DAO Governance: Everything to Know
By Beluga Research June 15, 2023
- A decentralized autonomous organization (DAO) is a new type of organization designed to operate on blockchain technology
- A DAO does not have a centralized authority controlling its operations
- Instead,a DAO is governed by its members, who make decisions through a consensus mechanism
- A DAO is designed to be transparent, secure and efficient, making it well-suited for a wide range of applications
DAO governance refers to the process by which a decentralized autonomous organization is governed where decisions are made by the members. A DAO is a decentralized autonomous organization that operates on blockchain technology. A DAO does not have a central authority that controls how it makes decisions. Rather, its members vote to make decisions. This is the key feature of DAO governance.
DAO governance is accomplished through a consensus mechanism. In cryptocurrency, this is done through proof-of-work (PoW) mining or via proof-of-stake (PoS). Further, the voting takes place through smart contract software. A DAO is designed to be transparent, secure and efficient, which makes it possible for a DAO to accomplish a wide variety of tasks.
A Brief History
A group of developers introduced the concept of a DAO in 2016. These developers created a decentralized autonomous organization they called "The DAO." The DAO was designed to be a decentralized venture capital fund. Members could vote on projects that deserved investment. The DAO raised over $150 million in funding. It was one of the largest crowdfunding campaigns in history.
In June 2016, The DAO was hacked. Over $50 million worth of funds were stolen. This led to a contentious debate within the Ethereum blockchain community, the network The DAO was built upon, about how to handle the situation. Ultimately, the developers in charge of The DAO implemented a hard fork. This resulted in the creation of two separate blockchains, Ethereum and Ethereum Classic.
Despite the setback, DAOs have continued to evolve and grow. Today, there are a wide range of DAOs operating on various blockchain platforms. These are being used for everything from decentralized finance (DeFi) to social networks.
What Is DAO Governance?
They vote on proposals using a consensus mechanism. This consensus mechanism varies depending on the specific DAO. The mechanism typically involves some combination of stakeholder voting and delegation.
Stakeholder voting is a process where members of the DAO vote on proposals using their stake in the organization. This stake can be in the form of tokens or other assets. A stake gives members a say in the decision-making process. Delegation is a process that involves members delegating their voting power to other individual members or a specific group of members, like a committee.
DAO governance is designed to be transparent and democratic. This helps to ensure that the DAO is operating in the best interests of its members. It also ensures the members make decisions in a fair and equitable manner.
- Create a community. DAOs are created and run by a community of members that hold tokens. A member holds tokens which represent ownership and voting power in the organization.
- Acquire tokens. Tokens are used to make decisions about the organization, including how funds are allocated, which projects to support and who should be in charge of the organization. Members can propose changes to the organization. The community then votes on the changes.
- Vote via smart contracts. Members execute the voting process through smart contracts. The smart contracts automatically tally the votes and execute the decision once a certain threshold has been reached.
- Ensure transparency, democratic voting, and decentralization. Anyone can become a member of a DAO by purchasing tokens. All members have an equal say in the decision-making process. This creates a level playing field where everyone has a voice, regardless of their background or wealth. Decisions are made based on the will of the community rather than the interests of a small group of individuals.
- Complete decentralization. No central authority exists with a DAO. Further, no central authority can override the decisions of the community. This makes a DAO truly autonomous. A DAO can operate without interference from outside entities.
- Transparency. All decisions are recorded on the blockchain and can be viewed by anyone. This creates a high level of accountability. Members can hold each other accountable for their actions.
- Flexibility. The governance process can easily be modified to suit the needs of the community. If the community decides a certain aspect of the process needs to change, it can make changes through a proposal and a vote.
- Use of quadratic voting. Quadratic voting is a system where members can allocate voting power in a non-linear way. Instead of one token being equal to one vote, members can use tokens to cast multiple votes on a single proposal. The more tokens a member allocates to a particular proposal, the more weight a vote carries. This system ensures that decisions are made based on the preferences of the majority. It also gives a voice to minority opinions.
- Transparency. All decisions and transactions are recorded on a blockchain that is publicly accessible. This ensures that all members of the community have visibility into the decision-making process and can hold the DAO accountable.
- Decentralization. Power is distributed among all members of the community. This ensures that no single entity can control the DAO. Decisions are made by consensus of the community.
- Efficiency. DAOs are run through smart contracts. These are executed automatically without the need for intermediaries or centralized control. Smart contracts enable the decision-making process to be more efficient. They eliminate delays and bottlenecks caused by intermediaries.
- Flexibility. DAOs can be customized to meet the specific needs of the community. The rules encoded in the smart contracts can be modified to reflect a community's needs and priorities.
- Inclusivity. DAOs are open to anyone who holds the crypto representing it. This is true regardless of the holder's geographic location and socioeconomic status. The rule makes it possible for all members of the community to have an equal say in the decision-making process.
- Complexity. DAOs can be complex and difficult to understand. They are especially difficult to comprehend for individuals who are not familiar with blockchain technology. This can make it difficult for new members to participate in the decision-making process.
- Governance Attacks. DAOs are vulnerable to governance attacks. It is possible for a group of members to collude to take control of the DAO. Then they could make decisions that are not in the best interest of the community.
- Lack of Regulation. DAOs operate in a largely unregulated space. This can make it difficult to resolve disputes and enforce decisions.
- Risk of Forks. DAOs are vulnerable to forks. A fork occurs when a community splits into two groups with different priorities and goals. A fork can lead to a lack of consensus and a breakdown in the decision-making process.