The birth and rise of decentralized autonomous organizations (DAOs) attest to sustained momentum in blockchain technology’s progress toward the renovation of global infrastructure in favor of people power.
As microcosms of this North Star, DAOs should be — if they’re not already — asserting a collective self-awareness around how they operate. DAOs are always overflowing with exciting new ideas, proposals and discussions. But without an effective operating system and consistent reflection, it doesn’t really matter how many good ideas are put forward. The underlying nature of the DAO in alignment with its overarching purpose will always be at least partially compromised.
Voting systems are proving pivotal to shaping a DAO’s output and ensuring a project’s success. It may come as a surprise, but the majority of DAOs have a Gini Coefficient tending to 1, meaning their voting power is about as centralized as you can get (on a scale of 0 to 1). Tokenized voting systems, where an individual’s voting power depends on the amount of tokens they own, lead to whale dominance. Data from Chainalysis found that just 1% of all holders had 90% of the voting power across 10 major DAO projects.
This imbalance of power can have huge knock-on effects for a community, disengaging large portions of DAO members who may be left feeling disempowered and reluctant to exercise whatever voting prerogative they do have. On top of this, those that do hold the majority of decision-making power can often have reduced interest in the nature and outcome of proposals. A recent report on DAO governance found that voter participation had stooped to numbers as low as 20% on average.
DAO members who may hold niche, specific knowledge on areas that directly influence the course of a project are left unable to contribute with substantial impact. This can deny DAOs of the potential to integrate new ideas and shift in new directions.
Multi-stakeholder governance as a solution
While capital is an important element in weighting votes, it is not sufficient alone and undervalues the knowledge and experience of other stakeholders. DAOs are, by design, only as strong as every member of their community. As such, for DAOs to survive and fulfill their true potential, they must fix these governance flaws. The emergence of multi-stakeholder governance models is blazing a trail in addressing these challenges.
ApeCoin DAO, for example, has created the ApeAssembly that can be accessed by both investments or by participation in their forums, while Optimism is seeking to balance the power of token holders through the creation of a Citizen’s House.
Credential-based governance models that leverage verified credentials or soulbound tokens using tools such as Otterspace and Gateway pioneer the idea that voting rights should be earned not bought. These have proven to be highly effective. In some cases where votes are distributed equally to each person, a Gini Coefficient of 0 can be achieved.
In tandem, proof-of-participation is emerging as a revolutionary method of tipping the scales back toward a more egalitarian ecosystem, creating a uniquely flat power dynamic among community members. Prospective voters must demonstrate a genuine impetus to contribute to and engage in the community’s ecosystem by completing a series of tasks. Once their membership is approved, they are then granted a single voting token, which remains in limited supply and all of which hold equal weight.
How to approach designing a multi-stakeholder governance model
Designing a multi-stakeholder governance system is not easy. In doing so, three key elements should be considered.
- Complete representation: How to determine which stakeholders are represented?
DAOs should think carefully about which stakeholders bring unique expertise to a project. Builders, for example, are often underrepresented but bring critical perspectives about the systems underlying a project, the viability of initiatives, and what it takes to drive impact.
Some DAOs may also look to recognize community members, or “Citizens,” as Optimism has done. By granting voting weight to more active and engaged stakeholders who embrace a sense of civic duty toward a project, those who are most likely to make decisions in alignment with the project’s mission and values have their voices heard. The million-dollar question is how to measure these subjective factors. Experimentation in credential-based voting is going to be industry-defining in this area.
- Dynamic representation: How does representation evolve?
Projects and organizations constantly evolve, and we know that Web3 in particular is evolving at a rapid rate. As such, governance models can’t be designed too rigidly. Systems need flexibility to ensure they can adapt to reflect the long-term reality of a project or organization as it grows and develops.
If representation doesn’t evolve over time with the DAO, it can make it easier or harder for stakeholders to earn voting rights. This could compromise the DAO’s security in the former case or limit the DAO’s growth in the latter.
DAOs looking to leverage verified credentials or soulbound tokens should pay particular attention to how their credentials exist in time. Do they respond when a stakeholder no longer exhibits the behavior that earned them the credential in the first place? How quickly do they respond? Calibrating the difficulty level to earn credentials, and the sensitivity with which credentials are revoked will significantly impact the effectiveness of representation in a DAO over time.
- Balancing power among stakeholders
Different stakeholder groups bring unique and valuable perspectives. If a DAO treats stakeholders as a monolith, calibrating the balance of power between different stakeholders becomes difficult. It can help to introduce houses or branches to the DAO, each pooling a specific type of stakeholder together, with equal power to each branch. The distribution of stakeholders within a branch becomes less important as they’ll never gain more power than the other branch(es).
Like any process of innovation within the blockchain ecosystem, the evolution of DAO governance will bring its own elements of trial and error.
Designing effective multi-stakeholder governance is not only crucial to protecting minority interests and upholding the decentralization of Web3, but it also has the potential to usher in an era in which DAOs make decisions more effectively than legacy organizations.
The development, or underdevelopment, of new models such as the proof-of-participation voting system, can be the difference between the views of those most equipped to influence the challenges and solutions of infrastructure development being heard or falling on deaf ears.
This in turn will determine how effectively, at a micro-level, DAO operations can bolster the macro-drive toward mass decentralization.