Decentralized Autonomous Organizations don’t need any introduction on what makes them better than traditionally hierarchical and centralized organizations.

DAOs have evolved into a more democratic, resilient, and efficient form of organization. Low entry barriers and global, democratized access have led to an explosion in the number of DAOs. They are a real-world application that utilizes innovative tools to solve the coordination crisis that has been prevalent throughout the existence of civilization.

Decentralized governance is a crucial part to make DAOs more robust and resilient. Low voter turnout and voter apathy have been an adversary problem for DAOs. Voting participation is often averaging 5% to 10%, making DAOs susceptible to governance attacks. Data points on Discord conversation and proposals that could be considered sufficient performance metrics for DAO governance have also fared poorly. The ones that have managed to keep growing into larger organizations while staying true to their ethos, such as the Optimism Collective, are shedding a more positive light on the future of decentralized governance.

Decentralization

The recent debacles of centralized entities in web3 validate the need for decentralization. Although the whitepapers of Bitcoin or Ethereum do not explicitly use the term “decentralized governance”, decentralization is still embedded as a core value for both blockchains.

In most cases, web3 projects that proclaim themselves as DAOs don’t start as a fully fledged out system, but instead progressively decentralize themselves. By developing the product with a core team and cultivating a community in parallel, the protocol can gradually grow and transition into a decentralized governance system. Progressive decentralization is an effective and time-tested approach to decentralization that ensures efficient growth for a protocol in it’s infancy.

Voting Mechanisms

Forming consensus in a decentralized governance system is a challenging yet imperative aspect to making DAOs work.

While it has its drawbacks, token governance is the most widely adopted form of governance to reach consensus. Token governance is often adopted based on the nature and size of DAOs as no method is a tailored fit.

Let’s discuss some of the voting mechanisms with token-based governance systems.

Stake-Based Voting

1 token and 1 vote is the most commonly used voting mechanism due to its simplicity and direct democratic feature.

It’s more of a skin-in-the-game mechanism, as holders with more stake would want to get the best out of the project, and hence vote in the best interest of the community and the outcome. Other benefits include direct signaling for the community, lower barrier for entry, and progressive involvement for newcomers in the community.

Coin voting is also the most criticized voting system, as it nurtures plutocracy and vote buying. Among other issues, low participation and voter ignorance are very prevalent drawbacks.

Beanstalk was exposed to one of the largest DeFi exploits. Beanstalk uses token-weighted governance, and as votes are transferable, such protocols can be gamed with flash loans in order to take over the voting majority and pass a malicious proposal.

On-chain reputation and credentials are some of the main solutions to improve upon token-weighted governance.

Delegated Voting

While it’s ideal to take the consensus of the whole group for complex decisions, it’s also worth noting that all the members do not have the expertise to make decisions across all domains.

Hence, delegating their vote to a subject matter expert could benefit the quality of decisions being made.

MakerDAO’s “Recognized Delegates” is an example of delegation where delegates are compensated regularly based on defined metrics such as governance rate and delegation volume. They have previously been criticized for centralization, as few token holders are largely decisive. This delegation program has gradually helped MakerDAO decentralize further, as the voting power of the single largest holder appears to be on a decline.

Delegate burnout, ignorance in a particular domain, and lack of incentivization are some of the problems associated with voter delegation.

Delegation seen as an alternative to coin-weighted voting has shown its shortcoming as well. For example, nearly 75% of $COMP delegates have never voted on-chain.

Professional Delegates

Delegates are a simple solution to voter apathy and low voter turnout. But as delegates generally lack expertise, Professional Delegates are emerging as a solution.

Simply put, Professional Delegates are DAO enthusiasts who work full time, cover a wide range of expertise and domains of knowledge, make voting transparent, and are capable of accumulating a reputation for the brand in the long run. They are mostly teams organized under an organization/brand that contribute to DAOs by providing research & governance operations, increasing community engagement, and providing context. These organizations also provide other services in data analysis, treasury management, and risk management.

Holographic Consensus Model

The Holographic Consensus Model is ideal for large DAOs or ones with ambitions for accelerated growth. Created by DAOstack, this consensus model combines prediction markets and token-based quorum voting.

In this system, anyone can submit a proposal. Proposals will be executed upon receiving an absolute majority, that is, when at least 50 % of reputational holders vote in favor of the proposal within the allotted time.

Proposals can be “boosted” by predicting that Reputation holders will accept the boosted proposal. If a proposal is boosted, it will be executed upon receiving a relative majority, that is, when more reputational holders vote in favor of the proposal rather than against.

The main problem solved by a Holographic Consensus Model is the single biggest challenge DAOs face — attention, and subsequently, participation.

The model may not be suitable for a smaller DAO, as the operational gas fees can be high. It might also become confusing for users, as there are two tokens in the system. Additionally, such a system can make the UI much more difficult to navigate and understand, confusing users.

A notable example of using this model can be found in DXdao.

