DAO Governance: Challenges, Ideas and Tools

Guest post by Jan Ole Ernst and Simon Sällström of the Oxford Blockchain Society. Jan is pursuing a PhD in Quantum Physics and Simon is pursing an MPhil in Economics.

Governance philosophy and challenges

DAO’s have profoundly shaken up the web3 landscape, since making headlines in 2016 when funds where drained in the first and original DAO — essentially a decentralized hedge-fund without ridiculous premiums for managers and investment determined entirely by members voting in proportion to their stake — the estimated value locked up in such collectives is estimated to be about 15.2 billion. Humans are herd animals, there is nothing more human than being part of an organization or collective and many visionaries in the cryptocurrency space have sought out to “solve” one of the wicked problems of humanity: governance. Before diving into the details of this key part of DAOs, we will spend some time clearly defining and interpreting the meaning of each one of the three terms.

• Decentralized: means that the participants are numerous and no one single participant should have disproportionate amounts of governance power. At an absolute minimum this would ensure that no member can ever hold the require vote weight required for a proposal to pass in a particular voting scheme.
• Autonomous: is defined as being independent and having the freedom to govern itself in virtue of the engagement of the community.
• Organization refers to a group of people working together in some structure suited particular common purpose or set of objectives.

DAO’s aim to implement frictionless and direct democracy, decisions are made directly by a particular form of community vote (setting aside delegated voting, whereby individuals can pass on their voting rights to someone else), there are no intermediaries or administrative barriers and any decision actioned by the DAO should directly reflect the preferences of the members of the DAO. There are certain rules encoded into some of the underlying DAO smart contracts and technological tools which support the full DAO stack, but these are transparently accessible by the community and in certain instances can be altered and revised if the right proposals are initiated. There is however, no need for needless bureaucracy or managers which take hideous premiums or fees, because governance is executed autonomously. The operationalization of such a truly autonomous and decentralized dream is however a formidable challenge and has evoked much debate with regards to voting, treasury design, incentive design & governance tooling. This article aims to shed light on some of the more recent developments in the field of DAO governance.

Background

Bitcoin and governance

Governance was never part of Satoshi Nakamoto’s original whitepaper. In contrast to most modern blockchain ecosystems, the protocol never envisions a Bitcoin treasury. Rather — Bitcoin’s governance is only about deciding on the protocol parameters and codebase which is maintained at the Bitcoin core Github.

The process of initiating a change starts with the researcher investigating a problem, and coming up with a solution to it. The researcher then shares their proposed changes with the wider community, be it through the bitcoin developers email list, a Bitcoin Improvement Proposal (BIP) or a formal white paper. However, there is no governance protocol of bitcoin which means that the process of changing the code is informal and mostly based on some vague notion of consensus amongst core developers and other key stakeholders such as exchanges, nodes and block explorers. Possibly as a result of the fact that the process for changing the protocol of Bitcoin was left undefined, decisions lacked legitimacy in the eyes of dissenting developers. This may have been the reason why groups chose to fork the protocol (eg Bitcoin XT, Bitcoin cash and Bitcoin SV), sometimes in the hope that exchanges and other stakeholders would accept their fork as the “true bitcoin”. Since a fork maintains the same history of a blockchain up until the point of the fork, it is not always obvious which one is the “true” Bitcoin if the process for changing the code base is undefined and hence informal. No cryptocurrency has any inherent value, rather the value comes from people believing and accepting that it has value and accepting it as payment for good and services. Exchanges have significant power in this case as their choice of the trading ticker “BTC” makes a huge difference in terms of wider acceptance of any given fork being the “real” Bitcoin.

What does it really mean to be decentralized?

Many, if not all, organizations are decentralized to some extent. Holding equity shares gives you the right to vote at shareholder meetings, being a citizen in a democracy gives you the right to vote and being a member of your local neighborhood association would typically also involve some power to vote. Do DAOs differ in some fundamental way from these tools for social organization or are DAOs just another buzzword that really just refers to the governance of decentralized protocols?

In our view, the key difference stems from two characteristics and an organization that satisfies one of them to a sufficient degree can be considered a DAO. First, that the rules governing the DAO are encoded into the blockchain of that organization. This means that the governance of protocol changes is encoded it the blockchain itself, and that these rules can only change through the mechanism specified therein. Second, that it is decentralized and self-directed. The second characteristic may be difficult to grasp so let us consider the following analogy.

