Examples of successful DAO governance models
While it might be arguable what “success” means for DAO governance, this chapter will highlight three DAOs that have scaled well beyond their initial size and retained lively participation and a robust degree of satisfaction among users and contributors.
MakerDAO
After the Maker Foundation turned over the reigns to a decentralized governance model in 2021, some decisions floundered and didn’t get executed due to low voter participation. The introduction of a delegate system, one of the first in the space, and delegate compensation helped to overcome this particular challenge.
The DAO grew to more than 140 full-time contributors during the 2021-22 bull market and started to lose money as operating costs skyrocketed. Token holders rallied around the “Endgame Plan” by co-founder Rune Christensen which radically revamped the governance process and introduced sweeping cost-cutting measures. The new system is designed to make insider dealings and bureaucratic scope creep much harder. It has led to Maker becoming hugely profitable in 2023 and doubled the governance token’s price.
Arbitrum
After a successful airdrop of $ARB tokens at the end of March 2023, Arbitrum decided to run multiple governance experiments in parallel. Most notable was the Arbitrum Short-Term Incentive Program and their creative use of jokeraces to get token holders to align on what to do.
Arbitrum also invited multiple teams like RnDAO to run grant programs for the DAO, leading to viral word-of-mouth marketing and high-quality contributions.
Optimism Retroactive Public Goods Funding
A special case in many ways, RetroPGF is structured by the Optimism Foundation team but involves so-called badge holders who decide on who gets awarded the substantial and coveted retroactive grants.
Round three concluded last November and attracted more than 700 nominations, leading to a huge challenge in structuring the workload so that badge holders – who don’t receive compensation – are able to vote meaningfully.
RetroPGF is a showcase for fast iteration of governance experiments and a consistent source of knowledge about what works and what doesn’t in this context.
2. Challenges in Scaling Coordination
Inherent challenges in coordinating large-scale DAOs
Complexity of decision-making in decentralized organizations
The complexity of decision-making in decentralized organizations lies at the intersection of autonomy and interconnectedness. In these dynamic structures, decision-making is distributed among various nodes, fostering adaptability and resilience.
The main challenge arises from harmonizing diverse perspectives and ensuring alignment with overarching goals. Achieving consensus becomes a delicate dance, requiring mechanisms that balance individual autonomy with collective coherence. The distributed nature of decision-making demands robust communication channels, transparent processes, and a shared understanding of organizational values.
As nodes operate in interdependence, the intricate web of interactions introduces a layer of unpredictability. Decentralized organizations thrive on innovation and agility, but the complex interplay of decisions means that each action influences the larger picture, sometimes in a non-linear fashion. Like the butterfly flapping its wings, a stray comment can sometimes tip the scales of a significant decision.
Navigating this complexity is not merely a theoretical exercise; it becomes the lifeline for individuals whose professional destinies hinge on the outcomes of these intricate organizational decisions.
Potential conflicts and coordination issues
The complexity of decision-making in decentralized organizations can give rise to various potential conflicts and coordination issues.
One significant challenge is the potential for divergent interests among decentralized nodes, leading to conflicts over priorities, resource allocation, and strategic direction. The autonomy granted to different units may result in inconsistent decision-making, hindering a cohesive organizational strategy.
Coordinating efforts across decentralized teams becomes an intricate process, and misalignments in goals or communication breakdowns can impede progress. Moreover, the lack of a centralized authority might create challenges in enforcing standardized policies or ensuring adherence to shared values, potentially leading to cultural clashes. Ongoing discussions about foundational values and a consistent process of alignment are paramount. I think Rune Christensen got that part exactly right in his Endgame vision for MakerDAO.
Rapid decision-making increases the risk of information asymmetry, where some nodes may be unaware of crucial developments, which can create unpleasant surprises or ill-informed decisions.
Striking the right balance between autonomy and alignment presents a perpetual challenge, as too much control stifles innovation, while too much anarchical autonomy risks fragmentation. Navigating these conflicts and coordination issues requires a sophisticated understanding of the organizational dynamics and the implementation of effective communication and decision-making frameworks.
