DAO Governance — Usage Made Easy
Decentralized Autonomous Organizations (DAOs) are no longer new, they’ve gained so much traction that it has become a regular word used amongst crypto enthusiasts. Several DAOs have emerged since the first DAO (The DAO) was launched in 2016 with different goals and ambitions; more often than not they’ve always achieved their goals. More recently, a former ‘CISCO’ employee launched a DAO to purchase the Denver Broncos U.S. National Football League team for around $4 billion. The BuyTheBroncos DAO aims to give fans a chance to own a piece of the team, no matter their level of wealth. But will they succeed? Let’s wait to find out.
Before going further, let’s take time to explain what a DAO is and how it’s governed/controlled. Also, we’ll look at understanding governance within a DAO and the basic criteria a DAO contributor should know about governance, and much more. Let’s dive in.
Contents
what is a DAO
Understanding Governance Within a DAO
DAOs With Governance Framework
Importance of Decentralized Governance in DAO
What DAO Contributors Should Know About Governance
Comparisons Of On-chain and Off-chain Governance
Governance Tools
DAO frameworks
Using Tally as a Case Study to Describe How These Governance Tools Work
Most Notable Governance Protocols
What is a DAO?
A “Decentralized Autonomous Organization” or DAO, is a community-run organization with no central authority. It is completely self-contained and transparent. DAOs are cooperatively owned and governed by their members. Decisions are made by suggestions and proposals that the group votes on over a set period of time.
They are characterized by the use of blockchain technology to provide a secure digital ledger to track financial interactions across the web, guarded against forgery and manipulation by securely keeping track of the creation, modification, and dissemination of a distributed database.
DAO’s rules are embedded into a smart contract which executes by itself based on the behavior of the protocol. There is no need to interpret these program rules as they are automatically implemented when the specified conditions occur which are agreed upon such as decisions, proposals, voting, and even the code itself can all be publicly audited at any time.
DAOs are designed to be completely transparent so that all financial operations performed by the company are visible to all shareholders and the DAO community. This high level of transparency is essential to the concept of a DAO. Just like the underlying motive behind cryptocurrencies, the idea of a DAO is to surpass the traditional centralized management of a company and create an absolutely transparent organization whose actions and finances are completely public.
DAO Governance
According to the Governance Institute (of Australia), Governance in general terms is the framework of rules, relationships, systems and processes within a policy and by which authority is exercised and controlled in corporations. It encompasses the mechanisms by which companies, and those in control, are held to account. It encompasses the system by which an organization is controlled and operates and the mechanisms by which it, and its people, are held to account. Ethics, risk management, compliance, and administration are all elements of governance.
For a DAO, the above definition applies too but the difference is in the mode of operation and application of their governance. so what is governance in DAO?
DAO governance is a type of governance where management decisions for the growth, development, and achievement of goals rests on the collective responsibility of all active members and is carried out through voting on proposals that can be initiated by any member after all requirements are meant. The decision is passed and implemented if the majority (the number depends on the DAO) votes for the proposal.
Understanding Governance Within a DAO
To help understand how governance works and the various components in a DAO, a DAO contributor has to know and understand the various notations and terms common to governance in a DAO which are well defined in the processes involved in DAO governance. These processes are outlined below:
Process of Governance in DAOs
The most popular DeFi and DAO governance structures all follow the same general process below, although not all follow through all the processes listed, but, these are the ideal processes/procedures for decentralized governance.
1) Discussion
Discussion is the first step of Decentralized governance, as stakeholders attempt to gauge the sentiments of the community around specific issues and potential changes. Discussions happen across a platform’s official governance forum and informal communication channels. Ideas and policies are ideally the centers of conversations, but politicking often occurs as users try to convince others in the community to support their ideas or proposals.
2) Improvement of Proposal
Improvement of proposals is an attempt to systematically and transparently put forward new changes to the system by using a generalized template consisting of the proposal’s context, description, and potential code change. Most improvement proposals are technical, quantitative, and mainly submitted by developers. Once a code change is proposed, it can be discussed and reviewed by the community — then changed further if necessary.
