Chelo Labs Mini DAO v2: Empowering Smaller Token Holders in Governance (A whale against the small fishes)
The introduction of governance tokens, such as Compound protocol, led to a significant surge in the DAO sector. The opportunity to participate in governance was a major milestone. However, as the number of token holders and treasury grew, it became more challenging for proposals to gain acceptance in DAOs. This is because only a small group of users, known as “whales,” can propose and dominate the decision-making, leading to centralization and inequality in decentralized protocols..
The possibility of a limited number of “whales” being the only ones able to propose in the DAO space in the future goes against the fundamental values of decentralization, trust, and community involvement that are essential to the web3 space. This could potentially discourage participation from the wider community and hinder the emergence of creative ideas and innovations that have made the DAO space so thrilling and transformative.
- The Uniswap governance process requires a minimum of 2.5 million UNI tokens to make a proposal (at a rate of USD6.28 per UNI it requires delegating USD15.7 million!)
- Compound requires 1% of COMP to make a proposal (currently 100k COMP or roughly USD4.5million).
This means that smaller token holders may find it challenging to have their voices heard and influence the direction of the protocol (despite various protocols attempts to allow vote delegation).
Currently, some DAOs are already facing this issue, but it’s likely to become more widespread in the future. Centralizing decision-making in the hands of a few powerful actors contradicts the principles of decentralization and trustlessness that underpin the web3 space. This could result in reduced community engagement and restrict innovative ideas from smaller token holders.
The current governance structure of many DAOs may result in the centralization of decision-making power among a small group of token holders, which can silence the voices of smaller holders. To counteract the power of whales, many DAOs like Uniswap, AAVE, optimism, ENS and more allow for vote delegation (i.e., delegating the vote to another DAO member until the original owner decides to revoke).
Delegation of votes works similarly as in a parliamentary democracy — the delegate is allowed to take decisions on behalf of the many members, with or without their consent. If the member who delegates is not fully involved in the governance policy, their only recourse is to remove the delegation; voter apathy might mean that votes against their interest happen many times.
However, the modular nature of blockchain technology allows for the development of new solutions to address such challenges.
In a previous article, we introduced Mini DAO v2 (https://medium.com/chelo-finance/decentralized-autonomous-organizations-made-easy-with-mini-dao-v2-562ef1fce209), which utilizes working groups to improve DAO governance. In this article, we propose a novel approach where decision-making power is delegated to interest groups for specific proposals. This revolutionary idea has the potential to significantly increase community engagement and ensure that all voices are heard in the decision-making process.
Let’s dive into how this solution works.
A DAO member can create a mini DAO with its own settings and purpose, and other members can stake their governance tokens and receive vGov tokens. This allows everyone to propose and contribute to the mini DAO, which can then make a proposal in the main DAO. If the proposal is approved, it moves into the main DAO. The vGov tokens can be transferable, creating a second market for governance tokens (subject to local regulations! — legal expertise is required), and providing a yield strategy for stakers. This solution improves delegate power, giving more members a voice in the decision-making process of a DAO. Additionally, Mini DAO v2 provides a time-limited option, making token holders limited partners, and giving them the flexibility to participate in proposals that align with their interests and goals without being locked into a specific DAO for the long term.
Vote delegation partially addresses the aggregation of multiple smaller DAO members, but Mini DAO v2 also provides a time-limited option, which means that smaller token holders are not obligated to stay permanently. When the proposal period ends, all tokens are returned to the original owners, who can then choose to participate in another proposal. This approach makes token holders limited partners, allowing them to participate in proposals that align with their interests and goals without being locked into a specific DAO for the long term.
Finally, the Mini DAO v2 can also help to attract more institutional investors to the world of decentralized finance. Large institutional investors like A16Z and other VCs are often deterred from investing in decentralized protocols because they lack control over the decision-making process. By allowing smaller token holders to form mini-DAOs and participate in the decision-making process, the Mini DAO v2 can help to make decentralized protocols more attractive to institutional investors, which could, in turn, lead to greater adoption and growth.
Mini DAO v2 is an innovative approach to decentralized governance that has the potential to make the governance of decentralized protocols more decentralized, transparent, and equitable. By allowing smaller token holders to pool their voting power and participate in the decision-making process, the Mini DAO v2 can help to reduce the influence of large whales and make decentralized protocols more accessible to a wider range of investors.
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