Imagine that the organization can be represented by a tower made out of bricks. Now, decentralization is not a binary concept, but it is more adequately captured on a spectrum. To measure how decentralized an organization is, you have to ask yourself: how many bricks can we remove until the tower falls apart? The larger the impact of removing particular pieces of this tower is, the lower the degree of decentralization is. The more pieces you can remove from this tower, the more decentralized and autonomous it is. If ETH 2.0 comes to a full halt without Vitalik Buterin, then that would suggest that Ethereum is not very decentralized.

The DAO trilemma — Scale, Quality and Access

In a small DAO, all members are likely to read and vote in all proposals. Simple voting methods suffice here, the most straightforward being “1 token, 1 vote”, cast with a “yes/no” vote on each proposal and approval granted, given that more than 50% of total voting power voted yes (absolute majority). However, as the DAO grows and there is a need to process and make decisions on a growing number of proposals, such methodology will lead to the emergence of issues as not all members of a DAO will be able to stay on top of all proposals. By holding on to the absolute majority principle with simple voting, quality and access can be maintained but not at scale. A large DAO would not be able to operate in a changing environment if it required an absolute majority for all its decisions.

A naive approach would be to lower the threshold for approving proposals to only require a majority amongst those who vote (relative majority). Scalability and accessibility is achieved as many more proposals can be considered and the system is easy to understand but proposal quality may suffer due to the sheer number, implying that members cannot consider all of them. This leaves the DAO in a state vulnerable to nefarious attacks that can get proposals approved with only a fractional stake in the protocol.

To achieve both scale and quality, DAOs can employ more complex preference elicitation or vote weighing mechanisms such as holographic voting or liquid democracy. This improves scalability whilst maintaining quality, but is slightly harder for voters to fully understand and get behind which reduces accessibility and hence also undermines the legitimacy of the decisions taken. They are also more difficult to implement, particularly when voting happens fully on chain.

Pick two of three: scale, access, quality

Throughout the article we will explore various governance systems that seek to address the trade-offs between scale and quality through various methods. We will broadly make the distinction between governance aspects that relate to the voting weights of members and the method for eliciting preferences.

Governance of what?

Neither the Bitcoin or the Ethereum have a treasury embedded into its protocol. However, most if not all modern protocols have a treasury that is controlled by the community in some manner. Hence, we will distinguish between protocol governance as that relating to changing the codebase itself and treasury governance which refers to decisions on how the DAO should use its resources. The main focus of this article is to provide an overview of the mechanisms, design decisions that relate to governance of DAOs but we will first illustrate how protocol and treasury governance may look like in practice in the status quo so that we have something to contrast the many innovations with.

Protocol governance example

The process for protocol changes of the Ethereum protocol follows a five-step process. Each proposal is called an Ethereum Improvement Proposal, but most other blockchain ecosystems have similar naming conventions and processes (see here).

1. Draft — An EIP is merged by an EIP Editor into the EIP repository when properly formatted
2. Review — An EIP Author marks an EIP as ready and requests Peer Review.
3. Last Call — the EIP is ready for review by a wider audience.
4. Accepted — a core EIP that has been in the Last Call for at least two weeks and any technical changes that were requested have been addressed by the author.
5. Final — an EIP that the core devs have decided to implement into the various clients and release in a future hard fork, or has already been released.

As seen in the last step, the core developers of the Ethereum blockchain are the ones who have decision making power of whether or not to implement these changes.

Treasury Governance examples

The traditional treasury governance mechanism follows a continuous “proposal-vote” structure wherein holders of a token can present project proposals and funds will be taken out of the treasury if approved by the community. BitDAO — the world’s largest DAO governed treasury — can be used to exemplify some of the parameter considerations that are typically involved:

• Proposal threshold: 200.000 BIT. To submit a proposal for consideration, the proposer must hold (including delegated).
• Vote duration: at least 7 days. This refers to the length of time between voting start and end.
• Vote threshold: 1% of token supply (100M BIT). This refers to the minimum quorum in terms of BIT token for a proposal to pass.

Some protocols let proposals go through several stages before final decision. For example, the Uniswap protocol has three phases of their governance process, each one incorporating feedback received from the previous stage:

1. Temperature check. After a two-day window, a majority vote of at least 25k UNI yes would allow the proposal to move to the Consensus check phase.
2. Consensus check. This phase allow proposers to incorporate feedback from the Temperature check and means that formal discussions are initiated if the proposal involves a partnership.
3. Governance proposal. The proposal should have executable on-chain code accompanied with it. Submitters must have at least 2m UNI delegated to them, and at least 40m UNI yes votes is needed for it to pass.