3. Experimenting with Governance Solutions
Introduction to innovative governance experiments in scaling coordination.
The landscape of public governance has witnessed a shift towards innovative experiments in scaling coordination. Traditional hierarchical structures and rigid frameworks are gradually making way for more dynamic and agile methodologies that allow organizations to adapt to challenges faster.
Even public sector organizations are exploring decentralized leadership models that empower teams to make decisions from the edges. This shift is fueled by a recognition of the limitations of top-down approaches and a growing understanding of the need for adaptability in complex, rapidly changing environments with rising degrees of uncertainty.
Some experiments involve the adoption of agile methodologies in public institutions. Originally designed for software development, agile methodologies like Scrum or SAFe have proven effective in enhancing organizational responsiveness and increasing focus on the “customer”. By fostering iterative and customer-centric approaches, public entities increase their ability to navigate uncertainties and deliver value efficiently.
Another area of exploration is the implementation of decentralized leadership, distributing decision-making authority throughout the organization. This approach fosters a culture of accountability and taps into the collective intelligence of teams, promoting innovation and adaptability. These approaches are usually very hard to implement for organizations with a long-standing hierarchy, which is often tied to pay grades. Nevertheless, even the military has successfully pushed the responsibility to where the rubber hits the proverbial road. See this TED talk by a nuclear submarine commander on how he successfully turned the military hierarchy on its head.
Voting mechanisms and consensus protocols
The most common voting mechanisms found in governance are:
- Simple majority – the option with the most support wins. Very easy to understand, but it could mean that the majority of voters don’t support the winning option. (Say three options A, B, and C exist and get 40, 35, and 25% support. 60% have not selected A, yet it is the winner of the vote)
- Instant Runoff Voting – The option with the least support is eliminated and the votes redistributed to the second choices, or the top choice. Can be designed to select the Condorcet winner of a vote.
- Approval Voting – Multiple options can be selected, and the option with the most votes wins. No elimination takes place. This reduces strategic voting and has been shown to be more inclusive to fringe voices.
- Quadratic Voting – Votes get counted by calculating the square root of the votes cast by each person. This assumes that a person can express the strength of their preference by assigning multiple votes to an option. Quadratic Voting empowers smaller token holders in DAOs because it flattens the power law curve of token distribution. It is notoriously susceptible to Sybil attacks, however. Gitcoin has gone to great lengths to reduce Sybil attacks through its decentralized identification passport system.
Which types of polls and voting mechanisms governance uses is ultimately also a question of the type of decision that is being made. Simple majority polls serve binary decisions (Yes/No) very well. Others might need IRV or approval voting to make the field more equitable for fringe options and to reduce tactical voting.
For further reading on this subject, please refer to this article:
The use of smart contracts in DAO governance
Smart contracts play a pivotal role in the governance of decentralized autonomous organizations (DAOs), providing a transparent and automated framework for execution.
Smart contracts execute predefined rules encoded into the system when specific conditions are met. In DAO governance, these self-executing contracts enable the allocation of resources and can trigger other actions without the need for intermediaries. The inherent transparency and immutability of smart contracts enhance the integrity of the governance process, reducing the risk of fraud or manipulation.
DAOs aim for automation and ossification to achieve robust, self-sustaining systems. Automation ensures that predefined rules are executed seamlessly, minimizing the need for manual intervention and reducing the surface for governance attacks.
This not only increases efficiency but also enhances trust. Ossification, referring to the stabilization of code and rules, contributes to the long-term stability of DAOs. Striving for a state of ossification means establishing a governance framework that resists unnecessary changes, promoting a more predictable and secure environment. As DAOs continue to mature, the strategic use of smart contracts aligns with the broader goal of creating decentralized, automated systems that can stay true to their explicit intent and deliver what they promised to their token holders with increasing efficiency.