3) Quorum
A quorum is the minimum amount of participation required to pass a vote. For example, a proposal may have 100% support from voters, but if the number of token holders who vote fails to meet the minimum percentage required, then the vote is often automatically canceled. “One of the biggest problems in DeFi governance is low participation”. People often want to hold tokens for speculative purposes and may not want to participate in governance because it is time-consuming, less instantly gratifying, and/or they do not have a strong view — or any view at all — on the proposed change to the protocol.
4) On-Chain vote
For most DeFi protocols, one token equals one vote, and a simple majority of more than 50% is enough to execute a new proposal. The more tokens an entity holds, the more weight its vote carries. Another major issue of DAO governance is the issue of a few whales with large token holdings manipulating the entire vote to their favor at the expense of the few-token holders. If a token holder does not want to vote directly, their voting power can be delegated to another address. Once a vote is passed, the proposal can be executed.
Considering AAVE V2 as an example; let’s see the impact of whales on voting results. @Ndhung1104 analyzed How much power do these big voters actually have, and how much they can impact. Here’s his result:
In AAVE V2, most proposals need between 300k-400k AAVE of voting power in order to pass an AIP with no objection. Top 5 on this dashboard alone have 420k voting power which means their delegated voting power alone is enough to pass any recent AIP.
5) Snapshot and Compilation
This refers to the process of recording the state of a voting system of a DAO at a specific point in time to aggregate the outcome of the voting process.
several tools are used for optimum dispensation of a voting process for speed, low gas fees, and accurate results. some of these tools are Tally, Snapshot, Gnosis safe snap, and so on
6) Implementation
Once the voting process is concluded, the outcome of the vote can then be implemented as required.
A Typical Example
The process of voting in AAVE V2 is as follows:
- A proposal or Aave Improvement Proposals (AIP) is first submitted. More than 200 proposals have been submitted since its transition to V2 in December 2020.
- To submit a governance proposal under v2, users first create a Request for Comment (ARC) outlining the proposal and sharing it with the community.
- Snapshot polls are then conducted, and eventually, the ARC is turned into an AIP which goes up for a vote.
- Users then cast and confirm their votes.
DAOs With Governance Framework
Different DAOs have emerged since the advent of the blockchain and the DEFI explosion in 2020 with diverse functions and roles in the adoption of cryptocurrency. These DAOs have different tools and frameworks in which they apply (such as a governance tool) to accomplish their goals while some DAOs exist generally as a governance tool that can be used and applied across different DAOs helping them manage their governance proposals and voting. Here is a comprehensive list of some of the DAOs that use governance:
The full list is available here
Importance of Decentralized Governance in DAO
1) Transparency
The decisions which are proposed are voted on for implementation by the protocol. The totality of the process is made public form the first stage to the implementation stage through smart contracts, hence ensuring transparency in governance. This is the major advantage of decentralized governance over the normal centralized governance we’re used to, thus increasing the trust placed on these protocols by investors and the community.
2) Distribution of Power
Stakeholders, and the community are more involved in the decision-making process of the protocol thereby giving a feeling of ownership and thus improving the level of confidence generally among members. Every active member shares a portion of the DAO’s decision and ownership and this feeling of distributive control and ownership is what drives the speedy growth of DAOs
3) Unbiased Decision
Since the decision is not solely the responsibility of the founding members or an individual alone, rash and unwholesome decisions concerning changes to the platform cannot be made. All decisions go through the voting process, where the community and stakeholders are involved, hence the best decision for the well-being and improvement of the platform are made through the collision of ideas.
4) Community Growth
The community's involvement in governance will lead to more active and robust participation in other aspects of the protocol, therefore, increasing the numerical growth of the platform. The coming together of like-minded people who share collective responsibilities of decision-making of a platform triggered by decentralized governance in DAOs has led to a massive increase in the population of DAO’s members.
5) Increase in Value of The Governance Token
The governance token which is the key tool at the center of decentralized governance will increasingly grow immensely as more proposals are made and more votes are cast increasing the use case of the token. Also, more tokens will be purchased for more voting power.(more tokens, more voting power); the demand across exchanges for this token will definitely increase which increases the market value of the token. This is most notable in a protocol with a large community with constant platform changes and proposals.
