DAO Governance Models

DAO Governance Models

The concept of the Decentralized Autonomous Organization (DAO) as we know it today initially became feasible due to Ethereum smart contracts. This allowed DAOs to operate with minimal central authority because as long as some predefined conditions are met, changes to the blockchain can be made with little interference from any single or group of individuals. As DAOs matured, so too did the governance models evolve to match.

In this article, we’ll take a look at three popular governance models and assess the challenges they face as well as what the future may hold for them.

DAO GOVERNANCE

To put it simply, a protocol governance is about who can make decisions and how those decisions are made. We have seen the emergence of quite a few governance models, with some of the more popular ones being a variation of either:

  • 1:1 Token voting model
  • Delegated voting model
  • Executives model

Let's explore these in a bit more detail.

1:1 TOKEN VOTING MODEL

The O.G. model of governance scores very high on the “decentralized” scale in theory, but not so much in practice. This is the most basic governance mechanism that a protocol can employ. Usually a proposal is put forward, and for it to pass, a certain number of token holders must participate in the voting process. If the threshold is met, the option with the most votes will be implemented. This model is adopted by protocols like Compound and Uniswap.

Challenges

One of the most prevalent challenges is that this voting mechanism can very easily devolve into a “plutocracy”, where the rich can dominate the decision making process because they hold the most tokens, giving them the largest share of voting power. Chainalysis published a report analyzing the distribution of ten major DAOs’ governance tokens and found that across several major DAOs, less than 1% of all holders have 90% of the voting power.

Source: Chainalysis major DAO tokens analysis

The second challenge this model faces is voter apathy. Just look at the on-chain voter turnout for some of these popular projects. For reference, voter turnout for US elections is around 55%, and TradFi Corporate voting is around 75%. Some proposals don’t even make it through the quorum because not enough token holders show up to vote.

Source: On chain voter turnout by Wave Finance

And thirdly, decisions that end up being implemented through this governance model are usually in the best interest of the largest stakeholders of a protocol, but not necessarily the protocol as a whole.. We have seen these challenges translate to hostile takeovers, vote buying and last minute proposal blocks time and time again as was the case with BUILD Finance,  and even Uniswap.

On the Horizon

Protocol’s are continuing to experiment with token voting, with trials of Quadratic Voting, Holographic voting and Futarchy all underway to try to fix these issues (See projects like Axelar and DAOstack)

DELEGATED VOTING MODEL

In this model, token holders delegate their voting power to trusted agents or “delegates”. These delegates are ideally more involved in the protocol, knowledgeable and have interests more closely aligned with the protocol’s overall well-being than the token holders themselves. This type of voting by proxy helps eliminate the  problem of voter apathy as well as allow for more fluid participation on key decisions.

Challenges

An obvious problem with delegated voting is that the delegator and delegatee can have misaligned interests. Delegates can also potentially be more susceptible to issues of collusion and bribery. Moreover, it does not necessarily fix the issue of voter apathy! The chart below shows the participation rate of delegates in Compound Finance.

Source: Metropolis

Being a delegate is currently a highly unattractive role with delegates expected to volunteer their time, navigate the politics and shoulder all the responsibility without proper compensation. One of the most mature examples of this variation that exists today is MakerDao and they only recently introduced their Recognized Delegate compensation framework. However, this is still a work in progress for Maker, and it’s being iterated on as we speak.

On the Horizon

Among the variations being trialed are “voting coalitions”  like Index Cooperative or She254 who represent a set of values and principles that token holders can get behind, all the while solving for misaligned interests, scalability and responsibility. Other protocols combine delegation voting with some form of proof-of-reputation or proof-of-humanity to further address these issues.

EXECUTIVES GOVERNANCE MODEL

Executives are the people who are entrenched in the project, with relevant skills, are able to dedicate time and effort to the project and who are paid to do their job. Token holders have the power to elect these executives to not only make the decisions, but to carry them out and perform the day to day operations. This model makes some compromise on full decentralization in return for solving the issues of accountability, efficiency and participation.

Challenges

The fundamental challenge here is that most of the power is concentrated in a central group of decision makers, therefore the bottleneck or points of failure can be amplified as it all rests on the shoulders of the executive body. There are also arguments that this model is less decentralized thus it can be less attractive for the community

On the Horizon

There has been an influx of tools and governance primitives to help with the challenges of bottlenecking, such as Pods  (like those created by Orca Protocol or Metropolis. In this way work can be better distributed and any points of failure can be isolated and dealt with separately.

(BONUS MODEL) THE BENEVOLENT FOUNDER

Whereby the decision maker and driver of a protocol's direction rests solely on the shoulders of a single person, or at least a single figurehead. Projects with this governance model cannot be considered to be "decentralized" per se, but it is worth talking about because it was a pretty popular model for a while (Crypto has no shortage of big names and charismatic leaders).

Challenges

The most obvious issue is that this model is not decentralized in the least. One person calls all the shots, and the community has no choice but to go along with it.

On the Horizon

This model is slowly being phased out as crypto matures and people become more skeptical about accepting a single person in power. Plus with the recent events across DeFi involving the decisions of these founders (Think Daniel Siesta from Wonderland.Finance and Andre Cronje of Fantom Foundation), even founders with the best of intentions cannot bear all the burden themselves.

FINAL THOUGHTS

Protocol Governance still has a long way to go before a satisfactory solution to decentralized governance can be found and implemented on a wider scale. But this sector is moving at an incredible speed and many will be carried with the tide. Even TempleDAO is placing particularly heavy emphasis on constructing a framework for a governance mechanism that achieves quality participation, equitable distribution of power, and efficient decision-making through its DAO Games.

Getting the governance model right is not merely for paying lip service to the community, it is in fact a critical component of a protocol’s success. The future is an exciting one for DeFi…but it is not an overstatement to say that the ultimate fate of many protocols and DeFi’s place in the world will be determined by the success or failure of its governance models.