In this blog we will explore the need for web3, how it solves problems traditional systems fail to resolve, and the role of DAOs In Web3 Governance. Read along!

The emergence of Web3 governance arises from the shortcomings of centralized institutions. These establishments fail to effectively oversee the financial and social framework of society, ensuring security, fairness, and transparency. Web3 relies on decentralized networks like blockchains and oracles that prioritize minimizing the need for trust. In turn, employing cryptography, consensus protocols, and mechanism design to govern digital infrastructure. This shift entails a move away from relying on human intermediaries for trust toward the implementation of technologically enforced assurances. This phenomenon is often referred to as cryptographic truth.

In addition to DeFi and NFTs, the advancement of trust-minimized digital infrastructure has given rise to a novel form of blockchain-based social organization known as a DAO. DAOs enable autonomous entities to collectively govern open-source infrastructure. Or democratically manage shared assets by encoding specific processes into smart contracts enforced by blockchains. Essentially, DAOs strive to extend the concept of trust minimization to the realm of human collective decision-making.

This post offers an insightful viewpoint on DAOs, commencing with an informative introduction to the fundamentals of DAOs. It then delves into the advantages and trade-offs that every DAO must carefully balance to attain sustainable success.

Understanding the Fundamentals of DAOs

To comprehend the advantages associated with DAOs in Web3 Governance, it is essential to define a DAO. Alongside, exploring different types of DAOs, outlining their responsibilities. As well as, examining the various tools and governance structures that exist within the realm of DAOs today.

What Constitutes a DAO?

DAO stands for “decentralized autonomous organization.” The primary objective of a DAO is to collectively make decisions in a more distributed, transparent, and trust-minimized manner compared to traditional organizations. Essentially, a DAO represents a novel form of human organizational structure that enables individuals to work together towards a shared goal. This goal is underpinned by the understanding that all participants can independently verify how the organization operates.

One of the distinguishing features of DAOs is their utilization of blockchain-based smart contracts. Smart contracts codify some or all of the processes involved in decision-making and ownership allocation. The integration of smart contracts serves as the foundation for their innovation. It enables the rules governing the functioning of the DAO to be fully transparent to members. It also becomes highly resistant to manipulation by either internal or external entities. This is made possible because the code is executed on blockchains. The code can be publicly audited and is secured by a decentralized network of nodes.

It is important to note that although the term “autonomous” is part of the acronym DAO. DAOs are not entirely self-governing. Since DAOs are comprised of humans, they require manual actions from users to operate. These include participating in voting, deploying code, and deliberating on proposals. The inclusion of “autonomous” in the term DAO stems from the notion of hardcoding specific functions of the DAO as immutable smart contracts. However, human interaction (providing inputs) with smart contracts (code) is still necessary for executing actions (outputs).

Categories of DAOs In Web3 Governance

While still in their early stages, DAOs in Web3 Governance can be classified into six general types:

Protocol DAOs:

These DAOs support the development and management of decentralized applications (dApps) or the infrastructure utilized by dApps. Protocol DAOs focus on stewarding open-source technology, similar to a company or foundation. Examples include:

• Tezos: A blockchain utilizing a DAO-like on-chain governance structure for protocol upgrades. It employs a delegate-based voting system with supermajority consensus requirements.
• MakerDAO: An organization managing the decentralized stablecoin DAI, where DAO participants are responsible for setting protocol parameters.

Investment DAOs:

These DAOs make and manage investments using funds held in a treasury under the DAO’s control. Investment DAOs primarily aim to generate profits for their members, resembling private equity funds or hedge funds. Examples include:

• BitDAO: A DAO that grows its treasury through various voted-on strategies and has allocated substantial funds to Web3 projects.
• MetaCartel Ventures (Venture DAO): A for-profit DAO investing in early-stage dApps, focusing on a community-oriented membership structure with more flexible participation than traditional venture capital funds.

Cause-based DAOs:

These DAOs oversee funds and initiatives dedicated to supporting specific causes, such as philanthropy, politics, or public goods. Cause-based DAOs strive to achieve collective goals, similar to traditional organizations like charities, lobbying groups, or grant programs. Examples include:

• Gitcoin: A DAO managing a platform where users collectively fund public goods for Ethereum and other blockchain-based projects using a quadratic voting model.
• Big Green: A DAO awarding philanthropic grants to promote education on growing food in schools, communities, and families.

