Interpretation of Governance: "In the field of political science, it usually refers to national governance, that is, how the government uses its governing power to manage the country, people and territory, so as to achieve the purpose of continuing the country and allowing the country to develop. In the field of business, it also extends From corporate governance to corporate governance, it refers to the management methods and systems in organizations such as companies." - Wikipedia
DAO is a decentralized autonomous organization built on the blockchain that encodes governance rules in the form of smart contracts. As the first decentralized autonomous organization, the Bitcoin community is regarded as the origin of DAO; there are also views that The DAO, as the first community operated by smart contracts, can be called the originator of DAO in the true sense. The rules written into the smart contract can automatically trigger the execution when the conditions are met, which not only improves the execution efficiency, but also makes the governance more transparent.
image description
The current DAO ecology; incomplete statistics
infrastructure
infrastructure
by
bySyndicate DAOimage description
Web3 Investment Club on Syndicate
The composability of DAO forms its composable and reusable organizational structure, which is also the driving factor for the development of DAO ecology.DAOs and DAOs cooperate with each other and stack to form "organizational Lego". This supply chain based on smart contracts is expected to form an industrial ecology of efficient collaboration among organizations. Gnosis Safe, a digital asset management platform, is the most widely used multi-signature wallet in the EVM ecosystem. It is not only an important tool for DAO to manage treasury, but also has evolved into an account management system with core standards.
Similar infrastructure tools that can be used by DAOs include Utopia, a salary payment system, Snapshot, an off-chain voting system, Tally, a governance dashboard, Sybil, a proxy voting tool, and more.
ideology
"They seem to be impeccably liberal politically - they hope that information technology will inevitably create a new "Jeffersonian democracy" in cyberspace, and the California ideology is the natural and unavoidable of a high-tech free market Avoided Triumph offers a fatalistic vision. "
— Richard Barbrook, Andy Cameron, "California Ideology," Mute, September 1, 1995
Governance is an ancient problem facing humanity. Human development is a process from centralized governance to democratic governance. "Principal-agent dilemma" means that when a few people can represent the interests of the majority, moral hazard arises: the agent may sacrifice the interests of the principal for his own interests. On the other hand, in the traditional governance model, the process of execution and supervision also faces moral hazard.
The governance of DAO expands the scope of decision-making participants, and voting is the game of all participants.secondary title
Governance scope
The advantage of DAO governance is that the rules and management are open and transparent to all members. However, more decision-making participants also mean that decision-making efficiency is reduced. From the perspective of collaboration, DAOs at this stage can be divided into three categories:Protocol DAO, Application DAO, Resource Allocation DAO。
Protocol DAO: Infrastructure for decentralized applications, such as public chains; infrastructure widely adopted by the encryption ecosystem, such as MakerDAO. Analogous to the real world, protocol-based DAOs are more like foundations, and they exist to maintain the sustainable development of the encryption ecosystem based on them. Therefore, their scope of governance is mainly the maintenance and upgrade of the protocol, system parameter setting, etc. The requirements for the quality of the proposal and the professionalism of the proposer are relatively high. For example, the Ethereum Foundation chooses off-chain governance. One of the factors is that Vitalik plays a key role in the choice of technology.
Application DAO: Around the application level of entertainment, art, games and life. Such as social applications, game applications, DeFi applications, data applications, etc. This type of DAO forms commercial bodies of different sizes, generally for the purpose of profit, or the development of its own community. Governance focuses on organizational personnel management, treasury fund management, protocol value capture plan, etc.
Resource Allocation DAO: This type of DAO itself does not produce agreements or products, but creates profits for members through treasury asset management, such as investing in DAO; or provides fund matching and technical support services, such as public welfare DAO. Resource allocation planning is the focus of governance.
secondary title
Treasury Asset Management
DAO's treasury assets support the organization's product development, personnel expansion and long-term development. The three principles of DAO asset management are:
a. Aim for perpetual duration (although liquidation is usually done);
b. Ensure positive cash flow;
c. Asset diversification.
Initially, the DAO's treasury was defined as the unissued portion of the project's native token. The market cap of the native token determines the market position of the DAO. However, the high volatility and periodicity of cryptocurrencies make the market value of tokens unable to faithfully reflect the actual purchasing power of DAO. The governors realized that only relying on the treasury composed of native tokens cannot support the long-term and stable development of DAO.
To construct an asset sheet that can actually reflect the purchasing power of DAO, it is necessary to replace a single original asset with a diversified asset composition. The current common solution is to add in assets: The current common solution is to add in assets:
a. Stablecoins;
b. Blue-chip encrypted assets;
image description
Image credit: Bankless
Diversified assets are often accompanied by the sale of native tokens. In order to reduce the negative impact of diversification, DAO usually chooses:
a. Diversify a small portion of treasury assets;
b. Use an auction mechanism to reduce the impact of token sales on prices, such as Gnosis Auction;
on the other hand,
on the other hand,DAO can also improve the efficiency of treasury assets and reduce asset risks by using DeFi financial tools. For example, stablecoins can be used for liquidity mining to generate interest; purchase insurance or short-term put options to resist black swan risks; issue bonds; unsecured loans based on credit ratings; credit loans between agreements, etc.
first level title
The DAO Governance Dilemma
Although the infrastructure of DAO is becoming more and more perfect, creating a DAO becomes easier and easier, but running a DAO well is not an easy task. According to the DAO ecological survey report released by Chainalysis in June this year, the governance power of DAO is highly centralized. By analyzing the distribution of ten DAO governance tokens, Chainalysis found that in several major DAOs, less than 1% of holders own 90% of the voting power.
