DAOrayaki: How DAOs Can Do Good Governance

DAOrayaki DAO Research Bonus Pool:

Funding address: DAOrayaki.eth

DAOrayaki DAO Research Bonus Pool:

Funding address: DAOrayaki.eth

Voting progress: DAO Committee 3/0 passed

Total bounty: 100USDC

Research Type: DAO, Governance

Author: Commonwealth Labs Team

Contributors: Jup@DAOrayaki.org

Original: How to think about Good Governance?

Certain elements of this article relate to potential legal risks and strategies. The author is not an attorney, and the content does not constitute legal advice. So please consult a lawyer before making any decisions.

In 2017, the common token model was the infamous "utility token", now they are called "useless tokens". This model fails for two main reasons, first, most projects do not provide any real utility and can be easily replaced by stablecoins. Secondly, because it looks more like a security token that promises to share revenue, it has been severely cracked down by regulators.

• Based on the above concerns, the current market token model mainly adopts the "governance token" model, because it is based on a characteristic network and is not a security token. As a result, more crypto projects are launching governance tokens and integrating DAOs into their models than ever before.

• However, the following issues need to be considered at the beginning of the project:

• What does a good governance model look like?

• How to use token governance?

How do we build governance systems?

Token distribution

This article is one in a series of articles that answer the above questions. Today, we focus on what the future of good governance looks like.

Token distribution

A key element of a good governance system is fair token distribution. This factor largely balances the interests of the core team, investors, community and incentive pool.

Ultimately, compared to other projects in the market, in terms of token distribution, the core team must first be allocated to provide short-term incentives for creating projects, and investors are second because they need to provide funds for project development. However, in order to ensure the long-term viability of the project, a large amount of funds need to be allocated to the community to take over governance and development, and to encourage real users to use the project.

In general, a good rule of thumb for allocations is to keep the combined core team and investors around 20-40%. This aspect ensures their real interests, while leaving 60-80% of the community to achieve truly decentralized governance.

It has gradually become common practice for some agreement projects to set up committees to be responsible for allocating part of the community funds. It looks like an appropriations committee that efficiently passes smaller proposals and acts as a working group to allocate budgets for specific projects. In general, these measures help reduce friction in the way community funds operate, simplifying the complex process of voting on every action.

Finally, the evaluation of incentives is equally important. For decentralization, if the core team and investors together get 40% of the shares, while also taking advantage of the 30% incentive pool, they have more than 50% ownership. A more common situation is to obtain tokens by staking in the incentive pool, and then dump them to the community. Since both of these situations undermine the drive for good governance, they can have extremely detrimental effects on the governance of the ecosystem.

• voting model

• The governance voting model is a very hot topic at present, and some major models have already been implemented. It is worth noting that each model has its pros and cons, and there is no perfect voting model. You'll need to do your research on each one and then decide which option is best for you.

• One Coin One Vote: This is the most commonly used voting model. Since those users with more tokens have a greater stake in the protocol project, it makes sense to give them more say in the direction of the protocol. Its biggest downside, however, is that it often results in large whales gaining a disproportionate say in the protocol. Many times early investors and core teams accumulate large stakes at low valuations, and any latecomers face a huge barrier to entry if they want to acquire more stakes.

• One-person-one-vote system: Although not many projects use this model, it is often considered a more egalitarian alternative to the one-coin-one-vote system. It allows all voices to have an equal say in decision-making, but also leads to trolls and those who don't have much stake in the project to influence votes. Also, it can be tricky to implement as it is vulnerable to Sybil attacks as people create many wallets to get more votes.

• Representative system: The popularity of this model is due to the Compound Governor Alpha contract. The voting representative system realizes republican democracy. Individuals can choose others to vote on their own behalf and can change their delegation at any time. One of the biggest criticisms of the model is that it starts to centralize the voting system. Decentralization of representation can be assessed in terms of how easy it is to assess representation, concentration of voting power (heads), and token voting participation. Especially for a large number of early participants holding a large number of shares in the project, the representative governance model will improve its decentralization.