Social DAOs:

These DAOs manage shared social spaces, collectively own assets of artistic value, and cultivate culture and events for their members. Social DAOs bring communities together around entertainment, art, games, and other social aspects of life, resembling modern social clubs. Examples include:

• Bored Ape Yacht Club (BAYC): A limited NFT collection where the NFT serves as a membership in the DAO, providing special perks to holders.
• Krause House: A social DAO comprising basketball enthusiasts with the long-term goal of owning an NBA team. The Krause House DAO already owns a team in The Big3 basketball league.

Data DAOs:

When it comes to DAOs In Web3 Governance, these ones develop and manage data controlled by the DAO. Data DAOs involve pooling users’ data or creating unique data products for sale to third parties interested in using the data for AI algorithms or market research. Examples include:

• dClimate: A marketplace for climate data, forecasts, and models that enables users to sell datasets and institutions to purchase them, with the DAO evaluating data quality and providing proper network incentives.
• Delphia: A planned robo-advisor that pays users for their data in a native token, pooling the data to design investment strategies, while providing users with access to these strategies through the token.

These different types of DAOs showcase the diverse applications and possibilities that emerge from decentralized and collective decision-making frameworks.

Responsibilities of DAOs In Web3 Governance

While DAOs can be designed to fulfill various tasks, they commonly shoulder several key responsibilities, including:

Approving protocol upgrades:

DAOs participate in voting on whether to implement upgrades to open-source protocols, such as endorsing changes to proxy contracts or supporting the release of new versions with updated logic.

Adjusting dApp parameters:

DAOs have the authority to modify parameters within decentralized applications (dApps), such as altering interest rates in decentralized stablecoins or deciding to introduce new collateral types in lending markets.

Proposing and debating improvements:

DAOs facilitate the submission of improvement proposals, enabling members to engage in discussions, challenge proposals, and deliberate on changes to the protocol or DAO before voting.

Managing funds and investments:

DAOs oversee the allocation of protocol-owned funds, including granting treasury funds to recipients, making investment decisions, or deciding whether to acquire limited-edition NFTs.

Leadership management:

DAOs in Web3 Governance engage in voting processes to elect or remove individuals from management positions, override leadership decisions, or restructure the underlying organizational framework of the DAO.

Dispute resolution:

DAOs play a role in arbitrating disputes arising from protocol usage, dApp interactions, or management of DAO-controlled infrastructure, such as determining compensation for users affected by hacks or bugs.

Setting long-term vision and roadmap:

DAOs engage in discussions to determine the future direction and vision of the protocol, deliberating on expanding use cases, selecting supported blockchains or layer-2 networks, and shaping strategic goals.

Value capture calibration:

DAOs make decisions regarding the value capture mechanism of the protocol, including setting user fees, considering token burn mechanisms, and exploring options for distributing dividends to DAO members.

These responsibilities illustrate the broad range of decision-making and functions that DAOs in web3 governance can undertake, reflecting their capacity to operate in a decentralized and collective manner.

DAO In Web3 Governance Tooling

DAOs rely on a standardized toolkit comprising various tools to effectively operate. These tools are often combined to establish a multi-layered structure within the DAO. Here are some key tools commonly utilized:

Governance token:

A cryptocurrency token issued by the DAO, grants holders specific powers within the organization. Governance tokens are frequently required for voting purposes, with each token representing a vote.

Multi-signature wallet:

A smart contract that necessitates m-of-n predefined addresses to sign a message, enabling the direct implementation of protocol changes. DAOs employ multi-signature wallets to enact on-chain modifications based on off-chain committee decisions or in emergency situations as a security measure against governance attacks.

Voting contract:

A smart contract that orchestrates token-weighted voting on proposals. The contract establishes predefined thresholds and quorums (e.g., 66% yes votes, 2% token holder participation) for approval. Implementation of voting results can be done via a multi-signature wallet or by submitting executable code proposals, as observed in Compound’s governance alpha voting contract.

Delegation system:

A mechanism allowing governance token holders to delegate their voting power to representatives who can cast votes on their behalf.