Community building, proposal discussions & idea formation

Another issue faced by some DAO’s with regards to optimally incentivizing participation is the fact that for effective DAO governance, one requires a high degree of user engagement and a vibrant community to make sure good ideas are developed and refined. There are many working parts to ensuring this in practice. Discord and online forums tend to be good platforms for engaging the community in idea forming discussions or so called “temperature checks” to gauge the interest and response to a vague proposal. For example, yearn finance requires at least 3 days of discussion in their forum before any proposals can be submitted to Snapshot, ensuring that only things which have been well thought through and discussed actually incur a community vote.

Most DAO’s run a Discord server and/or a dedicated online forum to try and mediate discussion in particular channels. This is also often someone’s first point of contact and to onboard new members successfully it is important that new members are met with enthusiasm and respect. Community managers can also play an invaluable role here to ensure members engage with each other productively and that any discourse is constructive, there is usually a code of conduct or a set of community guidelines which members need to abide by.

Information dissemination and communication is another key cornerstone of effective DAO governance. In the case of quorum based voting, or any system which requires a floor in voter participation a lack of voter participation paralyzes the DAO by precluding it to action any proposal if there is a lack of participation in a particular vote. This can be mitigated by having clear and effective communication which reaches out to the member in case of any proposal & vote, as well as clear time horizons for all the processes involved in making and voting through proposals. Leaving voting open for several days (e.g. 5 days in the case of yearn) is also a sensible idea to ensure people get a chance to partake. Moreover, vibrant discussion preceding the filing of an actual proposal usually ensures that participation is high, given that the voters are aware a vote is likely to happen soon and given the fact that people have spend time thinking about these ideas, it is more likely that they will eventually exercise their voting rights.

Voting weights

DAOs have experimented in governance and this has led to a number of alternatives to the simple “1 token, 1 vote” (1T1V) design. Though simple, the 1T1V design is rooted in the same logic as that of proof of stake — performing a governance attack would require a nefarious actor to control a very large stake, at which point it would be hurting itself if it did undermine the network. This section will explore the benefits and weaknesses of the traditional 1T1V model before exploring various alternative schemes that have emerged in the DAO ecosystems.

Stake based voting — 1 token, 1 vote (1T1V)

The most commonly used weighting scheme for voting is the simple “1 token, 1 vote” system. This system has the benefit of making Sybil attacks costly, assuming that a significant portion of token holders do participate in governance decisions. It also ensures that incentives and thus actions will align — if you hold a large amount of tokens with monetary value, then you will want the protocol to succeed and so you will participate in the governance accordingly. From this perspective, the naive conclusion to draw would be to say that the greater the stake, the stronger your incentives will be to participate and hence governance decisions will improve.

Though it is clear that having no stake means your incentives to participate are weak as it means you have no real ability to steer any decision in a particular way, similar incentive problems can emerge at the other end of the spectrum too. Individuals with very large stakes in a particular DAO are likely to be “too rich and too busy” to care deeply about participating in the DAO as the percentage of their total assets represented in a DAO will only be a small fraction of their total wealth. Hence, though their absolute stake in the system is large, that stake may be a much smaller as a share of their total wealth compared to a very small holder of the token. This relationship between the optimal stake and governance participation is illustrated below.

Maker DAO Optimal Participation Incentives (Source: https://forum.makerdao.com/t/governance-forget-about-whales/4995)

Stake based voting has at least three major drawbacks.

1. It is plutocratic and hence constitutes a significant concentration of power. Many blockchain protocols have “whales”, people with large holdings of the token. This effectively mean that DAO decisions are made by a small group of people, thereby nullifying the promise of distributing governance to the masses.
2. A person holding many tokens will not necessarily make the best decisions. For example developers or other contributors may not hold as many tokens as early wealthy investors. Lastly, measuring the stake that a person has in a system using the number of tokens is a crude measure that may not capture other aspects of stake.
3. Low participation. As the number of members of a DAO increases rapidly, the marginal impact of a given voter diminishes and the sense of meaningful participation falls. This is one of many reasons why participation in governance in many DAOs is frequently very low and is a reason minimum quorum requirements are set (1% of total token supply in the case of bitDAO)

In the what follows, we will present various weighting schemes that address some of these issues in various ways. In the next section, we will also present voting mechanisms that address these concerns indirectly.

