When blockchain began to mature into what we see as Web3 today, and platforms began developing more and more complex use cases, one of the biggest dreams for this ecosystem was a collection of large, powerful platforms that could accomplish amazing feats impossible for Web2 websites and social media platforms.  More so, the concept of decentralization was tantalizing.  What could be better than a powerful software with no central control, no single physical building, and no group of elite owners dictating how the company was run?  Instead, decentralization offered a scattering of control, community participation and ownership, full onchain transparency, and the ability for that community to guide the future by way of a Decentralized Autonomous Organization (DAO).

Dreams like this, while technically possible, are rarely achieved, especially when they so thoroughly upset the balance of power.  Instead of allowing those with the most money to control an organization, this idea literally gives the power to the people.  What would incentivize a company to do that?  And does the technology really create the checks and balances to allow for a smooth governance by the community?  Finally, do the DAOs that currently exist strike the right balance between allowing the full community to participate, while preventing bad actors from exerting too much “free speech”?  The short answer is that DAOs are alive and well, and there is a healthy community element to voting on proposals that guide the future of the platform.  However, the platforms still need to evolve to strike a better balance on how to include true community ownership in submitting proposals for the DAO to vote on, with few platforms (dYdX in particular) actually having requirements in line to keep incentives while being inclusive to the community.  Let’s dive in and find out more.

DAO Voting Today

Like any governing body, DAOs have branched out into many forms, fitting the ideas of the platform developers and the communities that support them.  DAOs are also meant for different purposes, including the general guidance of a Web3 platform, but also to decide where funds should be invested, where grant money should be awarded, how strategic decisions should play out, and even how actual code should be modified on the core smart contracts that make up the platform.  

The range of goals do still take similar forms in how the DAO is created.  In most cases, the DAO is formed by setting up the rules of participation.  Members typically need to either hold or stake a minimum amount of the platform’s token. DAOs today perform two main tasks:  proposing new ideas, and voting on proposals.  Once members have met the requirements for joining (usually some level of holding/staking a token), they can sign up as DAO members and start voting.

The simplest method is a token-based vote, with each token held counting as one vote.  This creates the obvious issue of whales controlling the direction of the platform (making it not so different than a publicly-held Web2 company), so other platforms have clever mechanisms to make the voting more community focused.  Quadratic voting is one such method that exponentially limits the voting power of large token holders.  The more subsequent votes a member would like to cast, the more tokens each vote will cost: X votes costs Xx tokens (1 vote = 1 token, 2 votes = 4 tokens, 3 votes = 9 tokens).  This gives heavy token holders more voting power, but not so much that a small percentage of the community can overpower the combined might of the majority.  In other platforms, voting is similar to many governments of today, with the community electing a small number of representatives to vote on proposals.  This creates a more efficient voting process, but can dilute the wishes of the community as a result.

Proposals, and Handling Unintended Consequences

There are a number of challenges in any DAO setup, as unintended consequences abound.  A DAO is most at risk when it is first launched, as large token holders could have an unusually large voice before the DAO is appropriately distributed across many diverse members.  Having too large a say just because you hold more tokens is an issue without quadratic voting, but so too is not meeting a quorum for votes because members are not participating.  Incentives like holographic consensus can help with this (pioneered by DAOstack), where members “bet” on proposals winning or losing, and getting rewards when correct.

So how do the proposals form in the first place?  This too varies, though the basic steps are similar.  Like with becoming a DAO member, there is usually some need to hold a minimum number of tokens.  This key area is where the average member of the community can often feel locked out.  Platforms like Alphaping DAO require the member to hold at least 100,000 tokens to submit a proposal, and Arbitrum DAO requires an eye-watering 1 million tokens.  For Abritrum, to even submit a “temperature check” poll out to the community, it takes 100k tokens.  While this certainly prevents most people from having a “busybody” attitude and sending proposals that are not well thought out, or that could create harm to the platform if approved, it still allows this for those holding massive amounts of tokens.  This is the biggest stranglehold for DAOs today, as the ability to submit a good idea is largely dependent on either holding a massive number of tokens, or going through the extra steps to find a delegate to submit the proposal for you.  This attitude isn’t everywhere however, with dYdX Chain allowing proposals to be submitted with a minimum 2,000 tokens.  This creates enough incentive for users to prepare their proposals carefully and for the good of the platform, without alienating the majority of the community who is meant to be a true governing body.

Lessons Learned, And Where We Go From Here

The spirit of DAO governance has been an overwhelming success for decentralization, showing that through smart contracts and well designed platforms, a group of individuals across the globe can produce intelligent governance for an entire Web3 platform.  The voting mechanisms established have worked especially well, with a large portion of the community able to participate, with those having more tokens (and more stake in the game) with more of a say.  However, elements tamper their ability to overwhelm the voice of the larger community, ensuring the overall voice is representative.  The proposal mechanism is similarly designed, though there seems to be a much higher threshold to participation of proposal submissions which arguably excludes many positive ideas from those who can’t afford to hold the large token amounts needed.  There is hope, however, with platforms like dYdX Chain experimenting with much lower thresholds and showing so far that this creates more inclusion without risking a flood of poor quality proposals.  

This experiment will continue to drive Web3 and show us what is possible with blockchain technology creating truly decentralized organizations.  It will be exciting to see DAO’s continue to evolve, innovate, and show what can be done with the power of the people.