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Introducing a simple framework for evaluating DAO governance models

very simple governance framework

Governance can be a very nebulous concept, especially in the context of DAOs. What we're really talking about is the decision-making process. The governance of DAO mainly refers to how DAO makes decisions—how to make decisions about anything.

Here are three simple questions that go to the heart of the decision-making process:

  • What decisions need to be made?

  • Who decides?

  • How to motivate them?

You can tear down any governance structure by answering these three questions.

  1. What decisions need to be made?

At one extreme, some DAOs need to make decisions about everything. Protocol parameters. Protocol upgrade. Support for new assets. money management. Big spend. When to suspend/shut down the system. These presumably lead to decision fatigue.

At the other extreme, the DAO doesn't need to make any decisions. Because some protocols themselves are immutable.

What is an immutable protocol? For example, Liquity, an interest-free loan agreement on Ethereum. Liquity's code base is immutable and therefore governance-free. Their docs make it clear: "All protocol parameters are either pre-set, immutable, or controlled by the algorithm of the protocol itself - making human intervention redundant." I like the latter formulation.

I used to think that protocols without governance were flawed. Now I'm starting to see how elegant and efficient it can be. For many DAOs, governance is a burden.

  1. Who decides?

Assume that some decisions need to be made (excluding governanceless systems), in one extreme case, by everyone. We know that most protocols with tokens delegate governance rights to token holders. Because token ownership is the only barrier to entry into governance, every holder effectively qualifies.

1 token = 1 vote. Most protocols work this way.

At the other extreme, only one person decides. Fortunately, such examples are rare. Instead, it is increasingly common for groups of specialists - "committees" or "panels" - to make decisions on specific business functions, such as treasury management or security.

In some cases, these extreme operations may work, but most projects want to be able to compromise. Equal amounts of centralized and decentralized governance is actually a good way to go.

  1. How to motivate them?

Charlie Munger famously said: "Give me motivation and I'll give you results."

People don't do anything for free. We work because we get paid. We eat because we are hungry. We exercise to be healthy and look good. We vote because we want our interests represented.

Incentives drive human behavior. So, what motivates people to participate in governance? Usually not.

Most DAOs do not provide any incentive for their token holders to participate in the governance process. An exception is UMA, which issues additional UMA rewards to token holders who participate in voting.

In DAOs that ostensibly have some specialization, multisigers, delegates, and other specialists participate in governance and can be financially compensated for their time.

As such, answering these three questions can help you build or evaluate a DAO governance system. Next, let's take a look at the current state of DAO governance.

Check status

First, let me say that there are no right answers to these questions. It depends on what you govern. Companies that provide products or services are governed differently than countries. That said, most DAOs today fall into one category:

  • everything needs to be decided

  • everyone can decide

  • no incentive

I've spent a long time thinking about this, but I can't think of an example where I want to be governed by the above structure. This structure resembles neither corporate governance nor state governance.

Why is this model flawed?

Prioritize wrong outcomes

As Hasu discusses in the podcast, most DAO governance models (especially direct token holder voting) are regulatory arbitrage. They are designed to reduce founders’ exposure to regulatory action.

When you are optimizing for "not getting sued", you sacrifice efficiency and expertise. Your product or service is therefore affected. For some projects, especially those with low barriers to entry, this can be fatal.

My guess is that if you gave every DeFi founding team immunity from regulatory action, you'd see a very different decision-making structure.

A better approach might be to determine what decisions need to be made, who is best suited to make them, and figure out how to do both of these things as efficiently as possible based on the team's risk appetite, rather than reverse-manage from regulatory action.

no incentive

I think it is common sense that most token holders do not participate in governance these days. Last year, Deribit gave a vivid metaphor in an article it published, DAO governance is equivalent to the student union. I like this metaphor.

Why don't token holders participate in DAO governance? Same reason most students don't join student union. Because they get nothing in return.

Every DAO token holder will do a quick cost-benefit analysis in their head and come to a decision: the cost (time) of voting does not justify the benefit (nothing).

Munger could have foreseen this outcome.

Below are statistics from the most recent MakerDAO governance vote. Only 0.1% of MKR holding addresses voted.

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Now you could argue that the benefit to token holders is that they have healthy governance over this economically beneficial system. While this is true, it is not enough for most token holders.

We need to start incentivizing participation in governance. Not necessarily a direct financial incentive, though that's an obvious place to start. People are also motivated by reputation, popularity and power. We can use these natural human desires to drive engagement.

Governance is not the same as community building

Governance is often used as a strategy to attract users and build communities.

Like airdrops. Tokens are distributed to a large number of wallets with the hope that recipients will feel part of the community, hold tokens, and become active users and governance participants.

The challenge for most DAOs is that there is no connection between using the product/service and the token. The only thing tokens confer are governance rights. The purpose of the airdrop is to guide some voters through passing relationships.

However, governance is not a community building strategy. 99.9% of token holders don't care about governance, so stop expecting to reward them with participation rights.

Your community is built on a collective mission/vision. When you do this, you can cultivate a community around it. Some of these communities will participate in governance.

write at the end

DAO governance is a long game, the team is making progress in governance every day, but more experiments are still needed. And experimentation will be accompanied by a lot of failure. We need to ensure entirely new experiments, and possibly new failures with them.

There is no reason for the new DAO to repeat the same mistakes and make new ones.

This article is compiled from: https://30000feet.substack.com/p/issue-72-a-stupid-simple-governance

Author: Andrew Beal

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