. March 2022.
- Nabilou, Hossein, und Assistant Professor of Law &. Finance at University of Amsterdam Law School. “Bitcoin Governance as a Decentralized Financial Market Infrastructure”. Stanford Journal of Blockchain Law & Policy, June 2021. stanford-jblp.pubpub.org, https://stanford-jblp.pubpub.org/pub/bitcoin-governance/release/2.
- “Governance — Forget about Whales”. The Maker Forum, 4. November 2020, https://forum.makerdao.com/t/governance-forget-about-whales/4995.
- Hackl, Cathy. “What Are DAOs And Why You Should Pay Attention”. Forbes, https://www.forbes.com/sites/cathyhackl/2021/06/01/what-are-daos-and-why-you-should-pay-attention/. Accessed 9. March 2022.
- Capital, Accelerated. “DAOs and Democracy: Voting Mechanisms in Web3 ?️?️”. Accelerated Capital, 30. July 2021, https://acceleratedcapital.substack.com/p/daos-and-democracy-voting-mechanisms.
- Arsenault, Eric. “Voting Options in DAOs”. DAOstack, 15. December 2020, https://medium.com/daostack/voting-options-in-daos-b86e5c69a3e3.
- Emmett, Jeff. “Conviction Voting: A Novel Continuous Decision Making Alternative to Governance”. Giveth, 18. November 2019, https://medium.com/giveth/conviction-voting-a-novel-continuous-decision-making-alternative-to-governance-aa746cfb9475.
- monetsupply. “Understanding Governor Bravo”. Tally, 1. July 2021, https://medium.com/tally-blog/understanding-governor-bravo-69b06f1875da.
- Hussey, Decrypt /. Matt. “What Is Snapshot? The Decentralized Voting System”. Decrypt, 4. June 2021, https://decrypt.co/resources/what-is-snapshot-the-decentralized-voting-system.
- Snapshot Docs, Home. https://docs.snapshot.org/. Accessed 9. March 2022.
- CoinYuppie. In-Depth Analysis: 7 Common Voting Mechanisms of DAO — CoinYuppie: Bitcoin, Ethereum, Metaverse, NFT, DAO, DeFi, Dogecoin, Crypto News. 12. January 2022, https://coinyuppie.com/in-depth-analysis-7-common-voting-mechanisms-of-dao/
- Governance and Operations | Yearn.Finance. https://docs.yearn.finance/contributing/governance/governance-and-operations. Accessed 9. March 2022.
- Governance — OpenZeppelin Docs. https://docs.openzeppelin.com/contracts/4.x/api/governance. Accessed 9. March 2022.
- Project Catalyst fund 8 launch guide. IOHK. Accessed 9. March 2022. https://drive.google.com/file/d/1gVMQkv6xIq-gLS2HGUyhYo5MihRpFWKg/view
- Project Catalyst fund8 launch — Town Hall #1 February 2022. IOHK. Accessed 9. March 2022.https://youtu.be/rNZJvzjgduM
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/comprehensive-study-of-dao-governance-challenges-ideas-and-tools/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.