Governance in the crypto space seeks to direct decentralized autonomous organizations (DAOs) in a democratic manner. It comes under unprecedented assault, challenging its integrity, independence and effectiveness. We know that community-led decision-making has incredible potential. Low participation rates, tactical influence, and the danger of late bribing erode this ideal of a truly decentralized governance model. These problems raise legitimate concerns regarding the long-term viability of DAOs. They undermine the legitimacy of these organizations when they are prompt to influence the future development of blockchain technology and decentralized finance (DeFi).
Low Participation Rates Plague DAOs
One of the biggest issues facing crypto governance today is the depressing extent to which token holders don’t vote. As we explored in a recent post, in many DAOs, less than 5% of token holders vote on governance proposals. This indifference cedes important choices to a vocal and well-organized few. These distributed and dispersed forms of state capture raise deep questions about the representativeness and legitimacy of governance outcomes. Without broad participation, it is all too easy for the decisions to be driven by a few organized interest groups. This approach ignores the needs and input of the broader community.
Several factors contribute to low participation rates. Furthermore, average token holders will often not have the time, expertise, or incentive to participate in governance processes. The complexity of proposals, the technical jargon often used in discussions, and the perceived lack of impact of individual votes can discourage participation. Not all token holders are passive investors, but many of them are. They are primarily motivated by the financial upside of their tokens and little else. One key feature of DAOs is the governance layer.
The lack of a minimum, required participation threshold only adds to the issue of under-participation. Without some minimum level of participation needed to make a vote valid, governance is opened up to tactical manipulation. A small group of well-coordinated actors can potentially sway decisions by mobilizing a relatively small number of votes, even if their views are not representative of the broader community. This participation threshold absence can harm the legitimacy of governance outcomes and decrease trust in the DAO.
Compound's Governance Models
Compound, one of the biggest DeFi protocols, provides interesting real-world context on what governance in crypto looks like in practice. Compound uses Compound Governor Alpha and Governor Governor Bravo, governance frameworks designed and tested in the ecosystem of the Compound protocol itself. These frameworks provide a structured approach to proposal creation, discussion, and voting, enabling token holders to collectively shape the future of the protocol.
Compound Governance v3 implements a new, defined process that moves from proposal drafting through to execution. This process starts with the submission of a detailed proposal, which must immediately go through a cycle of robust community discussion and feedback. If a proposal fits their rubric, it moves to a community vote. This would allow token holders to then actively publicize their support or opposition. If the proposal passes with enough votes, it’s executed, and the changes take effect on the Compound protocol.
The tools Compound uses include quorum, delay mechanisms, and supermajority thresholds. Quorum adds an extra layer of complexity by requiring that a minimum number of tokens vote on any vote for it to “count.” Timing mechanisms give public officials and advocates a clear timeline for debate and action, reducing the risk of rushed decisions. Support thresholds need a majority – a specific percentage or quota of votes in support of any proposal in order for it to pass. These mechanisms are meant to balance the desire for quick, considered governance decisions with the checks and balance that the broader will of the community provides.
Compound Governor Bravo Compound takes on-chain, executable governance a step further with their Governor Bravo framework. This means that governance decisions are automatically enforced on-chain, removing the need for intermediaries to carry out these actions. These qualities of transparency and immutability make the process of governance more secure and trustworthy. Beyond that, the on-chain nature of Compound’s governance increases the opportunities for automation and efficiency. As a result, this innovation dramatically lowers the risk of human error or tampering.
Governance is additionally executed through Snapshot and is completely off-chain. Snapshot provides token holders with a way to vote with their signatures while bypassing gas fees. This new off-chain voting mechanism makes governance more accessible to a larger subset of token holders. Notably, it eliminates the cost barrier associated with on-chain transactions. Although the actual voting occurs off-chain, the on-chain result allows for their transparency and verifiability as well.
Compound has become a touchstone for on-chain executable governance. Its participatory governance frameworks are a model. Beyond those features, its commitment to community-led decision-making makes it a shining example for other DAOs to follow. As a whole, Compound’s experience offers a number of different treasure maps full of lessons learned toward the creation of stronger and healthier crypto governance models.
