Decentralised autonomous organisations (DAOs) are a relatively new phenomenon that has emerged with the growth of blockchain technology. A DAO is an organisation controlled by a community of token holders who have a say in the organisation's decision-making process. One of the key features of a DAO is its ability to enable decentralised decision-making. DAOs rely on a voting mechanism to reach consensus on decisions, which is crucial to the organisation's success.
The DAO trilemma
The DAO trilemma refers to the challenge of achieving scale, quality, and access in DAO decision-making. Scale refers to the ability of the DAO to accommodate a large number of members and their contributions. Quality refers to the ability to make informed and effective decisions in the best interests of the DAO and its members. Access refers to the power of all members to participate in decision-making processes without barriers or restrictions. Balancing these three elements is crucial for successful DAO governance.
Treasury governance and legal risk
Treasury governance in a DAO involves managing and allocating the funds generated by the DAO. This process determines how much will be spent, where, and by whom.
DAOs face several legal challenges during treasury governance. Allocation of funds may be subject to taxation, and DAOs must comply with tax reporting requirements. Because a decentralised system manages the funds, fraud or misappropriation is a real risk. DAOs must ensure that their treasury governance is designed to prevent it. Funds must be spent for legitimate purposes; if they are misused, the DAO may be held liable. Using funds for projects that violate intellectual property rights may lead to legal action against the DAO.
To mitigate these risks, DAOs can adopt governance mechanisms that provide transparency, accountability, and security.
Voting mechanisms in use
One token, one vote
Each token holder is entitled to one vote per token owned, giving all members equal voting power. The system is straightforward, which makes it a popular choice. The downsides: it does not consider the contribution or expertise of the token holder, and it can lead to vote buying and centralisation, since large holders can disproportionately influence decisions. Token issuance and distribution must be fair and transparent, as inconsistencies or favouritism can lead to legal challenges and reputational damage.
One person, one vote
Each individual has an equal say in the decision-making process regardless of how many tokens they hold. The advantage is that decisions reflect the will of the majority rather than the wealth of a few token holders. The disadvantage is that larger holders may not bother to participate, since their voting power is equal to that of small holders. The system can also be susceptible to voter apathy or coordinated manipulation.
Reputation-based voting
Voting power is proportional to the member's reputation within the DAO community. The model rewards active participation and contribution. The drawbacks are real: reputation is hard to measure objectively, and the system can concentrate power among a small group of highly reputed individuals.
Delegated voting (liquid democracy)
Token holders delegate their voting power to a representative. Delegated voting can increase participation and reduce voter apathy, since busy holders can hand decisions to a trusted expert. The risks are corruption or capture of delegates, and centralisation if too few delegates end up wielding most of the voting power.
Holographic voting
Introduced by DAOstack, holographic voting balances meaningful participation with scale. Predictors stake the GEN token for or against a proposal; correct bets are rewarded and incorrect ones lose tokens. Boosting allows for a lower approval threshold if enough predictors back a proposal, making the system highly scalable and avoiding quorum-invoked deadlocks.
Quadratic voting
Members allocate voting power using a quadratic weighting function. The more strongly a member feels about a proposal, the more tokens they spend, but each additional vote costs more. This prevents majority tyranny and promotes a more equitable distribution of decision-making power, at the cost of additional technical infrastructure to implement.
Conviction voting
Conviction voting combines elements of quadratic voting and token-weighted voting. Voters express conviction by locking up tokens supporting a proposal; the longer the lockup, the higher the conviction. Voters can update their preferences over time, and the system rewards careful, sustained support over short-term tactical voting. The challenges are designing clear rules for unlocking tokens and managing potential voter collusion.
Choosing a mechanism
There is no single right answer. The right mechanism depends on the DAO's purpose, scale, and tolerance for legal risk. A treasury-heavy DAO with significant funds at stake should weight security and accountability highly. A protocol DAO with a broad token holder base may prefer simpler systems. In every case, the voting design should be documented in the DAO's constitution and reviewed against the regulatory regime that applies in the jurisdictions where members and the entity itself sit.