Quadratic Voting: This model provides token holders with more voting power on the one hand, but also limits the additional power due to the increase in the number of tokens on the other hand. For example, a wallet with 1 token can cast 1 vote, a wallet with 2 tokens can cast 1.9 votes, etc. Although there is no larger agreement to test and use this model, it tries to balance the advantages of one currency one vote and one person one vote system, so that whales no longer have too much right to speak. The problem to be solved here is to create a curve that prevents whales from increasing their total voting power by creating more wallets.

Time Weighted Voting: Time Weighted Voting is used by a few communities including Frax Finance. In this system, voters need to lock up their tokens. The longer they lock up their tokens, the more returns they get on their long-term investment, thus multiplying their voting power. This model does not necessarily solve some of the problems of one coin one vote, but it does help incentivize long-term participants. Two issues to consider here are: how to find the optimal multiplier curve and how to solve the situation where tokens are locked but new voting is open. To a large extent, this model facilitates ongoing voting, such as setting protocol parameters.

elements of good governance

Now that we have seen the initial distribution of tokens and some of the ways to enable voting power, let's take a closer look at the elements of good governance. Because there are trade-offs in the selection of these elements, we will discuss how each should be prioritized over the life of the project.

1. Transparency

Transparency is one of the most important components of good governance because transparency helps build trust in the system. Without truly transparent public discussion, voting and funding, the community could face oligarchy or systemic fraud. In the governance of crypto projects, it includes binding and tracking discussion statements to individual-specific wallet addresses. In addition, it includes thorough discussion and communication of all activities undertaken by the community and its leaders.

As the project grows, so does the need for transparency. In the early days, core community members could act without excluding anyone, and while the forums were public, not every address could be traced. When the number of members increases to 50-100, the establishment of transparent forums and communication channels becomes very important for the development of the project.

2. Ease of Access

One of the biggest problems in encryption and crypto governance is ease of access. Many don't know how to buy cryptocurrency or set up a wallet, let alone navigate governance forums, snapshot voting, and on-chain governance. What's more, many communities set token requirements for creating proposals. Additionally, the gas cost of on-chain voting can sometimes be prohibitively high.

A good analogy is traditional voting in the United States. Many states require government ID, early registration to vote, voting at specific polling places and more, and each of these additional requirements can skew the results. For example, those who have to travel long distances to work are often unable to vote because polling stations near their residences are only open during working hours.

The community needs to actively think about all the factors that hinder the ease of access and come up with solutions to make the UI/UX design of crypto governance more user-friendly. In the early stages of a project, closing governance access to external contributors can hinder the growth of important early members. As the project continues to grow, removing barriers is critical to growing the size of the community and the number of contributors.

3. Voter Efficiency

For a governance system to work, voters need to believe that they can change the status quo through participation. Communities should continuously monitor voter effectiveness through turnout and community surveys.

Looking back at American politics, the power of the two party system (Republicans and Democrats have large strongholds across the country) combined with the power of money in politics results in very low voter efficiency. Billions of dollars are spent on every presidential campaign, which largely affects swing state voters as well. As a result, many choose not to vote and become apathetic about governance.

The cryptocurrency space is currently facing this problem, especially when the voting power of whales or big players far exceeds that of community participants, leading community participants to think that their votes have little effect. In addition, many discussions are held in private chat groups, and the forum information is also fragmented. The voice of newcomers is drowned by noisy discussions, and it will become difficult for them to join the discussion of the community.

It can be difficult to join community discussions when many of the discussions take place in private conversations, the forums are fragmented, and newcomers are muffled by noisy discussions.

4. Accurate and rapid results

Finally, a good governance system needs to implement the wishes of the community quickly. This includes transparent and thorough discussions before voting. Once voting closes, voting results are executed accurately and quickly.

Currently, the community uses multi-signatures to make ambiguous changes and vote more cheaply, or to make specific code adjustments on-chain. But these processes only apply to certain stages from voting to execution, and there are many other factors to address.

If governance discourse does not have an appropriate structure, there can be delays in moving from discussion to voting to implementation. Voting usually has a quorum requirement and a token quantity requirement. If the bar is set too high, it can cause delays, sometimes requiring a re-vote, or simply waiting for whales to participate.