Decentralized Autonomous Organizations (DAOs) are a novel structure for project governance pioneered in the Ethereum community. Thanks to blockchain and smart contracts, the rules of an organization can be codified without the need for external legal contracts, making them fully on-chain organizations.
But the practice has been a little less rosy than that so far. The DAOs that have existed so far were primarily governed by their token holders, which created a number of issues. For one, executing the DAO’s wishes is difficult to do with smart contracts, and their lack of legal representation causes friction during business practice.
A good example is Sushi, which was born as a fully on-chain DAO, but gradually transitioned to a semi-corporate model with an elected “Head Chef.”
Furthermore, a token holder-heavy system incentivizes plutocratic governance, where large holders have much more voting power than regular community members. This inherently centralizing system clashes with the stated aim of achieving decentralization.
Other projects are continuing to experiment with different models that would fix the shortcomings of the classic DAO model, and they might just lead the charge on the DAO narrative in 2024.
Going beyond token holders: Badges and Karma
The inherently plutocratic model of “one token, one vote” has led several projects to look for alternatives. Among the most well known is Optimism, one of the leading Ethereum Layer-2 projects with a heavy focus on public goods funding.
In Optimism’s bicameral model, token holders vote on protocol upgrades and other technical matters, while the distribution of public goods is managed by a “Citizen House” drawn from contributors to Optimism. While the model isn’t democratic per se, it strives to maintain a balance of impartiality and contribution to the ecosystem. For example, most new Citizens are voted on either by previous Citizens or previous recipients of Public Goods.
The model has received criticism in the latest Retro Public Goods Funding round. While the round was very diverse, the Citizens, or “badge holders” as they’re often called, directed significant funding to VC-backed and educational projects.
Some builders on Optimism questioned the long-term sustainability of such allocations, as they do little to increase the revenue of the Layer-2, and thus the ability to continuously fund public goods. On the other hand, this may have been the goal all along: reward contributions that are difficult to monetize, instead of giving even more rewards to successful for-profit projects.
Other projects are nonetheless following in Optimism’s footsteps by introducing similar identity-based mechanisms for governance. For example, SSV Network has introduced a fully-fledged delegation system that promotes active community members to represent the rest of the community via a voting dashboard. By using a vote delegation platform, built by Karma, the SSV DAO and community can use it to empower active community members, get visibility into their activities, hold them accountable, improve voting participation, and further decentralize the DAO. By alligning with trusted community members non-voters can easily playa a part in the future of the protocol.
The ideal governance model could still be out there, driven by new on-chain ID technology and novel experiments in project economics, making 2024 an exciting year for DAO governance.
From centralization to decentralization: how communities are taking charge
Since October 2023, over $8M in DOT was streamed for marketing proposals as a direct result of community proposals to do marketing. In the meantime, specific teams are also being awarded with grants to take over the day-to-day marketing for Polkadot.
In Polkadot, the governance model is directly based on token holder voting, but it still manages a significant degree of participation from smaller holders. Given how active the community has become since Parity’s role was reduced, it may be that in the end the specific model doesn’t matter — rather it’s the community’s spirit and culture that makes a difference in how decentralized it really is.
