Decentralized autonomous organizations (DAOs) are one of the most exciting innovations in blockchain technology and cryptocurrency. As interest in DAOs grows, understanding their governance models is crucial. This article provides an in-depth overview of DAO governance.
What is a DAO?
A decentralized autonomous organization is an entity with no central leadership. DAOs are internet-native organizations collectively owned and managed by their members. DAOs codify rules and decision making procedures on blockchains like Ethereum, enabling governance without traditional hierarchies.
- Decentralized — Power and control are distributed among members, not concentrated.
- Autonomous — DAOs are self-operating according to rules encoded on the blockchain.
- Organizations — DAOs coordinate members and resources to achieve shared goals.
Some key benefits of DAOs include transparency, flexibility, democratization, and resilience. DAOs allow globally distributed individuals to coordinate and govern themselves in new ways.
DAO Governance Overview
DAO governance refers to the processes by which DAOs make decisions. Since DAOs have no central authority, governance procedures are executed via smart contracts.
DAO governance includes:
- Proposal processes — How new ideas are submitted and vetted.
- Decision making models — How proposals become approved.
- Incentive structures — How positive behaviors are encouraged.
- Conflict resolution — How disputes get settled.
- Software protocols — The code underlying governance mechanics.
Well-designed governance maximizes a DAO’s potential. But governance is complex, andthere is no one-size-fits-all model. DAO founders must carefully consider governance tradeoffs.
Key Elements of DAO Governance
There are several critical components to DAO governance.
1. Tokenized Voting
Most DAOs issue tokens to designate membership. Token holders can then vote on proposals. In principle, tokens represent voting power — «one token, one vote».
Different token models include:
- Reputation tokens — Non-transferable tokens earned through past contributions.
- Utility tokens — Fungible crypto assets with attached voting rights.
- Equity or governance tokens — Core to membership and voting power.
Token distribution is highly influential. More decentralized ownership structures tend to be viewed as more «democratic».
2. Proposal Rules
DAOs require processes to determine what gets voted on. Key parameters include:
- Who can submit proposals?
- Are there format/content requirements?
- Do submissions require staking tokens?
- Is there a review process or minimum vote threshold?
Rules aim to filter proposals, but overly strict requirements can constrain innovation. There are always tradeoffs.
3. Decision Making Models
Voting is the core of DAO governance. Different models include:
- Simple majority — Proposals pass with 50%+ votes.
- Supermajority — Requires larger thresholds like 66%.
- Quadratic voting — Uses vote weighting to maximize participation.
- Liquid democracy — Mix of direct & delegative voting.
No single model is ideal. Most DAOs take a hybrid approach based on proposal types.
4. Incentives & Rewards
Incentives encourage participation and align stakeholders. Examples include:
- Reputation tokens for active contributors.
- Bonus voting power for long-term token holders.
- Token rewards for voters and proposers.
Well-designed incentives limit self-interest and «free riders». But excessive incentives can also skew behaviors.
5. Conflict Resolution
Disputes happen. DAOs plan resolution processes like:
- Appeals systems for challenging results.
- Mediator/arbitrator roles for resolving disputes.
- Emergency veto powers as last resort.
Formal conflict resolution avoids gridlock. But it is also important to foster a collaborative culture.
6. Software Architecture
DAOs rely on blockchain software and smart contracts. Technical architecture enables and constrains governance options.
Some design choices are flexible and amendable. But core components are «baked in» and hard to change.
Understanding code tradeoffs is critical when evaluating DAO governance. Technical design and governance design go hand in hand.
DAO Governance in Action
DAO governance is complex because there are so many moving parts to balance. To see how the pieces fit together, examining real-world examples is useful.
Two leading dao governance models are:
- MakerDAO — Relies heavily on technical contributors who hold special voting power. Community input occurs off-chain. Suitable for infrastructure DAOs.
- MolochDAO — Governance power directly derived from token shares. Proposals and disputes handled on-chain. Suitable for democratized membership DAOs.
There is active debate about whether «decentralized» governance is even possible. But DAOs offer a grand experiment in collective coordination without centralized control.
DAO governance mechanisms are foundational for decentralized organizations. By codifying shared rules and incentives, DAO participants can coordinate and collaborate at scale.
There is significant work ahead in developing best practices. But DAOs provide an opportunity to reduce cumbersome bureaucracy and democratize governance. Their disruptive potential is only beginning to be tapped.