Part II : DAOs x Governance - A Match Made in Heaven!

Part 2: DAOs x Governance - A Match Made in Heaven!

Brief Recap ⬇️

Our part 1 of ‘DAOs x Governance - A Match Made in Heaven’ took you through what DAO governance is, who votes, how they can vote, why governance is the true foundation of a true DAO, different governance models, and how to improve the present governance models. We delved deeply into how choosing the right governance model can impact your DAO’s engagement, speed of decision-making and security. Additionally, the different DAO governance models that we explored, ranged from direct on-chain democracy, to direct off-chain democracy, to representative democracy, and lastly, quadratic democracy. The 2 different methods that we recommended for improving governance in DAOs were: (i) delegated voting, and (ii) holographic consensus.

In case you have not had the chance to check it out, feel free to access it here. ✔ What’s next for DAOs x Governance? 🤔

Things to Factor in while choosing your Governance Model

There are a couple of definite things that you must factor in 100% before you choose your governance model. 

For instance, firstly, you must look at the size of your DAO - this could either be (a) its potential size, or (b) its present size. If you hope that your DAO membership is quite huge then you need to ideate a complex governance model with different tiers. However, if you hope to have a small curated DAO then you may come up with a rather easy tried and tested governance model to fit your DAO. Therefore, the size of your DAO is probably one of the first prime considerations! ⚖️

Secondly, determine the decision-making process. The 2 primary questions that you will ask here are: (i) who votes?, and (ii) how can they vote? These questions have been duly elaborated upon in our Part 1 of the governance series. 📚

Thirdly, conflict resolution! Just like a traditional company, conflicts are bound to arise in a DAO as well and how participative you make the conflict resolution process, is another reflection of the DAO governance model that you’d choose. The general routes are that one creates a committee to handle these disputes from within the DAO members itself, or that everybody votes on the conflict and the majority decides the verdict. Of course, with the evolving governance mechanisms for DAOs, you can also come up with your own unique conflict resolution mechanism. 🪄

Lastly, nothing lasts forever, right? 💭 It’s unlikely that the DAO governance model that you choose when you begin, is the exact same one that you will be following throughout. Therefore, you would have to update your DAO governance model and in such a scenario, choosing a less complex DAO governance model would be a better solution. To conclude, depending on how often you’d have to update your DAO governance model, you choose the right flexible model to begin with. 

Key areas of governance

There are a multitude of areas of governance when it comes to DAO governance. However, the three key areas of governance are: ⬇️

(i) Managing risks - Yes, DAOs have risks too! 😏

DeFi and NFT DAOs primarily hold treasuries that span into millions or sometimes even, billions of dollars of assets. These assets are often risky and managing the currency exposure of a DAO is absolutely critical to ensure that the future operations of a DAO can be smoothly funded. For instance, if a certain governance decision of a DAO fails, then having these assets can ensure that there is a certain insurance of sorts to fall back on. DAOs need to ensure that they are a financially aligned community that acknowledges its sensitivity to potential threats and models itself to assess the nature of the threats. This obviously works supplementary to ensuring that the governance process that is in place, can help make the necessary changes to the asset management while ensuring security, throughout. 💰

(ii) Managing assets - Yes, DAOs have assets too! 😏

Asset management in DAOs primarily needs to be ‘collective’ in nature and this can only be ensured by choosing the right governance models. Usually, most DAOs have some initial capital that helps them not only launch but also fund the nascent operations. This capital is in the form of governance tokens and is held by some or all members of the DAO, in accordance with the DAO governance framework that one opts for. Since the said capital in the form of the DAO’s ‘asset’ is limited in nature, its extremely pertinent to ensure collective asset management because the best practices in corporate governance extend themselves in applicability, to DAOs as well! 📈

(iii) Curating assets - Which asset is good enough to admit? 😏

Every DAO governance model has its own format of asset curation - sometimes, DAOs require voting to be done by all members of the DAO, for making a decision about removing an asset or admitting an asset. On the other hand, some DAO governance models allow for permissionless asset addition, where any holder of governance token(s) can choose to add an asset. However, governance decisions surrounding the admissibility or removal of an asset also largely affect the security of a DAO, and must be made, keeping that in mind. It is mostly recommended that a DAO, within its governance model, incorporates parameters that the DAO participants must consider while determining whether a certain asset needs to be admitted or removed. 🗞️

Are these governance models accountable?