Minimum threshold single vote — 1 person, 1 vote (1P1V)

In light of concerns of plutocratic rule and the concentration that such concentration entails, some have argued for “1 person, 1 vote” systems instead. The idea would normally be that members must prove that they indeed have stake in the ecosystem and everyone holding at least X amount of the DAO governance token have the same voting power. However, in this system, a nefarious actors could circumvent the protocol by creating multiple addresses, each with the minimum token requirement. This has prompted the emergence of innovative solutions such as blockchain based registry and a ERC-20 Proof of Existence token.

Kleros have developed an ERC-20 registry called proof of humanity, whereby a particular offline identity is linked to an Ethereum address. This requires you to submit a video and the vouching of someone already on the registry to confirm that the individual wishing to be registered is indeed a real human and not already registered on the registry. Checking that an individuals address is indeed on Kleros’ Proof of Humanity would be a way to whitelist individuals who have a unique real world identity.

Governor DAO have come up with a way of issuing unique individuals non-transferrable ERC20 “Proof-of-Existence” token based on biometric authentication technology. They achieve this by hashing hundreds of data-points collected in their onboarding portal, which is then linked to their wallet indefinitely. Those who pass this identification test receive said “Proof-of-Existence” token which is attached to their wallet indefinitely. This token represents a unique source of identity as the same user’s sensory data would generate the same hash and thus would preclude the user from generating another Proof-of-Existence token affiliated with a different address.

Reputation based weights

One of the concerns of 1T1V governance systems is that they are vulnerable to governance attacks if voting participation is low. Malicious actors may borrow the asset from the lending market to perform a governance attack where they vote in favour of whatever outcome they prefer. We define reputation systems as all weighting systems wherein members can accrue non-transferable voting weight through their actions. We’ll present two types of such reputation systems in what follows.

The first one is the r/cryptocurrency contribution based governance token rewarding. The community allocates MOON tokens for contributions. These contributions could be anything from analyses, links to interesting articles and memes to comments on other posts. Though MOON tokens can be bought and sold, the voting power of such tokens cannot be transferred. A key challenge with these types of systems is that it can cause significant voting power concentration and may be prone to manipulation unless the community is very large. For example, if there were no restrictions on upvoting and commenting, then a user may set up multiple accounts and upvote its own posts in the subreddit to boost the number of MOON token it receives. The Oxford Blockchain Society DAO addresses these concerns by imposing a ceiling wherein no member of the society can hold more than 10% of total supply of (non-transferrable) governance token at any particular point in time. However, to retain incentives, contributions beyond the ceiling are rewarded with trade-able tokens (monetary incentives).

The second one is based on lock-up periods. This serves to prevent attacks that are based on borrowing funds only to participate in nefarious attacks. The Polkadot ecosystem employs such a mechanism wherein tokens without lock-up have only 0.1x the voting power of a token that has been locked up for 2 days, and 50x less voting power than a token that has been locked up for 32 days.

Delegated voting

One major weakness of all of the previously mentioned weighting systems is that of low participation and that it does not give people with greater expert knowledge more weight. Many DAOs introduce 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 power to other individuals that may have more time to investigate proposals. As in a representative democracy, this allows members of the organization to participate in the governance by proxy.

The main benefit is that a representative may have more time or domain expertise to make better decisions. Advocates of delegated voting argue that such system allow active community contributors, experts and other people with merit will gain greater weight. However, as we know from any representative democracy, it is not always the most competent that get votes but rather the person who is best able to attract voters. Moreover, a representative may not vote in accordance the preferences of the token holders who delegate to them. This may partially be redressed over time as token holders can “vote with their feet” by re-delegating to other representatives if they wish to do so.

Liquid democracy

This refers to voting in which elements of direct voting is combined with delegated voting. Under liquid democracy, individuals can vote directly with some weight if they wish or they can vote fully with their voting power on certain domains whilst delegating their voting power to representatives in other domains.

Liquid democracy is being implemented in the governance of the Cardano ecosystem. Though still in its experimental state, the Cardano community is planned to introduce a version of liquid democracy called absolute liquid democracy. This means that token holders can split up their voting power into several shares of possibly difference sizes, where each share can delegated to one or several different “dReps” who receive rewards proportional to the amount of voting power delegated to them. This delegation can be revoked at any time, increases accountability and empowerment. In the long term, dReps will represent token holders in protocol governance decisions, but in the current experimental phase, dReps will only be able to represent voters in voting for Catalyst proposal.

Preference elicitation mechanisms

There are many possible departures from the most simple preference elicitation mechanisms (”yes, no & abstain”). We will present some alternatives and compare them to the benchmark mechanism.

