The Governance Lemon Awards 🍋🥇

Overview

Decentralized governance is all the rage these days. On the surface, almost every new emoji token has ambitious decentralized governance plans. But we are still early! Many lessons have been learned the hard way, and many more are around the corner. The Governance Lemon Awards were created to celebrate our learnings, and to share knowledge gained and commiserate in our growth pains.

Hopefully these learnings can help new projects make better decisions as we keep experimenting and driving the space forward. If your project has some horror stories to share, send me an email at eric@daostack.io, and we will include you in our follow up article.

🍋🥇 $MTA, $FEW, $SUSHI, $SWERVE

All of these projects unfortunately suffered from a similar community backlash due to early insiders potentially profiting at the expense of others. Whether or not there was any truth to these claims is another topic altogether, but valuable lessons can still be learned.

• mStable had an IDO on July 18th, using the Mesa platform. The tokens were listed at $3.5. Unfortunately, only three days before, the team sold $3.1M MTA to investors, at a price of $0.15.
• The $FEW debacle took place over Sept 22. If you aren’t in the loop, here’s a summary for you.
• $SUSHI, on the other hand, was subject to Chef Nomi’s token sell-off, just over a week after launch.
• $SWERVE, a Curve fork, speculatively faked a “fair launch”.

Takeaways:

• Vesting periods are important since they help align incentives and ensure individuals are vested in the long term success of a project. Projects should also consider funding mechanisms like a DAICO instead to further build community trust.
• Fair launches > unfair launches…and YOU CAN’T FAKE IT! Actually, that’s not true, you can definitely fake it, for a while.
• For investors in these projects, this risk needs to be priced in. Be careful, and assume people will do what they can to maximize their gains, no matter how committed they seem.

🍋🥇 $CRV

Curve had some early governance drama, but reCRV token distribution (voting power in the DAO) has since gotten much better. New projects using quorum-based voting should ensure they don’t get in a situation where very few members can dictate complete control over the project.

Takeaways:

• The voting power distribution in your economy is important! As Jake Brukhman has previously alluded to, a poor token distribution will likely end up being priced into governance tokens. If you do go with a skewed token distribution, you might want to use some other voting mechanism such as quadratic voting to ensure voting power is more distributed.

🍋🥇 $DXD

The launch of the DAO was successful in distributing governance to a wide variety of folks. Shortly after, products like the DutchX and Mesa (both Gnosis products) were handed over to the DAO. The DAO recently raised funds via a continuous bonding curve, which issued $DXD token.

Takeaways:

• Despite the DXdao being given both OWL tokens as well as GEN tokens, there is still no long term alignment of the DAO and either DAOstack and Gnosis. Vesting of tokens might have helped with that, to a certain extent.
• The $DXD tokenholders were not given voting power in the DAO, which also leads to another misalignment of incentives. The DAO is currently looking into ways of giving voting power to tokenholders, to give them better representation.

🍋🥇 $UNI

Uniswap launched their token on September 16th 2020. The airdrop was a nice little present, but governance hit some snags. Most importantly was the super high $UNI threshold required to make proposals to Uniswap. As it currently stands, only Binance (🤭) has enough voting power to submit proposals. This has resulted in groups creating $UNI pools to make it possible for others to submit proposals.

Is such a high threshold “good” governance design? In one way, it behaves almost as elected political representatives, which seems to be a more effective way to govern… so maybe this is actually a good direction. Time will tell.

Also very bizarre is the fact that tokens were issued at launch, instead of being issued according to the vesting schedule they outlined in their intro doc, below. A great article on the topic is linked here.

Finally, the following claim is quite surprising:

“…team members will not participate directly in governance for the foreseeable future, although they may delegate votes to protocol delegates without seeking to influence their voting decisions.”

Why shouldn’t they participate in the governance of their protocol? Very bizarre, and likely not true if push came to shove.

Takeaways:

• Although there hasn’t really been much backlash from the lack of vesting tokens, it would be great to have transparent communication by the team.
• Decentralization theatre shouldn’t be used, particularly if your stakeholders are savvy crypto nerds.

🍋🥇 $RARI

Rarible launched their $RARI token earlier this year, and has seen impressive growth because of it.

The ability to snapshot the token wasn’t included in the ERC-20 contract, which will likely mean that token holders will need to lock tokens in order to obtain voting power in their future DAO.

For many projects, this isn’t a problem. In the case of Rarible however, it would have been preferable*. Including snapshot would have allowed the team to have a much smoother UX for tokenholders when governance time rolls around.

*This information was obtained through discussions with the Rarible team, which were kind enough to include this learning point in this article*

Takeaways:

• Ensure the right functionality is in your ERC-20 before launching! Snapshot is likely at the top of the list.

🍋🥇 $Genesis DAO

Genesis DAO was a DAO launched by DAOstack in 2018. The hope was that this DAO would eventually inherit the DAOstack protocol, as well as a substantial GEN treasury. In early 2020, the experiment ended early.

The main issues with the experiment included: 1) The DAO members with voting power had very little overlap with GEN holders (DAOstack’s native token), so there was a misalignment of interests from an early stage. 2) There was very poor accountability within the DAO. A number of projects were funded and did not deliver. 3) Because there was no fundamental alignment of interests and few clearly stated DAO goals, the DAO ended up funding all kinds of projects, many of which had nothing to do with DAOstack’s product direction.

Takeaways:

• Having the right stakeholders is critical to have a successful decentralized community. Without the right stakeholders and a clear vision, you may end up going in circles.
• Decentralizing progressively is a good strategy, as you can “go back” once you are decentralized.
• Having effective accountability measures is important (a problem that is still present in many communities today).

🍋🥇 $DORG

dOrg is a dev cooperative that launched on the DAOstack platform in 2019. In 2020, some changes were made to the DAO parameters, which made it impossible to upgrade the DAO moving forward. Thankfully, the team only had to launch a new DAO, transfer funds, and periodically check their clients weren’t making payments to the old DAO address.

Takeaways:

• Changing DAO parameters are particularly risky. DAO protocols like DAOstack have added security measures for these types of proposals (longer voting time, higher proposal staking requirement), but there are still risks! Be careful.

🍋🥇 $YAM

$YAM was the catalyst that kickstarted a huge token farming rush in Aug-Sept 2020. $YAM allowed people to farm tokens by providing liquidity to certain Uniswap pairs. The resulting farmed $YAMS have an elastic token supply mechanic identical to Ampleforth, but with a % of positive rebases being directed to a community governed DAO.

Unfortunately, shortly after the start of rebasing, a bug was found which made it impossible for any proposal to pass in the DAO, thus locking the community governed funds in the DAO forever. Although this sort of governance bug is pretty specific, it does highlight one of the issues with pure quorum based token voting.

Takeaways:

• If you do end up using quorum based voting, make sure your parameters are chosen properly.
• Possibly consider another governance mechanism! There are many being experimented with, such as conviction voting, holographic consensus, quadratic voting, among others.

Conclusions

Decentralized governance is a complicated beast, and many projects will stumble along the way. Let’s not be afraid to share our learnings, and help drive the space forward for everyone. If you have any learnings from your governance experiments, please share them in the comments below.