MakerDAO's Governance Stack
MakerDAO, the organization behind the DAI stablecoin, has established its own governance system. It is high time that this system starts excelling at managing its complex and critical infrastructure. Starting in 2023-2024, MakerDAO began to implement its own governance stack. This tech stack includes a delegate verification process, executive votes and time-delay modules to improve decision-making. This intricate layer of governance serves to ensure the peg of the DAI stablecoin remains intact. It further protects the integrity of the Maker Protocol and its assets.
MakerDAO’s governance stack features a delegate verification process. With an eye to keeping participation manageable, token holders can delegate their voting power to trusted representatives. These federal representatives have the technical knowledge and practical experience necessary to determine what is reasonable. A thorough delegate verification process serves to confirm that delegates are the most qualified individuals. Additionally, it reiterates their pledge to do what’s best for the MakerDAO community.
The governance stack works to provide executive votes and time-delay modules for major decisions. Executive votes are extremely important to the structure of the Maker Protocol. They play an essential role in driving important decisions such as changing interest rates and developing new functions. Time-delay modules provide a buffer period between proposal approval and project deployment. This is an opportunity for the public community to consider the decision and raise any concerns or objections.
This intentional, policy-based approach to governance proactively mitigates risks. It guarantees that these decisions are made openly and with public accountability. Even so, MakerDAO’s governance stack offers a perfect case study in what makes strong governance necessary for governing these large, complex, and critical decentralized systems.
The Influence of Token Locking
The time period for which users lock their tokens has a huge effect on their power within a DAO. Users who lock tokens for at least 1 year and up to 4 years earn the highest level of influence. This unique mechanism provides an incentive for long-term commitment within the DAO. It further aligns the interests of token holders with the long-term success of the organization.
By locking their tokens for a longer duration, users express a stronger belief in the DAO’s long-term potential. This move is indicative of their pledge to pour money into its long-term development. This commitment increases voting power and influence across the entire region. In turn, this gives long-term holders of the token more power and incentive to better guide the direction of the DAO.
This mechanism can create challenges. This would be a major incentive against short-term participation. As a consequence, it can overly anoint power to the few with sustained tokens held over the long term. Only we can appropriately reward long-term commitment without closing the governance process to new ideas and input. To truly protect all token holders and facilitate their participation and contribution.
The Risk of Late Bribing
Late bribing stands as a powerful countermeasure to the tampering of crypto governance. This happens when outside groups fund an outcome late in the voting period. These kinds of actions can financially tip the scales of an election. This occurs even when a vast majority of token holders are against the resulting action.
Many crypto governance systems are opaque and anonymous. Consequently, this breeds an environment where late bribing is difficult to detect and prevent. Third, malicious actors can use anonymous accounts and sophisticated transactions to hide their efforts, making it difficult to investigate or trace.
The possibility of late bribing also taints the fairness and legitimacy of crypto governance. This institutional framework is what makes their decisions fungible. The effect has been that decisions are no longer made on the merits of the best proposals or the community’s preferred will. Tackling the problem of late bribing is an important step towards maintaining integrity and trustworthiness for these DAOs to succeed long term.
Solutions and Mitigation Strategies
To effectively deal with the problems of low turnout, tactical voting and chronological bribery takes a little more than a piecemeal effort. DAOs require additional strategies to incentivize participation, improve transparency, and safeguard against malicious actors.
One possible solution is to create incentives that encourage more aggressive civic participation in government. You can incentivize token holders by distributing tokens to them. Provide them incentives like fee waivers and other rewards for participating in the let us vote processes. DAOs can encourage engagement by enticing people to get involved. This helps guarantee that the decisions made truly represent a broader variety of constituents’ viewpoints.
A second, complementary tactic is to increase transparency in discretionary governance processes. Technicalities aside, you owe the public easy to understand, concise information about a proposal. Further, ensure voting records are available to the public and require disclosure of potential conflicts of interest. One of the tenets of DAOs is to build trust and accountability through greater transparency. This greatly limits the ability of malicious actors to game the system.
To address the issue of late bribing, DAOs can incorporate protective mechanisms. This might entail anything from standardizing how long tokens must maintain a voting period to requiring disclosure of any large token holders to instituting anti-collusion structures. DAOs lower the bar for manipulation, as it becomes easier to bribe voters. This helps ensure that decisions are made on the merits of the proposals, not on political considerations.