Benchmark: Direct voting with Quorum

This is the most basic voting protocol, every member can cast a single vote to express their preference with regards to a particular proposal or decision. There are three possibilities; yes, no or abstain, with an absolute majority requirement for a passing vote. Weights can be assigned in accordance to any of the methods outlined in the previous section but there are often additional constraints:

• Quorum threshold. Require minimum threshold on the proportion of governance power (in the case of weighted votes) or proportion of voters to participate in a vote for it to pass. A very common scheme is called Quorum based voting which requires 60% of total governance tokens to partake in a vote. For example, for a DAO with 1000 circulating governance tokens, one requires users with a total number of at least 600 tokens to participate in a vote for it to pass.
• Special majority requirements. This refers to any majority requirement that is not 51% of the voting power. For example, one may require that voting power in favour of a proposal must be greater than 15% than those opposing it, or that at least 75% of votes are in favour of the proposal.

In a Q&A on DAO voting, Clement from Kleros argues that quorum based voting “leads to tactical voting” — people lie about their true preferences and the best decisions are not truly actioned. Moreover, the wind is taken out of the sails of the DAO when the quorum weight isn’t reached over an extended number of proposals and it might lead to a climate where only very popular proposals ever pass. Given the possibly large number of proposals which may be voted upon and the vast range of types of proposals, this sort of voting scheme is vulnerable to some voter disillusionment. Some individuals may care a lot more deeply about certain proposals than others and have no way to express these preferences which motivates the introduction of holographic, quadratic or conviction based voting.

Holographic Voting

First introduced by DAOstack, holographic voting is an attempt to balance meaningful participation with scale. In a small DAO, all members can consider all proposals, but without some additional mechanism, this is not possible as the DAO grows as illustrated in the figures below.

To understand how the GEN token works, first assume that X-DAO (it could be any DAO) at baseline has a rule stating that all proposals must be approved with an absolute majority, i.e. more than 50% of the total governance token supply. Now if this DAO chooses to use the GEN predictor community, then predictors can signal their beliefs about proposals by staking “for” or “against” it using the GEN token. To be clear, the GEN token can only be used to bet (through staking) but it is not a governance token that can be used for voting. A good prediction is one where the predictor stakes “for” a proposal that the DAO eventually approves and stakes “against” a proposal it rejects. To incentivise “good” prediction, correct bets are rewarded with more GEN tokens whereas wrong bets lead to the loss of GEN tokens.

As noted before, the general rule of X-DAO is that proposals must be approved with absolute majority. However, this is not tractable on scale which is why “boosting” is introduced. If a sufficient amount of GEN predictors bet that a proposal will pass such that it satisfies the dynamically adjusting “boosting” conditions (more boosted proposals make it harder to become boosted), then the threshold for requirement is lowered from the absolute majority requirement to relative majority (more than 50% of those who participated in the vote) and the timeframe for voting on the proposal is reduced significantly. Here is how the process looks like for the governance of DAOstack itself.

1. Initiation. For a proposal to be submitted, the proposer must have a minimum reputation.
2. Enhancement. GEN holders (predictors) make bets by staking in favour (against) proposals they believe voters will approve (not approve).
3. Voting. Those with voting rights vote on the proposal. If a predictor correctly betted that a proposal would be approved/not approved, then they are rewarded.
4. On-chain execution. The approved proposal is executed on the chain.

Note that there are very strong incentives for predictors to identify the proposals that are most likely to be boosted and approved by the DAO as that would not only give predictors rewards for a correct prediction, but also unlock their GEN tokens faster so that they can bet on other proposals. This voting scheme rewards those which have good understanding of the climate of a particular DAO and who correctly predict vote outcomes which creates a meritocracy where those with more knowledge and experience quickly overhaul those with less knowledge, skill and experience. On the other hand, this is a clever way to avoid quorum invoked deadlocks and a highly scalable solution that can process and reach a decision on many proposals.

Quadratic voting

Under quadratic voting, voters can vote multiple times on a proposal using their voting power. However, each additional vote for a given proposal becomes increasingly costly (in terms of voting power) at an exponential rate: $cost = votes²$. This means that voters have incentives to spread out their votes to multiple proposals rather than just casting all votes on the proposal they prefer. For example, 1 vote for the same option will cost 1 token, 2 votes will cost 4 tokens and 3 votes for the same option will cost 9 tokens. This system is being used in making decisions in the grant DAO Gitcoin.

Such systems can be combined with many of the weighting schemes described in the previous section. For example, it could be directly applied to 1T1V systems. Alternatively, it could be embedded with the 1P1V system meaning that members of the DAO that meet a minimum token holding requirement and have a proof of unique identity could be allocated a set and equal voting power budget which they can allocate to competing proposals.

