A Lack of Standardization in Decentralized Governance
StableNode Governance Series #2
In this article, we will dive into the topic of Decentralized Governance. You’ll learn about traditional governance, decentralized governance and its lifecycles, and the lack of standardization within this space.
What is Governance?
Governance generally means coming to a decision and how you come to that decision. In traditional governance, the board of directors or CEO are the individuals that influence the management of the company. Whereas decentralized governance (DeGov) revolves around providing all stakeholders with an opportunity to have an impact. Still, like with traditional governance, the main aim is to have a formal process on how to move from point A to point B. These standards and procedures are a formal description of the processes that should be followed to enact a change to the protocol. For example, if a stakeholder in MakerDAO wanted to adjust the parameters of the vaults, they would follow the outlined process in their governance documentation to enact the change successfully.
Governance in both worlds, web3 and traditional, impacts today’s proposals. More importantly, it sets a precedent for the future of governance, and developing a sustainable and effective framework is of more importance than short-term success. An ideal framework allows a protocol to enact change safely and effectively with genuine participation.
Decentralized governance will follow a similar path to traditional governance, but DAOs uphold the creation and execution of the standards instead of a central organization.
The Basics of DeGov
As protocols explore DeGov, more standards are being created to uphold a certain level of value required to participate in governance. These standards can be frustrating and restrictive, but for large organizations such as companies or DAOs, they are essential to ensure a somewhat smooth running of the organization. For a DAO to make a decision such as:
- DAO-to-DAO partnerships
- Fee adjustments
- Adjust voting parameters
An ENS vote on SnapShot decided to fund a DAO-Governed Identity Service
It requires a formal process followed through a lifecycle of community feedback, review, proposal, and finally voting. Well-known protocols require community discussion, signaling, off-chain voting, and on-chain voting, but each varies in execution.
This variety within decentralized governance provides an uncertainty of how governance within a DAO should be, spawning a range of practices, with some being more effective than others.
Types of Proposals
Generally, there are two types of proposals; social and technical. A social proposal does not include any smart contract changes and requires an off-chain vote. A technical proposal will consist of changes to a smart contract therefore it will require an on-chain vote. These differences influence the lifecycle of a proposal.
An example of Element Finances’ lifecycle diagram of their on-chain proposal
Here are a few more examples of the lifecycle of a proposal:
- Forum discussion -> Signaling -> Review-> Off-chain
- Forum discussion -> Signaling -> Off-chain -> Review -> On-chain
- Forum discussion -> Signaling -> Review-> Off-chain -> Review -> On-chain
Each DAO has its own framework for decentralizing governance. Some are more thorough than others, but this variability provides an opportunity to identify the superior practices within DeGov and create a standard for DAOs to utilize.
One lifecycle from our example does not include an on-chain proposal, and less mature DAOs commonly employ this practice. Even when a proposal may require some form of on-chain execution, the less mature DAOs still opt for an off-chain proposal, which may be considered risky, but is it acceptable due to their lack of maturity?
Decentralized governance is a new concept, leaving it vulnerable to exploitation by malicious users, especially for younger DAOs. A lack of standardization for DeGov will lead to repeated mistakes by DAOs, affecting the contributors, token holders, and the DAO.
Dangers of Decentralized governance
Some of these mistakes can involve operational errors such as treasury management and diversification into stablecoins or non-native tokens of the protocol. Some protocols have paid the price for their lack of diversification, and this can potentially cost protocols a chance of success if their runaway is reduced. Due to the recent slump in the market, we have seen protocol treasuries reduce by over 50% since December 2021. With some form of standardization, DAOs would recognize the importance of treasury diversification and implement it sooner rather than later.
Decentralized governance is powerful but can be used by malicious users to hurt a DAO. Protocols have been taken over or liquidated. Individuals with large coin holdings can use coin voting to shift the protocol favoring their interests. A lack of transparency can lead to distrust, affecting the protocol and its token value. A lack of documentation can lead to a lack of voter participation.
Conclusion
This lack of standardization for DAOs on the structure of their DeGov creates a broad range within DeGov. We must learn from both the successful DAOs and the unsuccessful DAOs in their execution of decentralized governance to identify the primary points that make a decentralized system effective.
We look forward to working with a group of experts who can contribute to this discussion and support us as we develop a set of standards for decentralized governance.
Learn more — StableNode Governance Series
- #1 — The Road to Decentralized Governance in web3
- #3 — How do DAOs work? Decentralized Workforces Behind the Scenes
- #4 — Delegates and Streamlined Governance
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About StableNode
StableNode is a Research and Investment firm dedicated to growth and governance advisory. StableNode operates Blockchain Node Validations and uses the accruing rewards for Investments in early-stage Crypto and Blockchain ventures as well as for liquidity provision in DeFi Applications. We provide a broad range of advisory, supporting and guiding our portfolio companies, founders and their teams from early-stage to growth-at-scale. With long standing experience in decentralized governance, we structure processes and frameworks around protocols and become active participants post launch for the projects that are part of our investment portfolio.
Get in touch,
- if you would like to support us in our governance efforts,
- if you and your team need guidance on governance related matters, or
- if you are a founder who is building something interesting in web3