Conviction Voting

Conviction voting executes proposals based on the aggregated preference of community members, expressed on a continuous basis.

Voters can assert a varied level of preferences in multiple proposals within time-boxed sessions. A user can keep changing their preference from proposal to proposal, but the longer they keep their chosen preference, the stronger the conviction grows.

For example, a user could put a quarter of their voting power in proposal X, half of the voting power in proposal Y, and divide the rest to Z and W. Imagine these preferences are filled in a bucket. The more one holds onto a preference, the more the bucket is filled with conviction. If the preference is shifted into a different bucket the conviction erodes alongside it, like a hole in the upper part of the original bucket. The accumulation and decay of conviction are based on the decay curve.

Projects using conviction voting include Commons Stack and Token Engineering Commons.

Quadratic Voting

Quadratic voting is not just about being for or against, it also shows the intent behind the vote. Here, each voter is given voting credits, which they can use to influence the outcome of a proposal. The cost of casting is increased quadratically with the amount of votes:

For instance, the voters are issued 10 vote credits. If the user makes 1 vote, it will cost him 1 credit, 2 votes will cost 4 credits and 3 votes will cost 9 credits. If a user is keen on a particular proposal, they can spend more credits.

Microsoft economist Glen Weyl has proposed quadratic voting. Vitalik Buterin has also championed the novel idea.

As with others, there are some drawbacks to quadratic voting. It has recently been exposed to Sybil attacks in some Gitcoin grants. Options from DIDs and SBTs are being explored by Gitcoin to mitigate the risk from future Sybil attacks.

Capturing Reputation

Working in web3 requires the ability to contribute, create, and be compensated based on one’s identity.

These properties of a community member can all be captured in their reputation, making it an integral part of the meritocratic culture of web3. For delegates and individual contributors, building a reputation has become an imperative aspect, sometimes synonymous with advancing their careers. Reputation is a social phenomenon that varies with context. Due to their reputable nature, credentials could be thought of as building blocks for this phenomenon.

NFTs are the most straightforward and immutable form of credential. DegenScore quantifies interactions with Defi protocols and outputs a score using rules written on smart contracts. POAPs attest to your attendance at an on-chain or IRL event. Otterspace allows DAOs to decide what constitutes meaningful work and issue its members an NFT badge for it, while Provedrequires a DAO to “sign off” on a claim before enabling its members to mint DAO-specific NFT badges for it. This is fittingly called Proof of Contribution. Kleoverse issues users Typescript, Rust, or Solidity competency badges based on Github data.

As we can go on and on about credential tooling, integrating credential data points will be meaningful in building reputation capital.****

Orange Protocol is aspiring to become a one-stop solution for credentials. The protocol collects data from different credential platforms, adds a method of calculation, and provides the data collected to other platforms in the form of reputational models. Dapps or other platforms can then plug in and use this data. So far their partners include Aave, Gitcoin, Snapshot, DAOHaus, Dework, talentDAO, and Crypto Sapiens. Privacy preserving credential tools using zero-knowledge primitives (Sismo badge) have also sprung up and will be instrumental in shaping the landscape further.

How Soulbound Tokens Could Shape Governance

Soulbound Tokens are non-transferable (but possibly revocable), publicly visible, non-fungible tokens.

Unlike most existing NFTs, SBTs must be issued (or attested to) and cannot be transferred or sold, which makes them suitable for reputational identity. In the most simple form SBTs can be compared to badges received for achievements. They could be attestations of IP addresses, Github data, Twitter data, POAPs, DAO membership, DAO participation data, etc. SBTs are valuable because they are not transferable. The non-financial aspect of SBTs could also make them a potential contender for token-based governance systems.

Implementation of SBTs is possible through EIP-4973: Account-bound Tokens(under review). Without getting under the surface, the primary feature here is non-transferability. If successfully implemented, SBTs have the potential to thwart Sybil attacks, foster new governance designs, and facilitate community organizations. Notably, Gitcoin grants are presently exploring SBTs as a way to mitigate Sybil attacks. Here is a visualization on potential distribution mechanisms for soulbound attestations:

Closing Thoughts

It’s unclear how DAOs will evolve into the future, but the bear market is the right time for communities to build, experiment, and iterate on governance to ensure longevity and growth.

Although most DAOs call themselves decentralized, their decision-making is often controlled by very few entities, and a voting process like Snapshot might just be a UI/UX cover-up of the underlying centralization. Establishing decentralization across the layers of DAOs is crucial to their sustenance. Modular operation structure, establishing accountability for governance, fostering an enduring culture that stands by decentralization, and rewarding contributions are some of the core tenets to help DAOs decentralize sustainably.

Use cases and tooling in capturing and honoring reputations on-chain are ripe for innovation and will shape the future of decentralized governance systems.

Questions About Premia?

If you have any questions about Premia, or would like to progress the conversation surrounding DAO governance, don’t hesitate to join us on our Discord!

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