6) Smoothness
The lengthy protocols of hierarchy, board meetings, and deliberations on decisions that are present in centralized governance are eliminated in DAOs where the duration of decision-making takes only the allotted time for the voting process after which implementation follows.
What DAO Contributors Should Know About Governance
Starting a DAO has been made easy with different tools that are been developed to help creators and developers start up a DAO in the most easy way. Governance in a DAO is a major component and a distinguishing factor between a DAO and other organizations, therefore much attention and care should be taken in setting up a governance mechanism for a DAO so as to suit the main purpose of the DAO. Here are some important points to pay attention to:
1) Governance Mechanism
There are 2 mechanisms that can be set up for governance, which are on-chain mechanism and off-chain mechanisms. Depending on the structure of the DAO, you need to choose from this two. Most often, the on-chain governance mechanism is preferred because it depicts the true nature of decentralized governance offered by DAOs.
Comparisons Of On-chain and Off-chain Governance
On-chain Governance
On-chain governance is a system for managing and implementing decisions directly on blockchain using smart contracts. In this type of governance, rules for instituting changes are encoded into the blockchain protocol. Developers propose changes through code updates and each node votes on whether to accept or reject the proposed change.
Off-Chain Governance
Off-chain governance is a type of blockchain governance in which decisions, framework for rules and changes are made informally by the stakeholders and core developers, away from the primary code base of the blockchain.
2) On-chain Governance Mechanism
The options available and those being developed was well detailed by Vitalik Buterin;
a) Token-based voting
This involves the use of tokens (including NFTs) to cast votes. The voting power of a user depends on the number of tokens or coins held or the rarity of an NFT held.
This mechanism is used by most DAOs out there, but there are some problems with this mechanism:
i. Small group of rich participants is better than huge groups of small-holders at successfully executing choices.
ii. The governance of coin voting empowers coin holders and coin holders’ interests at the expense of other members of the community.
iii. Concerns about a potential conflict of interest
b) Proof of personhood systems
These are Algorithms that validate that identities correspond to distinct individuals in order for governance to assign one vote per person. See here for a review of some techniques being developed, and ProofOfHumanity and BrightID for two attempts to implement this.
c) Proof of participation:
POAP has attempted to implement this. These are systems that verify that an account belongs to a person who has taken part in an event, completed some educational training, or contributed to the ecosystem in some way.
3) Governance Tools
A governance tool is a tool that assists in the creation and maintenance of an organized collection of policies, processes, and protocols that govern a voting/governance process, enhancing the efficiency and throughput of the whole process by providing better ways through which data is stored, used, and managed in the said organization (DAO).
Different governance tools for DAOs have emerged since the advent of the blockchain and the DEFI explosion in 2020 to help in setting up, governance, management, etc. of DAOs. The governance tools available presently are listed below:
Full list here
4) DAO Frameworks
The DAO frameworks are sets of smart contracts and data interfaces that allow users to create and run an on-chain organization with a few mouse clicks, and provides a set of “out of the box” essential services like fund management, membership administration, and voting. With the aid of these frameworks, DAO creators can configure their own parameters, such as the length of the voting period, the quorum required for the proposal to pass, and the number and share of existing members. Some of the DAO frameworks available to DAO contributors are shown in the picture below.
Now let’s group some of these frameworks according to the level of coding they require:
a) No-Code Solution Tools: There are a number of no-code solutions where these providers offer to run some or all the governance operations of your DAO for you. They are great solutions, reducing the amount of work you need to do, helping you focus on other aspects of your DAO.
They are all great tools to help you set up your DAO and if you want to work with one through their UI.
b) Coding Solutions
Using Tally as a Case Study to Describe How These Governance Tools Work
What is Tally?
Tally is a voting and governance analysis tool that allows members of a protocol DAO (such as Bifi, YAM finance, Gas Dao, or Gitcoin, for example) to vote on ongoing on-chain proposals, delegate votes to a third party, and review prior proposals.
Tally empowers user-owned governance through a voting dashboard, governance tooling, real-time research and analysis, and an evergreen wiki. It also displays the results of past proposals, allowing the public to see who voted, how much voting power they had, and whether they voted for, against, or refrained on a proposal, bringing transparency to the voting process.
How Does it Work?
Tally is divided into three main areas: Governance, Voter, and Proposals.