The issue with quadratic voting is that it may be difficult to understand and hence limit participation. If the benefits of quadratic voting are not clear to voters, then it may face a lot of resistance which nullifies the many theoretical benefits it could provide. Moreover, people can game the system by spreading their funds over several addresses and thereby buying themselves additional votes more cheaply. Unless one has a proof of humanity or proof of existence integration in place, this is very vulnerable to such undesirable exploits.

Conviction Voting

Conviction voting is a unique proposal whereby the share of someone’s vote weight, is proportional to the time duration during which they held this particular voting preference. Proposals are thus judged on the aggregated preference of community members expressed over a particular time-span. As opposed to a vote which happens at a discretized point in time, time is suddenly a continuous variable. This does not preclude members from changing their preferences, but it incentivizes people to hold long-term beliefs as their vote-weight increases in proportion to that. As a result, people with consistent, long-term preferences amass more governance influence and new money has a harder time in steering the course of governance decisions.

Setting aside the issue of how exactly this could work in practice — let us briefly outline the advantages of this sort of voting scheme. Conviction voting is incredibly resistant to short term vote swings and collusion as an impulsive short term change of mind leads to a colossal loss in voting power. Moreover, people who simply wish to buy themselves short term governance power through tokens are given a hard time as this would require so called “vote-renting”.

DAO Voting Tools

There exist a multitude of DAO voting tools which aim to streamline DAO voting, in general one has to distinguish between on-chain and off-chain voting. In particular, a few different voting tools will be discussed and the trade-offs with regards to security, cost and flexibility will be discussed.

Voting-Tool Trilemma

Off-chain voting with Snapshot & IPFS

Snapshot is a protocol which processes DAO voting off-chain with the decentralized file storage medium IPFS (Inter-Planetary File Storage System). It is an “off-chain gasless multi-governance client with easy to verify and hard to contest results.” (Snapshot). If a particular DAO wants to use Snapshot to process their proposal votes they need to create an ENS (Ethereal naming system) domain upon which they can add a record on ENS to allow votes to be viewed at that particular address. Users, simply need a wallet address with the protocol’s desired currency which enables them to partake in a vote. There is a huge amount of customizability and flexibility with regards to how users are whitelisted to vote, they may merely be required to hold the required governance tokens, perhaps a membership NFT or through the interaction with a contract. Snapshot supports multiple voting systems; quadratic, direct voting, etc and users can cast their vote by connecting their wallet to Snapshot’s website which will redirect them to any open proposals. This level of flexibility is particularly useful for protocols which adapt their voting styles over time and require unparalleled customizability.

What makes snapshot fee-less is its light-weight stack which doesn’t rely on the consensus of a distributed set of nodes operating the same ledger to record votes, but rather processes votes as signed messages which are easily verifiable online, as they are uploaded and stored on IPFS. Off-chain voting has the huge advantage of circumventing the issue of transaction fees, which is particularly problematic for Ethereum users at the moment. Charging users high fees for voting is a huge disincentive to participate in governance in the first place and severely constrains the scaling and growth of any DAO. A potential downturn is that one has to place some trust in Snapshot in processing votes honestly, correctly implementing the desired vote weighting scheme and uploading the correct signed messages. There is certainly scope for intentional as well as accidental mistakes. Moreover, the poll creator must be provided with a trustworthy and correct interface where vote results can be displayed. The snapshot.io site which users interact with must also be secure and is susceptible to tampering at the front-end level. At the end of the day on-chain voting is more susceptible to nefarious behaviour or fraud than if everyone cast their votes on chain with full transparency and a direct link between an address and a vote, but there is an obvious trade-off with regards to costs and ease of use. Snapshot outperforms any on-chain tool with regards to its low-cost and is currently the most widely implemented DAO voting tool.

On-chain voting Tools

There are various smart contracts which have been designed specifically for the purpose of handling on-chain voting. The most widely adopted ones are “OpenZeppelin” or “Compound Bravo”. These on-chain voting schemes are usually linked to a front-end like Tally or Sybil which point to specific contract addresses when users submit votes. The full on-chain implementation is not without trade-offs, the degree of flexibility and customizability is rather limited and costs remain high. The Compound Alpha implementation had some shortcomings which included difficulties with implementing upgrades and parameter changes. Several new features have been added in the Bravo version which overcome previous limitations as outlined below:

(Source: https://medium.com/tally-blog/understanding-governor-bravo-69b06f1875da)

Governor Bravo supports upgrades and parameter changes. Previously Governor Alpha contracts were deployed with fixed values for all of the key governance parameters like proposal submission threshold, quorum threshold, or voting periods. On the other hand, Bravo allows for governance to adjust parameters after deployment. This streamlines the workflow for interfaces like Tally since interfaces don’t need to update their site in case of a parameter change which used to require a contract migration.

