Corporate governance in Web 3
Historically, a board of directors is a group of people elected by a company’s shareholders to represent their interests.
From a behavioural perspective, a board is a collection of individuals trying to operate as a group. Functioning as a group is something many people are not comfortable with. Thus, each board evolves with its own culture. Each culture is dictated by the backgrounds of the individuals on the board. Therefore, we might assume that there is a certain decision bias programmed here by definition.
Generally speaking, the board has the responsibility of developing a governance system for the business, defining strategic directions, controlling and incentivizing company management.
Rationale
On the contrary, decentralized autonomous organizations (DAOs) rely on a set of smart contracts and do not have a physical address or people in formal management roles. The target architecture is that the DAO removes delegated power from the board of directors and places it directly in the hands of owners. By doing this, the DAO removes the ability of board directors and fund managers to misdirect and waste investor funds.
Thus, DAOs are just the digital version of the above-mentioned Board of Directors where all rules and regulations are written in the source code, rather than on a piece of paper.
Democracy
There’s also democratic governance incorporated. There is a council with members having shares in the DAO in the form of tokens. These tokens can be used to vote in the DAO to take a certain decision. The more tokens a holder has, the more control they will have on the DAO. Each member will have the rights to submit the proposal to take certain decisions.
Moreover, the voting power can be optionally delegated to someone to whom a member trusts more. This is just like voting by proxy in real-world organizations.
On top, an open-source protocol can be implemented to define more sophisticated governance principles which are auditable, censorship-resistant, and anonymous due to the underlying DLT. Furthermore, a simple DAO can be implemented as a multi-signature account, with a vote threshold required to perform the operation.
How to ensure scalable and high-speed governance that blocks bad actors?
DAO governance assumes that all actions are legitimate unless proven otherwise. In practice, this means that governance becomes a never-sleeping factory of proposals that are scheduled as on-chain transactions to execute by default unless they are specifically challenged by the council.
In the nutshell, to establish DAO you need to:
- Define the overall target and parameters of your community
- Execute control, e.g. transfer of funds can be limited to some addresses as council members
- Implement some windows for deliberation to give a chance to each council member to challenge proposals, where a successful challenge will cancel the transaction
- Define the collateral by the DAO to schedule a transfer of DAO funds
Collateral is refunded at the close of the execution window unless someone has successfully challenged the transaction, in which case it will be forfeited to the ecosystem fund.
Furthermore, DAOs themselves can be tokenized and DAO tokens can be allocated to multiple accounts. DAO tokens can have both governance and voting rights, as well as yield farming instruments.
By implementing this framework, democratic governance can be realised in the form of a DAO and its council, resulting in unparalleled and high-speed fair decision-making.