Token-based governance models = tokenizing democracy

While token-based community governance models for DAOs are often the common choice, they may not always be the most accountable choice. Granted, this model ensures the overarching narrative that decentralizes power as well as creates a participative governance model; however, accountability is a crucial element of a democracy that is quite forgotten in the implementation of this model. 😓

The reason that accountability does not factor into the picture is because in a token-based governance mode, DAOs don’t hold the voters accountable for their actions. This means that Alex, a voter, can vote with an ill-intention that even if it passes, it does not restrict his ability to participate in future governance procedures. Similarly, if Alexandra voted maliciously to pass a certain decision, she would not face any direct monetary consequences of the same. Therefore, voters can easily be bribed or they can collude to execute a certain decision that may not be in favor of the DAO’s general narrative. 😈

No KPIs = no success

Even if a governance decision is passed, there is no way of actually determining how successful the governance decision is, without accurately delineating key performance indicators, or KPIs. Sometimes, DAOs can be too decentralized and this may be a con as well as a pro in itself. This is because there is an obvious absence of leadership. This absence of leadership can then lead to an absence of compelling vision as well and this compelling vision could have been the route to a singular achievable goal for the DAO. Therefore, laying down KPIs before every governance decision is atleast a measurable solution to determining if the governance decision that was passed, has been successful or not. 🧮

DAOs also need to be careful of the law - DAOs are simply not above the law! 

While there are no specific laws in most countries that govern DAOs, a DAO needs to choose its governance structure wisely, in order to ensure that they are not infringing any laws. For instance, there have been legal actions against the Ooki DAO and the bZeroX DAO by the U.S. Commodity Futures Trading Commission. This was primarily because of the DAO governance structure that they chose and how they executed it in a manner where they were issuing unlicensed securities. With the global and borderless nature of a DAO, it therefore becomes extremely pertinent that every DAO sets a regulatory framework for itself in its governance model, in order to stay within the lines of the law. 🧑🏼‍⚖️

To Conclude: What are the leaders saying?

Vitalik Buterin, the Co-Founder of Ethereum argues that in order for DAO governance to be successful, DAOs need to be highly decentralized and they must actively incorporate elements of political science as well as corporate governance. In implementing this, Buterin stated that DAOs could be more efficient than traditional corporations that largely run the web2 world. He further stated that DAOs could benefit from decentralization by making decisions in concave environments, rather than convex environments that traditional corporations are often used to/ modeled on. One of his other strong beliefs is that DAOs can reduce corruption as well as collusion. ✔

While Vitalik seems to be bullish on DAOs, CZ seems to be bearish on the same. He recently stated that DAOs are only a great ‘concept’ and that in reality, there have been no successful or big DAOs that the web3 universe could be proud of. He relied on some statistics to back his views, when he said that 60% of DAOs have had 3 or fewer proposals since their inception. Similarly, he also stated that 65% of all the proposals came from only 10% of the total number of DAOs. Such statements clearly depict his skepticism towards the unsuccessful nature of DAOs. 

References

1. Building and Running a DAO: Why Governance Matters? | https://future.com/building-and-running-a-dao-why-governance-matters/  

2. Vitalk Buterin argues that highly decentralized DAOs will be more efficient than corporations | https://cryptoslate.com/vitalik-buterin-argues-that-highly-decentralized-daos-will-be-more-efficient-than-corporations/  

3. DAO Differences? Ethereum Co-Founder Vitalik vs. Binance CEO CZ | https://www.bsc.news/post/dao-differences-ethereum-co-founder-vitalik-vs-binance-ceo-cz