Decentralized governance is a numbers game. Its success depends on the active participation of aware and invested voters. Decentralized Autonomous Organizations (DAOs) with low activity are thus unable to achieve their full potential and ensure true grassroots governance.
At a granular level, the Top 10 DAOs have no more than 10% active voters on average. Meaning, core team members and some ‘delegates’ make most decisions. This negates the bottom-up and community-led decision-making that DAOs are meant to foster.
The problem stems from the inherent complexities of designing, implementing, and sustaining distributed, community-led governance at scale. But more importantly though, there is a gross overestimation of the role (and power) of altruism in attracting voters.
DAOs must offer real financial incentives and rewards instead. Motivation is key and DAOs have to optimize for that. Now is the best time to do this, given the recent emergence of cost-efficient, user/dev-friendly tools and platforms that enable programmable governance systems.
Complexity, for one, can no longer be an excuse. Rather, now it’s more of a mindset and intention question.
Passive governance, passive voters
DeepDAO’s listings suggest there are at least 2442 DAOs. Roughly 8.4% (206) of these have +$1 million assets under management while about 427 projects have more than 100 governance token holders.
These figures show that DAOs have a pretty decent adoption as such. The problem is with how many of their members actually participate in the decision-making process. For example, the unique voter turnout for Nouns DAO hovers in the 7-20% range, often dipping much lower.
Source: Nouns Voting dashboard on Dunes.com by @brnunes
This represents the ecosystem by and large, barring outliers like Optimism or local spikes like the ones following Linea’s launch in April 2023.
Most governance token holders (i.e. potential voters) simply don’t have enough reasons to invest the time and effort to participate. ‘Shaping the platform/protocol/product’s future’ seems more impactful on paper than in reality. People usually don’t care, unless there is something tangible for them in it — financial gains, for starters.
Cases like UNI and MKR illustrate this issue. As David Canellis wrote in the Empire Newsletter, these governance tokens — two of “DeFi’s most important experiments” — faced a ‘reckoning’ when activity and revenue grew on Uniswap and Maker, respectively, around May 2024.
“All that growth, if not shared directly with token holders, cheapens the concept of governance,” as David pointed out. Holding BTC or ETH makes more financial sense when that happens, which is a key demotivator for potential governance participants.
On the other hand, while direct voting by every member might work in small setups — consider Athens, for a historic example — this system lacks the scalability an efficient DAO would need. Then there is competence.
Just because anyone can acquire governance tokens, doesn’t mean they can make the right decisions on matters that require specific expertise. For example, it’s not everyone’s cup of tea to efficiently decide whether Bitcoin must reintroduce OP_CAT.
Delegation is a reasonable alternative and that’s what most protocols implement today. Similar to electing political representatives to decide on national/international policies, individual token holders can ‘delegate’ their voting powers to specialists.
Except delegates are no different from end-users when it comes to motivation. The rewards don’t balance the time and effort investment. Plus they have to pay gas fees for voting — imagine an employee paying to do their job at the company.
No wonder +90% of delegates on dYdX have never used their voting power. It’s a similar story on Uniswap and elsewhere.
So the problems remain. Control is centralized. Decisions are sub-par, without room for diverse viewpoints, specific expertise, etc. Financial mismanagement and security risks are high.
Moreover, as Nansen highlighted in its analysis of DAOs and governance models, “whales” can use their capital power to overturn or manipulate votes in token-based systems.
These issues manifest themselves in events like the ETHTrustFund DAO draining its treasury worth +$2 million. Or when proposals get passed despite community opposition, as it recently happened on Compound. Although ‘Humpy’ from ‘Golden Boys’ later scrapped the controversial proposal, that it was passed in the first place signals the potential for governance manipulation.
Finally, even active delegators are mostly unwilling to ‘ruffle feathers’ or go against the grain. Decisions are often unanimous as a result — not a healthy sign for DAOs.
Privacy and anonymity are thus necessities for effective distributed governance. The lack of these, on the other hand, are a major hurdle to the “promised utopia of free and transparent governance.” It breeds group-think and other biases.
As Fractal CEO and Co-Founder, Thomas Stuart recounted, “[DAO members] tend to avoid voting against proposals that might impact individuals they’re personally connected to.” This severely undermines the sanctity of a DAO’s decisions, besides hurting the community’s interests.
Isn’t the solution obvious?
Reward token holders and delegators based on their activeness — a process similar to staking but optimized (thus more effective) for protocols. Just like liquidity providers earn rewards and APYs for their contributions to Decentralized Exchange (DEX) pools.
Both proposals and votes are critical contributions to DAOs. They even generate value for the platform in terms of performance boosts, new market opportunities, etc.
So fairness demands that proposers and voters make real monetary gains for their contributions. That’s how it works elsewhere within Web3 and DAOs can’t be an exception.
Rather than expecting altruism, DAOs must let members utilize treasuries to incentivize various activities and campaigns, including referrals, contests, etc.
One, this aligns incentives among stakeholders who tend to have diverse interests — bringing different experiences into the mix boosts expertise and flexibility. DAOs can incorporate new thoughts and become more productive, efficient this way.
Two, control over treasuries fosters more ambitious, innovative proposals beyond the mundane stuff dealing with technical upkeep. This ties back to the upsides of diversity mentioned above.
The obstacle, however, was complexity and a limited tech stack. Building stand-out incentive models and governance structures is easier said than done. Restrictive costs, lack of talented devs, the complexities of building robust economic models, etc. are some of the main problems.
Reading Galaxy Digital’s comprehensive report on The Ethereum Government, gives a clear idea of the many complications of implementing distributed governance at scale. Even on the world’s ‘most sprawling blockchain’ with +4000 dApps and +7000 devs, the decision-making happens off-chain for most parts. The Ethereum governance, though highly decentralized, does not involve ETH holders voting through on-chain proposals.
From coordinating multiple, diverse stakeholders to tackling the risks of manipulation by whales, complexity is indeed one of the biggest challenges to achieving the ideal state of free and fair distributed governance.
Programmable governance is the future
Emerging no-code platforms are solving both aspects of the governance problem. They let DAOs easily implement programmable circular economies, with fees for delegates and various other incentive/revenue streams. That too, with minimal development and implementation costs.
As with abstractions in other areas of the blockchain/web3 stack — onboarding, wallets, chains, VMs, etc. — programmable governance liberates DAOs. It gives them the flexibility necessary for efficient distributed governance, without compromising security or other business interests.
For example, DAOs can choose on-chain or off-chain models out of the box which lowers entry barriers and streamlines the adoption curve.
Besides direct rewards and revenue-sharing, the ability to adapt/offer custom models serves as an additional motivation for voters. They are more likely to participate actively in a system that is built with their interests and vibe in mind, rather than in a generic setup. No matter how close to the ‘industry standard’ the latter might be.
Motivation is multi-dimensional, so the efforts to motivate (here, voters) must be likewise. DAOs cannot get away with half-baked approaches. Especially when the complexity angle is losing its appeal.
Robust, efficient, and truly community-centric decentralized governance is no longer a utopia. The toolkit is here and will mature to its full potential in a few years. Ensuring wide and easy access to these tools is a must, of course.
But above all, it’s about a progressive mindset and a genuine willingness to share and distribute power/control. That’s the endgame for DAOs — the fulfillment of their promise. Because solving historic unfairness and disbalances in decision-making is a pressing need, not an option. And those who try getting by with excuses will perish sooner or later.
Read Also: What is Programmable Cryptography? Concepts, Applications, and Future Prospects