Governance of DAOs suffers from low participation. According to the statistics of the data website DeepDAO, among the top 10 DAOs in treasury assets, Olympus DAO has the highest governance activity (active users/total number of governance token holders), reaching nearly 50%, followed by Aave, but the activity is only was 13.5%.
There are three main reasons for the low participation in governance:
a. Short-term speculators do not care about the future development of the community, but they may have voting rights;
b. Minority shareholders may think that it is difficult for them to influence the process of the proposal, which reduces their enthusiasm for participation;
c. The voting mechanism itself is not fair enough, and voting rights are concentrated in the hands of a few people.
Unlike corporate recruitment, the openness of DAOs allows anyone with a common goal to become a member of the organization. A lower participation threshold also means lower member stickiness. In the early stage, there are often several core leaders who play a key decision-making role in promoting the community and developing new members. As the number of members increases, in order to ensure the quality of proposals, the community often sets proposal rules, such as: users must hold 0.1% to 1% of the outstanding token supply to create proposals. With such a number of token holders, it may only account for one-thousandth of the members of the DAO community.
It can be seen that using tokens as a single certificate of voting rights will bring about the problem of centralization of governance. Even if voting rights are not concentrated in the hands of a few members for the time being, the liquidity of tokens allows anyone to buy a large number of tokens from the market to obtain proposals or voting rights that determine the future of the community. If the proposal adversely affects the community, it creates a "token governance attack".
The worst governance attack is "Governance Extractible Value": Governance votes to give up all system software to get benefits. When voting rights are in the hands of short-termists, the drive of immediate interests (handling fees/token appreciation) may destroy the long-term development momentum of the community. In a more extreme case, the proposal liquidates the treasury and terminates the agreement.
On August 19, one of the largest DAO organizations Tribe DAOfirst level title
DAO Governance Improvements
The development of DAO is still in a relatively early stage, and the infrastructure is still being improved. Various DAOs are also trying a more scientific governance mechanism. From the perspective of voting mechanism, there are weighted voting, proxy voting, quadratic voting, belief voting, and EI voting based on game theory. From the perspective of the distribution of governance rights, POAP, which records the historical participation certificate of the governance person, can effectively screen out candidates who meet the governance conditions.
Various voting mechanisms have different applicability in different governance scenarios. Familiarity with the advantages and disadvantages of each voting mechanism can help to develop strengths and avoid weaknesses when formulating governance rules.
Token-weighted Quorum Voting: This is a voting mechanism most commonly used by various DAOs. Passing a proposal requires a certain percentage of votes. This mechanism is straightforward for participants, but has the disadvantage of requiring a high degree of participation and votes can be manipulated.
Vote Delegation: DAO members can assign or "delegate" their votes to another party, usually an industry expert. The advantage is that the voting participation rate is increased. On the other hand, experts can provide more effective suggestions and promote the development of DAO. The disadvantage is the unfairness caused by bribery and collusion.
Quadratic Votingimage description
Image credit: Quadratic Payments
Conviction Votingimage description
Image credit: Jeff Emmett
EI voting: EI is the abbreviation of Efficiency Index, originally proposed by ICPDAO. It is a set of cross-anonymous voting reward and punishment system based on economic game theory. It doubles the amount of all marked contributions on a monthly basis, pairs issues with different people but similar sizes, and then submits them to the Other members vote anonymously; and calculate the individual EI value of the month based on all voting results for rewards and punishments.EI voting applies to DAO's reward and punishment system, through the supervision of the mechanism, everyone can self-regulate the quotation and minimize the influence of malicious quotation competitors. The disadvantage is that election bribery cannot be avoided, and it may also form a situation where small groups hold together. Also known as PoW governance, the well-known domestic community SnapFingers DAO also started to try out this scheme not long ago. ICPDAO made a little game for thisEl votingimage description
Image source: ICPDAO
No single voting mechanism has proven perfect, and more are being developed as the DAO ecosystem grows. Each voting mechanism has its advantages and disadvantages, and the DAO must consider the implementation scenario individually. Choose the most suitable solution in a given situation.
Token-based governance is easily manipulated by whale holders. Reasonable distribution of voting rights has become a necessary measure for governance optimization. The distribution of voting rights can be solved from the following dimensions:
Screen out qualified voters by identifying voters, such as POAP that provides users with proof of participation records, and Soulbond Token that builds an on-chain reputation system for users;
By subdividing the organizational structure, according to the different fields that voters are good at, the voting rights are limited to a smaller range, such as the mechanism of Parent DAO & Sub DAO;
epilogue
epilogue
disclaimer
References
https://medium.com/giveth/conviction-voting-a-novel-continuous-decision-making-alternative-to-governance-aa746cfb9475
https://medium.com/1kxnetwork/a-guide-to-dao-treasury-diversification-sales-eee65f89d0b5
https://newsletter.banklesshq.com/p/how-daos-should-approach-treasury
https://www.chaincatcher.com/article/2069415
https://multis.co/post/nail-your-dao-a-guide-to-dao-treasury-management
https://newsletter.banklesshq.com/p/why-daos-need-to-diversify
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