Updated: Nov 25, 2022
The first DAO (Decentralised Autonomous Organisation) emerged in 2016 as a novel approach to venture capital. The premise that a community could take control of critical decisions and use of funds has recently grown in popularity as an idea, and we have since seen the birth of just over 10,000 DAOs across a range of industries.
With treasuries now hovering around $8.4Bn (in a VERY BEARISH MARKET), and close to 5m governance token holders, the appetite for building Ownership Economies shows no signs of diminishing.
Platform businesses such as Amazon, Uber and Meta have clear value propositions in their ability to connect network participants in a marketplace. The model, however, is increasingly seen as extractionary by many, and DAOs promise a more collaborative sharing economy, with ownership and voting rights held by the network rather than the central
That said, there are challenges in coordination, with governance and voting mechanisms currently being tested. As with all organisations or communities, politics and power struggles need to be overcome. DAOs are, after all, still collections of people with shared goals, and there will always be actors with self-interest or ill intention.
The aspiration of DAOs to become Autonomous, self-determining agents is perhaps a bit too much of a stretch. The idea that an organisation can exist independently, and hire humans to complete tasks in the real world that it cannot do, is fanciful in my view.
In its current form, DAOs represent coordination systems, enabling strangers to be co-owners and managers of organisations with which they feel aligned.
Rather than having a few shareholders and a centralised board, DAOs create a more democratic organisation with all participants able to participate in governance and rewards.
However, achieving consensus on complicated topics at speed and scale is no easy task.
A DAO without an active community is unlikely to get significant representation when decisions need to be made. And if it does, coordinating a large group for each decision can be very time consuming.
Additionally, although democratic, the wisdom of the uninformed crowd may not be as valuable to the DAO as the decisions of a few elected experts.
Equally, if proportional voting is used, the risk of a major token holder influencing the direction of the DAO might not be in its best interest.
DAOs must decide who can vote (e.g. all token holders or selected authorised wallets) and which voting mechanism to use.
A variety of these are being trialled, each with its own strengths and limitations:
Token-based Quorum Voting
In this system, a minimum number of members must vote in order to pass a proposal. Without a quorum, the proposal fails. Whilst this tries to encourage participation and mass opinion, it is a challenge to pinpoint the appropriate threshold and to find active voters. Setting this too low compromises good practice; too high and adequate engagement may not occur.
Voting in this way is time-consuming and expensive, and risks larger token holders either avoiding votes as means of sabotage, or buying votes to manipulate the outcome.
Permissioned Relative Majority Voting
There is no minimum voting requirement with this method. Rather, it depends on the relative number of ‘For’ vs ‘against’ votes, which in theory can result in a single voter participant determining the outcome. Though quicker and less expensive, this system risks inattention of voters and thus disproportionate power to the more engaged. A potential solution to this is to require proposal sponsorship from DAO members.
With quadratic voting, members can vote repeatedly for a proposal, but the cost of the vote is the square of the number of votes they wish to acquire. For example, one vote costs one token, two votes cost four tokens and three votes cost nine tokens. This means strong opinions must be backed by financial risk. Willingness to pay does not equate to utility and wealthy voters may still influence undesired outcomes. Additionally, sybil attacks (using fake identities and hiring others to cast votes) presents collusion risk, and therefore this system requires identity management solutions to ensure fairness.
Conviction voting is based on the community’s aggregated preference and uses time as a utility. Members can vote on different in-progress proposals and the longer their vote remains the same, the stronger the power of the vote becomes. The increase of the voting utility slows down gradually as it inches ever closer to a set maximum point. Voters can make changes to their vote at any time, in which case the voting utility of their previous vote will eventually diminish.
This mechanism is a great way to display how interested voters are in a proposal and perhaps how their opinions are influenced by internal or external factors. There is no need for a majority vote in order to pass a proposal, but rather the community’s beliefs are at the core of decision making. It’s also an efficient way to eliminate the risks of new DAO members gaining too much power in the DAO protocol.
On the downside, the mechanism requires significant time for a verdict to be reached, making it inappropriate for DAOs in need of time-sensitive decisions. It is likely that if conviction voting is adopted by more DAOs it could be used in combination with another, quicker mechanism.
With this system, members bet (using tokens) on proposals they believe are more likely to pass. If successful, they receive a reward. If the proposal fails, tokens are lost. This design helps screen out unwanted proposals, and focus attention on those more likely to pass.
Under this model, DAO members have the power to signal on proposals, while a centralised and predetermined committee executes the vote on the suggested proposal. This model is one of the fastest voting mechanisms and could be appropriate in cases, where urgent action is key to the survival of the DAO. However, there are risks of the centralised authority taking advantage of their position and voting in a way that is now in the best interest of the larger portion of the DAO community.
Liquid democracy or vote delegation shares the core principles of political democracy. In this case, a DAO assigns specialists to participate in an electorate that has the power to make decisions on behalf of DAO members. Members delegate their votes to trusted experts of their choice, who are better prepared to make the right decisions regarding the DAO’s future. This approach is more centralised than some of the other methods, but to counter that, DAO members have the power to transfer delegation at any time and assign new participants to the electorate.
It’s important to say that all of these strategies are still works in progress, and that variable successes have been observed in different DAOs. There is no one-size-fits-all. It may still be the case that culture eats code for breakfast when voting design is informed. Political democracies may not be easily negated by algorithmic solutions.
There is, more recently, a trend towards “Governance 2.0”, which in some ways appears to be similar to traditional corporate governance, with specialised groups being delegated certain decisions.
Some DAOs, for example, have implemented the use of elected Grant or Treasury Management Committees, while others have created SubDAOs or ‘pods’. These are independent entities, aligned with the parent DAO, which funds them to contribute to certain functions.
We are clearly in the early stages of DAOs, and governance mechanisms are likely to evolve significantly over the next few years as communities develop tools and strategies to enable efficient decision-making.
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