Off-chain snapshot:

An off-chain platform that conducts token-weighted voting through signed off-chain messages. The platform takes a snapshot of on-chain balances and addresses to determine voting power. The voting results influence subsequent actions within the DAO. This approach encourages broader community participation by eliminating the need for members to pay on-chain transaction fees to vote.

Discussion forum:

Almost all DAOs in web3 governance incorporate a social layer where members can gather, present ideas, and engage in open debates. Dedicated governance forum websites like Discourse, Discord servers, or Telegram groups are commonly used mediums.

Reputation systems: Still in the early stages, on-chain reputation systems are being explored to assign more weight to individuals who actively participate, provide valuable insights, or support the DAO. One proposed approach involves soulbound tokens, which assign non-financial merits to user addresses as tokens, establishing an on-chain reputation or “soul.”

Each DAO must decide how to combine these tools and others to create a comprehensive governance process that aligns with the desired balance between efficiency, cost, and trust minimization. The optimization of these tools will vary across DAOs based on the philosophy, values, and specific objectives of their members.

DAO In Web3 Governance Structures

DAOs in web3 governance employ various governance structures to facilitate consensus and decision-making in a decentralized manner. Here are several commonly used governance structures, combining different tools mentioned earlier:

Direct on-chain democracy:

Members vote directly on-chain, and a predefined threshold must be met for a proposal to be approved. Token-weighted voting is typically utilized, where the number of tokens held determines voting weight (e.g., 1 token = 1 vote). This approach is straightforward, Sybil-resistant, and widely adopted.

Direct off-chain democracy:

DAOs conduct off-chain votes using snapshots, with a threshold for approval. Token-weighted voting is often employed, and trusted entities in a multi-signature setup execute the proposed changes on-chain. Off-chain democracies require trust in the multi-signature signers aligning with the off-chain snapshot results.

Representative democracy:

DAOs in web3 governance rely on elected representatives who cast on-chain votes for proposals. Off-chain snapshots may be used to gauge community sentiment before voting. The DAO may include mechanisms to override or replace representatives in cases of significant lack of support or dissent.

Quadratic democracy:

This governance structure employs quadratic voting, where the cost to a voter is calculated based on the square of the number of votes. For example, one vote may require one governance token, while five votes may require twenty-five governance tokens. Quadratic voting prevents outcomes from being controlled solely by members with the highest token balances, empowering a larger number of individuals when voting collectively. A Sybil-resistance mechanism is necessary to prevent token spoofing and splitting.

Probabilistic Quadrating Voting (PQV):

D3LAB is developing a Sybil-resistant quadratic voting system called PQV specifically for DAOs. It aims to enhance the practicality and effectiveness of quadratic voting. D3LAB received a Chainlink grant to further develop this system.

It’s important to note that there are decentralized crypto communities anchored by token ownership, but they may not technically qualify as DAOs. These communities often have support from development companies and open-source foundations, benefiting from blockchain’s transparency and incentive alignment, although they may follow more traditional organizational structures.

Each DAO selects a governance structure based on its specific needs and desired level of decentralization, aiming to foster consensus and inclusive decision-making among its members.

The Benefits of DAOs In Web3 Governance

Transparency:

DAOs in web3 governance operate on open-source code and on-chain actions, allowing for transparency in decision-making processes. Participants can easily view and audit the rules and activities of the DAO, promoting trust and accountability.

Democratization:

DAOs provide a more democratic process by allowing any member to submit proposals, participate in discussions, and vote on decisions. This inclusivity empowers members to influence the direction and governance of the DAO, fostering a more equitable environment.

Trust-minimization:

DAOs rely on smart contracts deployed on public blockchains, reducing the reliance on centralized entities and minimizing the need for trust in intermediaries. Once consensus is reached, it becomes difficult for any single entity or group to tamper with the governance processes.

Global Participation:

DAOs in web3 governance enable global participation, as anyone with an internet connection can join without revealing their full identity. This inclusiveness helps to overcome potential biases based on personal identifiers and promotes a more diverse and meritocratic community.

Efficiency and Speed:

DAOs can streamline decision-making processes by automating them through smart contracts. This reduces bureaucracy and allows for faster execution of proposals, enabling DAOs to be more agile and responsive to changing circumstances.

Value Distribution:

DAOs provide opportunities for members to directly participate in the value creation and capture of the organization. This can be achieved through mechanisms such as voting rights, governance token ownership, and access to shared resources or profits generated by the DAO.

