Democratic Journey: A Critique of the DAO Governance Structure – BeinCrypto India

In 2008, when Satoshi Nakamoto released his famous Bitcoin white paper, it was a direct response to the 2008 financial crisis. Bitcoin and subsequent blockchains were designed to respond to the worrying levels of wealth accumulated by banks; these creations were thus intended to distribute financial power and, in doing so, to decentralize power.

Decentralized Autonomous Organizations (DAOs) are the clearest illustration of how blockchains can decentralize government power; they explicitly reject hierarchy and replace it with a form of direct democracy, allowing any individual holding a governance token to propose and vote on any decision. They replace human authority with smart contracts, which automatically enforce actions based on majority votes within each DAO. As a result, DAOs have taken off in recent years, capturing the imagination of many for their ability to organize people without regard to borders, identity or hierarchy.

However, earlier this summer, Chainalysis has reported that less than 1% of all governance token holders own 90% of the voting rights in DAOs. So, if the DAOs were designed to reject hierarchy, then why is power centralized among a few?

DAO: the power of bespoke governance

Governance Tokens are primarily distributed through a buy-and-sell process, allowing DAO members to literally buy their power. Unfortunately, this wealth-based distribution of power reflects deep-rooted problems with traditional monetary systems, which blockchain technology was originally designed to solve.

As DAOs become more common in the Web3 space, it’s time to consider how power can be determined by factors other than wealth; think about experience, work, contribution, participation and commitment – ​​actions that advance the work of the organization.

Since DAOs operate entirely online, they can measure their members’ actions and reward them with governance tokens accordingly. An investment DAO may reward its members based on the success of the portfolios each manages (experience); a crowdfunding DAO could reward its members for outreach or referrals (engagement); other DAOs might reward their members for the number of tasks completed or for the time spent on specific tasks. Each of these cases creates an avenue for people who might not otherwise have the capital to become influential members of their respective DAOs.

Even these reward systems aren’t perfect. That said, there are ways in which DAOs can be creative with safeguards to ensure governance power does not rest with just one percent of their members.

  • Voting Power Limits: DAOs can program their contracts to limit the voting power each member can receive for holding tokens, setting maximums and even minimums to ensure members have a fair share of influence.
  • Quadratic vote: DAOs can schedule strategic instances of quadratic voting, in which votes are counted based on individual address support, giving smaller token holders a greater share of allocation power through community decisions.
  • Mixed rewards: To ensure that DAO members are incentivized to stay involved in the organization, DAOs can reward members with a mix of governance tokens and monetary rewards, ensuring that no one accumulates too much governance power.
  • Diminishing returns: DAOs can be programmed to reward the first action of a specific type with a maximum reward, which is reduced by a certain part for each subsequent repetition of the action, so that the first action is the most valued, followed by the second, then the following ones, and so on. This action is useful for rewarding new activity relative to the amount of activity.

Can this system be a real revolution in contemporary electrical systems?

Ultimately, the decoupling of wealth and power is not an end point we can aspire to, but rather an ongoing process. Once explicit wealth is separated from power, it is more than likely to be replaced by experience and participation – and it should be. However, this substitution raises the question of how much time and knowledge wealth allows, and whether wealth can be completely separated from power. These are complex problems that require deliberate development and experimentation.

DAOs have the potential to solve countless systemic problems in contemporary power structures, and many have already done so. Their online format eliminates geographic limitations; their anonymity reduces the myriad of superficial characteristics that affect individuals’ ability to acquire power – family background, gender, race, and age, among others; and by innovating and applying creative safeguards, they have the potential to undermine the wealth model decided by power.

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Democratic Journey: A Critique of the DAO Governance Structure – BeinCrypto India


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