DAO & GOVERNANCE
Governance is a term we hear very often in traditional finance and society at large and the
book's definition of this term refers to the control of resource allocation. One of the greatest
benefits of blockchain technology to the finance community at large is decentralization and
easy access to finance. Decentralization does not mean an absence of control, rather it
means a distribution of control. How that control is distributed fairly is the purpose of
governance.
This implies that Governance is an integral part of any decentralized protocol and how
governance works to achieve the financial goals of the investors, keeping the protocol
sustainable and safe from bad actors could be a challenge.
Governance acts basically in two ways.
●
●
Consensus
Resolution
Consensus is how decisions are made in a non-automated manner, a manner where smart
contracts are not called by functions or oracles. This is done by voting and a majority wins
the voting session. Of course, voting rights in most protocols are obtained by acquiring
governance tokens, and these tokens are used to determine how much voting rights a wallet
has in a protocol. However, there could be limits to the number of voting rights a wallet has
as a way to protect the ecosystem against bad actors with malicious intentions.
Resolution is another way by which governance is established in a protocol. This form of
establishment is fully automated and controlled by a smart contract. Usually, an oracle
triggers this smart contract to come to this resolution after some external conditions have
been met and vetted by the oracle. A good example will be a protocol that wants a resolution
to be carried out as soon as an event occurs in the real world. An oracle will confirm this
event and once it is affirmative, the resolution is carried out by the smart contract. This may
not be in tandem with the decentralization values of blockchain technology but such actions
are taken as security measures to protect the ecosystem.
For the efficiency of the ecosystem, there has to be the right balance between automated
and non-automated actions as it concerns governance.
Decentralized Autonomous Organizations are groups of people who operate a totally
decentralized way of making decisions, a bottom-top management approach where the
responsibility of decision-making is distributed. DAOs are the biggest implementers of
governance in the blockchain ecosystem and have proven to be profitable for investors.
DAOs operate various types of governance models namely;
●
●
●
Constitution DAO
Friends with Benefit DAO
Juicebox DAO
●
ENS DAO
A Constitution DAO is the most common governance model in use. In this model, there is an
already laid down set of rules that covers all key areas of the protocol such as voting
procedures, emergency actions, and response, and conditions for membership of the DAO.
There is a lot of emphasis on stability and collaboration of participants of the ecosystem.
A Friends with Benefit DAO is governance model that uses social tokens. Social tokens are
such that they monetize experiences and services, commonly used by content creators or
sport elites. In this model, the goal is to incentivise participants to take part in an activity and
so the DAO offers some form of service payment such as tickets to exclusive events and
unique collections. They are also known as social DAOs. This model is adaptable, suitable
and easily adopted for community management and growth using tools like discord.
JuiceboxDAO is a much more centralised model of governance. In this model, there are two
layers of governance. The token holders’ layer and the layer for the team of stewards. Here,
participants are permitted to crowdfund their projects and create tokens for their
communities. The token holders make the decisions here while the stewards act on these
decisions and ensure the day to day running of the protocol.
The fourth model being the Ethereum Name Service DAO is a much more complex model
than the other three. It comprises of 3 structures for governance namely;
Disclosure of proposals - This is done by listing a set of proposals to be considered for
voting by participants. It is usually arranged on a community level on a platform where
various discussions can be held.
Offchain voting - Offchain voting occurs outside the chain and is purely non-automated. The
number of votes per user can be adjusted in some cases to accommodate various changes.
Onchain voting - Onchain voting is also carried out in this model where the voting occurs on
the blockchain and is fully monitored by smart contracts recording the votes.
There are three basic types of proposals that can be launched within the ENS DAO. They
are;
●
●
●
Social proposals such as adjustment in fees for holders.
Executable proposals; Proposals to be executed by smart contract
Constitution amendment proposals which involves amendments to the constitution of
the DAO. It usually takes some time to get every participant on board for such
proposals, except in cases where there have been clear breaches and certain
actions need to be taken.
What should be considered before choosing a DAO model?
Picking a model for DAO governance is not an easy task and requires consideration of a
host of factors regarding the protocol’s vision and goals.
It is key to understand the pros and cons of each model but also consider the size of the
DAO you want to have. A large DAO will require a complex model such as the ENS model
with a lot of incentives to keep the particiants motivated to act right in the protocol.
A smaller DAO may only require a social incentive model and that may work perfectly.
It is also very key to understand the purpose of the DAO. There will always be a little trade
off between speed and democratic fairness. It is up to the founding team to determine which
factor is of more importance to the protocol. A fast decision making DAO will require a
delegate voting system and this is inclining towards a Juicebox model which is more
centralsied and less inclusive.
Another point to note is the level of technical expertise on the team. In the past, this has
been a bottleneck for some projects and the model chosen may prove difficult to implement
after publishing a whitepaper. A much simpler model takes less time to build and implement.
Finally, the conflict resolution mechanism and the token economic model should also be
considered. The goal here is to have a governance model that supports the token economic
model of the protocol whether is has to do with rewarding stakers and putting certain limits
on rewards at various points in time, or how the protocol intends to protet itself from
malicious attacks.