DAO Governance 101
In 1788, the Constitution of the United States of America went into effect. It was a radical experiment in taking power from the governing elite and entrusting citizens to govern themselves, regarding them as endowed with the reason and dignity to do so. At the time, most people assumed monarchies were the natural form of government, and kings even claimed their power originated from a god-given right to rule. The Declaration of Independence startled European monarchies at the time by challenging the divinity of kings, asserting that governments "derive their just powers from the consent of the governed." Today, the US Constitution has becoming the world’s longest-running uninterrupted governing framework. The reason it has survived so long is the same reason we look to DAOs today: decentralizing authority, protecting rights, and giving a voice to people creates a robust and resilient system. It curtails the absolute power wielded by kings and emperors, which may create prosperity under benevolent rule, but can lead to injustice and brutality under less auspicious circumstances. In the long arc of history, political structures have become fairer and more democratic. In our digital lives, however, we have accepted a reality where large companies dominate the internet and town squares of tomorrow. With the right governance structures, DAOs can bring flourishing democratic institutions to the internet.
Governance is how we make decisions as groups and who we empower to make those decisions. To decide how a DAO is governed, it's critical to consider the wholistic purpose of the organization, who is a part it, and how its resources should be stewarded and allocated. There is no perfect governance model - only tradeoffs that create different types of systems. Setting up the initial governance framework is the job of the DAO's founders and should be done thoughtfully. The biggest mistake DAOs make is choosing a governance system that makes it impossible to accomplish its goals - usually either a system that's too authoritarian to inspire community support or too decentralized to make decisions effectively.
DAO governance is an emerging and rapidly evolving design space. In these chapters, we will discuss different governance systems and the incentives they create, considering approaches like direct democracy, delegation, token-weighted voting, quadratic voting, proof of humanity, and other mechanisms.
A DAO's mission determines the type of people who will be drawn to the DAO, which proposals that get written and funded, and ultimately what the DAO accomplishes. An organization can get started and make some initial progress without a codified mission, but as the number of people in the organization increases, a mission becomes critical for community alignment. In the early days, DAO founders should define a clear mission and mandate for the DAO, being as specific as possible. This will make it easier down the line for DAO members to evaluate proposals and decide if they advance the mission of the DAO.
While many companies have lofty ambitious missions (Google's is to organize the world's information, Facebook's is to bring the world closer together) DAOs should prefer narrow missions that a large decentralized group can contribute to. When writing a mission, one useful exercise is to remove all constraints and work backwards from the question: If the DAO was a tremendous success, what would that look like?
ConstitutionDAO: To buy a copy of the U.S. Constitution
KrauseHouse: To own and operate an NBA team
CityDAO: To build the blockchain-native network city of the future
NounsDAO: Allocate resources for the long-term growth and prosperity of the Nouns project
VitaDAO: To accelerate research and development in the longevity space and extend human life and healthspan by collectively funding and digitizing research.
DAOs are tiny governments, and a constitution is critical for clearly outlining the vision and purpose of the DAO, the process for making decisions and allocating funding, and members' rights and expectations. A good constitution should answer questions like : how do proposals get passed? How many people need to vote and over what time period? What types of proposals are allowed? What abilities or rights do I have as a member of the DAO?
A constitution should at least cover:
Traditional organizations like LLCs have operating agreements that define how membership works. If your DAO is incorporated (more on that later) we recommend making your constitution and operating agreement the same document. For inspiration on how to write a constitution, the governance research organization Metagov has compiled some example governing documents and a constitution template.
A constitution should ideally be adopted early on the lifecycle of the DAO to set expectations for all new members. If it's too late or the constitution needs amending, the DAO should have a discussion period and formal vote to adopt the constitution.
Many people are drawn to DAOs since they are a democratic way to build something bigger than themselves. A good voting mechanism allows members of the DAO to express their preferences and opinions, and help ensure that decisions are made in a fair and transparent manner. The most common voting mechanism used in DAOs is token-weighted voting, where each member's vote is weighted based on the number of tokens they hold. This allows those with a larger stake in the organization to have a greater say in decision-making, but can also be susceptible to manipulation and bias towards those with a larger number of tokens.
While the vast majority of projects today are largely built upon financial incentives and token-weighted voting, new voting mechanisms are emerging that balance the rights of users and expectations of investors and financial supporters to create fairer systems. One of these is quadratic voting, where members can vote multiple times on an issue, but the cost of each additional vote increases exponentially. This system allows for more nuanced expression of preferences, as members can choose to place more votes on issues that are more important to them. However, it can also be complex to implement and understand, since it requires maintaining a balance of credits across a series of votes.
One-wallet-one-vote is another emerging voting mechanism, where each wallet address is only allowed to cast one vote on an issue. This is usually facilitated with Soulbound Tokens (SBTs) which grant the right to vote but do not allow transferring the token. This can reduce financial speculation, vote buying, and manipulation since tokens cannot simply be traded on the open market. One-person-one-vote is the fairest voting mechanism, aiming to ensure that everyone has one equally-weighted vote. Since it requires verifying a real human is on the other side, an identity protocol like Proof of Humanity or Gitcoin Passport is needed. While this verification helps prevent bots and automated systems from manipulating the voting process, it can add friction to the voting process and may clash with the anonymous-friendly culture prevalent in DAOs.
There are many other more experimental voting mechanisms that can be used in DAOs, such as liquid democracy, which allows members to delegate their vote to another member or to a group of members, and reputation-based voting, where the votes of members with a higher reputation are given more weight. In summary, there are many different voting mechanisms that can be used in DAOs, each with its own set of pros and cons. When forming a DAO, the founders should carefully consider the type of voting mechanism to balance the needs of contributors.
Quorum is the minimum number of participants or votes required for a vote to be valid. Setting the quorum is an important aspect of the governance structure of a DAO, as it determines the level of participation and consensus required for decisions to be made. Participation in a DAO can vary widely over time depending on media hype cycles and external factors like crypto bull or bear markets. One recommended approach to setting quorum is to average the participation in recent proposals and set the quorum bar to something slightly lower than the average of the past few votes. Quorum should be high but attainable, so that proposers need to create a broad coalition to pass proposals, but not so high that the DAO treasury is marooned.
It is also important to consider the voting mechanism being used in the DAO. With token-weighted voting, a higher quorum is needed to ensure that a sufficient number of people have voted and whales cannot unilaterally pass proposals. With other voting mechanisms like quadratic voting or one-person-one-vote, a lower quorum can be set. Setting the quorum for a DAO is an important aspect of its governance structure. It's critical to consider the size of the organization, the type of decisions being made, and the voting mechanism being used in order to determine the appropriate quorum threshold.