Beyond Governance Power Determined by Capital
‘Web 3 is the internet owned by the builders and users, orchestrated with tokens’ C.dixon.
Meaningful ownership is integral to what makes web3 innovative and interesting. It is this feature which allows DAOs to act with speed and agility, and to incentivise a wide pool of individuals towards the success of the DAO. Meaningful ownership is the secret sauce which will allow DAOs to outcompete their web2 counterparts.
Ownership of DAOs is typically determined by the number of tokens an individual holds which corresponds heavily to the amount of capital an individual has invested in the project.
The logic is that the more capital an individual has invested in a project the more skin in the game they have in that project’s success. This in turn should mean they are the best candidates for making decisions on how the protocol is governed. While this may be true in certain situations, it is not always the case.
Capital as the Only Determinant of Governance Power
Token holders who contribute only capital rather than time and labor may prioritize short-term financial gain over long-term protocol health. Contributors who add value outside of or in addition to capital, may have a substantially smaller voice in governance relative to investors despite being the closest to the project’s development and the main drivers of the project’s success. Experts on a given topic could find their voices drowned out by a sea of armchair commentators who just want to see the token price go up.
We know from the non-crypto economy that wealth tends to concentrate into relatively few hands. So if wealth is the only determinant of governance power, concentration of that power is likely.
We know from past crypto cycles that hype and hysteria can drive short term thinking and greed, so if holding a token is all it takes to run a protocol, that thinking will prevail.
We know that the concentration of power can stifle innovation and lead to inefficient businesses, so if power within a DAO is not consciously decentralized then the same inefficiencies which plague large traditional businesses will likely plague DAOs too.
What is the alternative? Does one exist at all? Thus far in the evolution of DAOs, equating governance power with capital invested has been the norm. But there is a rich design space open and available to all for allocating governance power in new ways which better support a project’s ambitions.
Alternative Approaches
Staking models are one of these attempts at improved governance design. Staking protocols guard against mercenary capital taking large positions in a governance token for short periods to swing particular votes. The alignment of long term holders with governance power sounds reasonable on the surface. But the fundamental link between wealth and power is still present in staking models. Simply equating power to time in the protocol is a blunt metric.
Another potential solution, delegated voting, gives holders who don’t have the time or the motive to stay up to speed with governance matters the option to delegate their voting power to others. This looks similar to representative democracy but is much more fluid as token holders can switch their delegations any time.
Additionally, appointing councils or giving specific teams operational autonomy removes token holders from day to day decisions entirely. This option recognizes that in any DAO there may be contributors who work on a given project day in day out, while simultaneously there will be passive token holders as well. DAO contributors working consistently and closely at the heart of a project can often be best positioned to make decisions on how certain parts of that project are run. Most DAOs tend to give teams some level of autonomy as it is simply impractical to vote for every decision. There remains a large amount of variance regarding how and when decisions are brought to the community vs just being handled by DAO contributors.
Spending time debating governance structures rather than actually building may seem counter-productive. There is a compelling argument that we should be automating as much human decision making as possible and that political debates in DAOs are a waste of time and energy. After all, internal politics are exactly the kind of thing that blockchains and smart contracts are designed to help us avoid.
Despite this, the reality remains that human decision making is not going anywhere anytime soon. So long as humans need to take a front seat in the process of building anything, questions over who should be making what decisions will need to be answered.
So what does meaningful ownership actually look like? This is a subjective question but we can try to present a high level answer by breaking the question down in to four:
- Who gets ownership rights?
- How did they get these rights?
- How do they exercise these rights, and what impact does it have on the DAO?
- Why is ownership of a given DAO desirable in the first place?
Satisfactory answers to these four questions should give us some insight into what meaningful ownership looks like.
- Who gets ownership rights?
If you believe that hard work should be rewarded it naturally follows that the builders behind a given DAO should be awarded ownership rights. Equitable reflection of a contributor’s inputs into a project would be a satisfactory answer to this first question. In addition, the users of a product could be awarded ownership rights. This is core to web3: the value creators of a product can and should be given a stake in that project. This is integral to how web3 products achieve network effects and outcompete their web2 counterparts.
2. How did they get these rights?
A possible answer could be: through ingenuity, skill, hard work and dedication. They saw a problem in the world, built a solution and the market has agreed this enterprise is a valuable use of resources. For users, they could be awarded ownership rights for contributing to the success of the product.
It should be noted that neither of our answers to who gets governance rights and how they exercise them rely on the amount of capital invested.
3. How do they exercise these rights, and what impact does it have on the DAO?
In a DAO ownership rights are exercised through token voting. On-chain governance involves actually executing code upon a successful vote but most DAOs have not adopted truly on-chain governance and typically still rely on a multi-signature wallet to execute transactions. In this setup holders vote on a proposal by signing a transaction on the blockchain and the proposal is then carried out by whoever controls the multi-sig. Without on-chain governance, token holders are trusting that the multi-sig signers will enact the will of the community.
In practise a large amount of governance activity within DAOs happens off-chain, before any voting takes place. Discord channels, in-person events and public online forums are where ideas and proposals are discussed and iterated over.
In terms of the impact this has on the DAO, there is a trade-off between speed of execution and number of decisions put to token holders:
The more votes that are held, the slower the execution of the DAO is likely to be. Exactly which decisions sit with DAO contributors and which sit with all token holders is an important decision for all DAOs.
This is one question where a satisfactory answer is likely to be different for every project but some balance between dedicated working groups with the authority to make decisions and token holder voting is paramount.
4. Why is ownership of a given DAO demanded in the first place?
Governance rights in isolation are not a sufficient demand driver. A share in revenue or utility within a product are good reasons for holding a DAO’s token. A holder may also simply be speculating that a DAO token will go up in price, but if this is the only reason for holding a token, it is likely to be volatile and heavily driven by market sentiment.
Meaningful Ownership as a First Principle
To conclude, meaningful ownership is an integral feature of web3. It is through meaningful ownership that DAOs can achieve a competitive advantage of web2 businesses. A decentralized token holder base that is properly incentivised gives DAOs a wider pool to draw ideas and talent from. The transparency of on-chain voting gives token holders more of the information they need to make informed decisions that can help the business grow and succeed. Achieving meaningful ownership will look different for each DAO but some decisions will need to be taken by all DAOs:
- Who is given ownership rights
- How they get those rights
- How they execute those rights including balancing the number of decisions pushed to the community vs decisions taken by contributors
- Why those rights are demanded
Thinking through these questions and translating them into tokenomic and system design that does not rely solely on capital invested, will stand a DAO in good stead for success.