Governance: Allows users to explore DeFi protocols, crypto exchanges, and tokens to see specific information like total voters, addresses, active voters, delegations, and proposals. It shows details about a specific governance system, including current and past proposals and vote delegate addresses.
Voters: Allows users to see how the holders of individual addresses have voted and their percentage of token holdings across all the protocols that Tally monitors
The top of the voter page displays key details about that address’s participation in the selected governance system which include total votes, total tokens, voting power, e.t.c.
Proposals: The proposal page shows details of a particular active or past proposal. The top of the page shows the proposal title, current status, the Ethereum block when the voting period ends, and the address that submitted the proposal.
The Problems Tally solves
1) In-depth Analysis
Tally provides an in-depth analysis of governance operations carried out on its platform. The voting power of a user with respect to the total votes is displayed using analytical embedded in Tally. This helps to provide a more detailed voting process for future plans.
2) Archiving
Tally is a front-end governance analysis tool that stores all proposals, voting, and voting outcomes of all previous proposals and does a comparison with the outcome of a current proposal. it stores all voting activities that are carried out on it. With Tally, you get the motions that were proposed, who voted for what, and their voting power.
3) Multi-protocol
Tally links all accounts of its users across different platforms; a user can view all the protocols where they’ve participated and currently holds voting positions as long as the protocol is supported by Tally.
4) More transparency
Tally provides user-friendly dashboards, displaying all activities of all active and past proposals analytically, visible by anyone in real-time. Transparency which is a core value in DAOs is enhanced more vividly with Tally.
Most Notable Governance Protocols
Some really good governance frameworks have emerged thus far, but just two (2) are mostly used and hence become the most popular because of few reasons that will be mentioned here. These protocols are:
1) Compound Governor
The Compound protocol is governed and upgraded by COMP token holders, using three distinct components; the COMP token, governance module, and Timelock. The governance module currently used be compound is “Governor Bravo". Compound Governor was created by Compound Labs specifically for use with COMP voting and proposals. Many other protocols have chosen to copy (or "fork") Compound’s governance structure rather than inventing their own because the code is flexible, open-source, and has been well validated. Compound governors have become one of the most widely used governance frameworks among DAOs.
Initially, Governor Alpha was the governance module deployed by Compound before they migrated to the more recent Governor Bravo. Both are seemingly the same but with a few key changes, for more comparisons, follow this link. The following are the reasons for the huge adoption of compound governance frameworks among DAOs
I) Decentralized
II) Simple
III) Extensible. Click for more details.
Tally currently supports Compound governance framework, which means that every DAO built with this framework can be integrated into Tally.
2) Aragon
Aragon is an open-source software used to maintain and create decentralized autonomous organizations (DAOs) on the Ethereum blockchain it is an organization that supports the interactions between the platform’s community of DAOs.
Aragon software can be used by organizations that collaboratively manage finances and decision-making through its decentralized apparatus, it is also used to create clubs, companies, non-profits, etc. According to Aragon, more than 1,700 organizations are built on Aragon, and it is used by projects including Curve, Decentraland, and PoolTogether — with a total project market cap of over $3 billion USD. Aragon has several offerings that serve as tools for specific purposes, they are:
i) The Aragon Association: A non-profit organization that distributes the proceeds of the Aragon token sale;
ii) Aragon Court: A dispute resolution system;
iii) The Aragon Network: A wider DAO that is made up of a network of DAOs;
iv) Aragon Govern: A pioneering framework for frictionless DAO governance with on-chain execution and plug-in dispute resolution. It is simple and low-cost, vote less execution, execute/dispute.
v) Aragon Voice: The ultimate solution for creating and managing proposals and voting in a decentralized, cost-effective, and secure manner.
Some developers find the use of Aragon easy because of its speed and ease of use.
Closing Thoughts
Complete decentralized on-chain governance has gained its ground and has proven to be more sustainable and efficient in diverse ways, looking at the huge success and growth of organizations practicing it, hence it should be fully embraced by Blockchain organisations still practicing off-chain governance.
Although, it is still under active development as it’s technology improves and completely matures, developing new ways to solve some of its ineffeciencies, this is the best time to transition your company into a DAO if it fits your purpose.