Irrespective of the improvements brought about by Governance Bravo, the degree of flexibility and support with regards to implementing more exotic voting schemes like holographic or conviction based voting is very limited. Moreover, the cost of an on-chain vote, particularly on Ethereum remains high.

The OpenZeppelin implementation which is a modular system of Governor contracts allows the deployment on-chain voting protocols similar the one’s described in Compound’s Alpha&Bravo, but also allows a larger degree of customizability with regards to different aspects of the protocol. It for instance allows delegated voting to be realized. The shortcomings with regards to high fees are however similar (at the time of writing the average gas fees on crypto.com over the last 7 days where about 23 $). This is substantial and can’t be overlooked.

Snapshot have promised to combine the best of both world; on-chain voting and almost gas-less execution by resorting to layer 2’s. Snapshot X (previously named StarkVote) is a collaborative project with the StarkWare team, which is a voting framework built on StarkNet, the layer 2 ZK-Rollup. Votes are fully secure & on-chain but Snapshot claim the cost for a vote on Snapshot X around 1,000 gas or about 50x to 100x times cheaper than on native Ethereum. The core innovation lies in the use of storage proofs to verify balances, these computations which are rather costly on layer 1, can be significantly reduced in cost by resorting to layer 2 technologies. If this works as promised by the Snapshot team, it proves advantageous in various ways; firstly, the process is fully decentralized and trust-less without requiring the intervention of an intermediary which transfers votes onto a file storage platform like IPFS. Moreover, this is entirely permission-less, anyone would be able to interact with it on-chain without going through Snapshot client if they wish to, but at the same time one can integrate Snapshot X with the existing Snapshot client which provides a high degree of customizability and flexibility when it comes to implementing DAO governance protocols. Layer 1 on-chain voting tools, albeit secure, trust-less and permission-less, are severely constrained by the costs they incur, but Snapshot X seems to offer a promising and cheap alternative. This seems to satisfy all three characteristics of a great DAO voting tool: security, low fees and flexibility.

Innovative DAO treasury protocols & governance models

Most blockchain protocols follow traditional funding decision mechanisms through a centralized process wherein grant-seekers can send in applications to the company developing the protocol. Many also allow proposers to submit project proposals along with budget requests to the community, which are then put to one or several rounds of votes using a platform such as Snapshot. However, some protocols have ventured even further in their treasury management. We will here highlight two unique treasury governance models that stand out.

Yearn finance: Workstreams & Multi-DAO

Yearn considers its-self a ”multi-DAO” structure, managed by constrained delegation. Thereby, it aims to strip the protocol of excessive bureaucracy whilst staying true to its decentralized principles. This aims to strike the right balance between decentralization and effectiveness in execution. Within the Multi-DAO there are several decentralized autonomous organizations (DAOs) that contribute to the protocol in a unique way. These groups consist of:

• “YFI holders vote for changes to the protocol or the protocols governance structure
• yTeams focus on specific aspects of the protocol or relevant operations
• Multisig members execute or veto any on-chain decisions” (Yearn Governance)

Token holders form the bedrock; they have the last word with regards to which yTeams exist and carry out which sort of work and about who has Multisig rights. They can vote on any proposals and thus control the decisions actioned by the protocol. This is the sense in which yearn is managed by constrained delegation — it is the token holders who delegate their power to different groups which enact whatever things are desired by the community and improve and manage yearn.

Token holders create and vote for proposals which include Yearn Improvement, Yearn Signalling and Yearn Delegation Proposals, which are used to make any sort of decision. This can include for example a proposal to spend treasury funds, to change multisig rights, to change a particular smart contract or to alter the standard fee structures in the Yearn Protocol. Within this framework, there also exist a multitude of teams with specifically assigned roles and powers, some examples which are shown below:

yTeams (from yearn docs)

This implies that expertise is optimally distributed by giving yTeams very specific tasks and narrowing down the scope of one’s responsibilities as much as possible. Thereby power is also distributed amongst different teams.