Innovation and Collaboration:

DAOs foster collaboration and innovation by bringing together individuals with diverse skills and perspectives. The decentralized nature of DAOs allows for the rapid iteration of ideas, experimentation, and the emergence of new solutions and projects.

While these benefits are promising, it’s important to note that DAOs in web3 governance are still in the early stages of development and adoption. As the technology evolves and more real-world use cases emerge, further exploration and evaluation will help to determine their long-term impact.

The tradeoffs faced by DAOs can be examined through various dichotomies:

1. Early-Stage vs. Late-Stage Members: DAOs may grant more power to early founders and investors, potentially leading to a concentration of influence. Balancing the empowerment of early contributors with the inclusion of later members’ voices is a challenge.
2. Decentralization vs. Efficiency: Maintaining decentralization and trust minimization can result in slower decision-making processes and reduced agility compared to centralized organizations. DAOs must find a balance between decentralized governance and operational efficiency.
3. Stabilization vs. Growth: DAOs need to strike a balance between preserving the core values and vision of the protocol and adapting to evolving market needs. This involves determining the extent to which a DAO should adhere to its original vision while allowing for expansion and growth.
4. Leaderless vs. Leadership: While leaderless DAOs align with decentralization, effective leadership can contribute to better decision-making and long-term success. Finding ways to incorporate leadership while preventing the concentration of power is a challenge.
5. Short-Term vs. Long-Term Priorities: Balancing the interests of members focused on short-term gains with those concerned with long-term sustainability and adoption can be challenging. DAOs need to consider both immediate benefits and future growth.
6. Knowledgeable vs. Unknowledgeable: DAOs may rely on members with specialized knowledge to analyze proposals and provide insights. Ensuring the inclusion of less technically or legally savvy members while valuing expertise is a delicate balance.
7. Nothing-at-Stake vs. Hyper-Financialization: DAOs require some barrier to participation to prevent attacks, but excessive financial reliance can lead to governance decisions solely driven by financial power. DAOs need to incorporate participation criteria beyond purely financial considerations.

Addressing these tradeoffs requires careful consideration and decision-making based on the DAO’s specific goals and priorities. By understanding these dichotomies, DAOs can navigate the challenges and optimize their governance structures accordingly.

The Future of DAOs

The future of DAOs holds great potential for the evolution of governance systems and the decentralization of power. While DAOs are still in their early stages, there are several possibilities for their development:

1. Experimentation and Iteration: As more DAOs are created and tested, builders and participants will gain valuable insights into what works and what doesn’t. This experimentation will lead to iterative improvements in governance mechanisms, decision-making processes, and tokenomics.
2. Hybrid Governance Models: DAOs may adopt hybrid models that combine elements of decentralized decision-making with certain centralized components. This could involve integrating representative structures, expert committees, or modular governance modules that can be customized to suit specific needs.
3. Integration with Real-World Entities: DAOs may establish connections and interactions with real-world organizations, bridging the gap between on-chain and off-chain governance. This could involve partnerships, legal frameworks, or mechanisms to bridge digital assets and physical assets.
4. Enhanced User Experience: Improvements in user interfaces, user education, and accessibility will make it easier for a broader range of individuals to participate in DAOs. This can drive greater adoption and increase the diversity of voices and perspectives within DAO communities.
5. Interoperability and DAO Networks: DAOs could collaborate and form networks, enabling cross-DAO coordination, resource-sharing, and joint decision-making. Interoperability standards and protocols can facilitate seamless interactions between DAOs and promote collective governance efforts.
6. Legal and Regulatory Considerations: As DAOs gain prominence, legal frameworks and regulations may be developed to provide clarity and guidance. This could address issues such as liability, dispute resolution, and compliance with existing laws.
7. Social and Cultural Adoption: The adoption of DAOs will depend on their acceptance within broader social and cultural contexts. As understanding and awareness grow, individuals and communities may gravitate toward DAOs that align with their values and offer transparent and inclusive governance.

Overall, the future of DAOs will be shaped by ongoing experimentation, technological advancements, regulatory developments, and the collective wisdom and choices of builders, participants, and society at large. The potential for innovation and positive transformation in governance systems is significant, but it will require continued collaboration, learning, and adaptation to realize this vision.