Operationally yearn enacts changes by making use of separate work streams which allow for the effective delivery of high-quality work. These work-streams are usually run by a particular yTeam. The whole ecosystem can thus be viewed as an aggregation of separate projects which have specific aims and workflows which in terms of the governance structure means that it is highly decentralized and scalable.

Cardano: Project Catalyst

Catalyst is the name of the governance side-chain of the Cardano ecosystem and Project Catalyst is the name of the series of experiments that are designed to advance on-chain governance of the Cardano ecosystem.

The first difference between Project Catalyst and the benchmark model is that proposals cannot be submitted on a rolling basis. Instead, there are funding rounds wherein proposal can only be submitted during a certain time-frame and to address specific challenges that the community has voted on.

Challenges correspond to priority areas identified by the community and contain a description of what types of proposals can be submitted, objectives, KPIs and a total pot. In the current iteration (fund8) there were a total of 22 challenges addressing specific priorities, as determined by voters in the previous iteration, for example “Grow Africa, Grow Cardano” ($250.000) and “The Great Migration from Ethereum” ($500.000). Utilising the unique multi-asset functionality of Cardano, native protocols can launch “Catalyst Natives” challenges within Project Catalsy which allows the community to submit proposals that address a specific challenge, along with a challenge pot that teams compete for.

In line with Cardano’s philosophy of radical inclusivity, holding ADA is not a requirement for being a Proposer or being a Community Advisor receiving rewards for reviewing proposals. The following describes the process from submission to funding decision.

1. A proposer submits a draft proposal to a suitable challenge through the platform. Proposals outline the problem, solution, team members and budget request. They can only be submitted during a fixed window and must be finalized by a certain deadline.
2. A Community Advisor (CA) is any person who signed up to become CA before the final submission deadline. CAs write reviews on as many proposals as they like along three dimensions: Relevance, Feasibility and Auditability. For each dimension, CAs provide a score (1–5 stars) and a short justification.
3. Veteran Community Advisors (vCA) who have done CA work in past funds rate reviews written by CAs in the current round. Based on majority decision, a proposal can be rated as either “filtered out”, “good” or “excellent” and this determines the reward given to the CA who authored that review. The total budget allocated to vCA rewards is shared based on the share of ratings a given vCA did. New initiatives have been taken to create a system wherein CAs and vCAs that do well can build a reputation over time.
4. Voters enter the voting app wherein all project proposals within a Challenge are are listed from top to bottom in accordance to their average CA review stars. Voters vote “yes” or “no” on however many proposals they like using direct 1T1V voting without minimum quorum.
5. After voting closes, proposals with the greatest difference between “yes” and “no” voting power first receive the funds they requested from the Challenge pot. Project proposals receive funding sequentially until the Challenge pot runs out. Moreover, Community Advisors (CAs) that wrote reviews of proposals that eventually were approved are given bonus rewards — similar to how Holographic voting rewards successful bets.
6. Approved proposals (receiving at least 15% more “yes” than “no”) that did not receive funding in the Challenge they submitted in may receive funding in accordance to the same mechanism as in 5 if there are leftover funds from other challenges.

It is worth noting that the above process only relates to treasury governance. The Cardano ecosystem are still researching the details of their intended protocol governance though some indications have been given that it will make use of something resembling a two-chamber parliamentary system. One chamber will consist of the Cardano Circle where various user groups and stakeholders are represented and the other will consist of technical councils — all of which are elected by the community either directly or through dReps. For a protocol change to occur, both chambers must reach a consensus.

Conclusion

The DAO landscape is a rapidly shifting and in this review article we have placed the emergence of DAOs in their historical context and presented some of the key challenges and innovations with regards to the governance of such organizations. Humans have always worked in groups in various ways throughout history and in many respects, DAOs are no radical break in the context of the development of human organizations. DAOs are unified by the underlying philosophy of embracing decentralization, as well as a desire to innovate autonomous, democratic & collective decision-making. We have outlined and compared difference voting schemes & preference elicitation mechanisms. DAO voting for on-chain and off-chain governance was also evaluated and many examples of procedures, tools and governance models from the existing DAO landscape were presented, focussing particularly on yearn and Cardano. Governance is a wicked problem that may never be fully solved but thanks to the proliferation of Decentralized Autonomous Organizations, we are sure as hell a lot closer than we were before. We believe that some of the research being done with regards to the governance of DAO’s may even spill over and aid with the development of better traditional governance.

🙏 This piece was submitted to the Codeless Conduct Hackathon as an article on DAO governance. Both authors contributed equally to this work and we thank Orlando Fraser, as well as everyone from the Oxford Blockchain Society for useful discussions.

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