Decentralized Autonomous Organizations (DAOs) have been heralded as the future of governance, enabling a more egalitarian approach to decision-making. However, decentralizing leadership is not a magic solution that immediately leads to better results. To truly get the best out of a decentralized organization, steps must be taken to regulate weighted voting and tokenomics. If not carefully balanced, DAOs can implode – and some have already.
Decentralized governance explained
DAOs provide a model for managing a project or company that distributes voting rights among all members. There is usually no central authority, only the will of the collective. While this sounds fair in theory, the opposite may be true for certain governance models.
Perhaps the most problematic of all structures are DAOs that operate on a token-based voting system. Despite being decentralized, token-weighted governance — where users with the most tokens have the largest share of voting power — can end up inadvertently giving control to a few wealthy participants and taking it away from the many. As is immediately apparent, this completely undermines the philosophy on which DAOs were built and allows wealthy whales to have a disproportionate say.
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This can do more harm than centralization alone; token-based voting systems can lead to hostile takeovers by DAO token whales and other malicious actors – like the Build Finance DAO takeover. In February, the DAO fell victim to an attacker who had enough assets to push through a proposal that gave them complete control over the project.
Because of its token-based governance model, this acquisition was fully compliant, leaving little choice for developers or the community to fork the project and start over. An asset allocation weighted vote is clearly not the best way forward.
Overcome DAO problems
The point is that asset-weighted voting is not the ideal vehicle for decentralized governance systems, especially when trying to replace legacy models. The long-term goal is to run companies, organizations and even nations with a decentralized system that gives each individual a meaningful voice but also takes into account what that member is contributing. Various forms of personalized blockchain-enforced IDs, as well as a meritocracy-based voting structure, could be just the thing to balance the equation.
Imagine a new model where voting members are evaluated against certain key performance indicators (KPIs). These may include engagement and development metrics within the DAO, and failure to meet these KPIs may result in that user’s voting rights being reduced or removed entirely. Such an approach would encourage all entities to make decisions that are in the broader interest of the community, not just for themselves.
It can also apply to almost every factor of the platform, e.g. B. for future technological developments or the allocation of Community funds. It could even create new social organizational structures for charities, environmental groups, and entire governments—and thus offer greater motives than just capital gain.
Related: Decentralization, DAOs and the current Web3 concerns
NFT communities have already shown that they can incentivize actions that benefit the collective, such as: It is not uncommon for successful Web3 projects to provide some sort of common, shared goal, and existing governance systems do not provide this direct incentive to participate. Take, for example, modern governments in which citizens vote for one person to be given the position of centralized power. Web3 and DAOs demonstrate how things could work differently, through mutual benefits and incentives to participate.
This is only a vision, but the basic premise remains. In order for decentralized organizations to remain incorruptible, new structures must be explored. There are too many attack vectors affecting important projects, and if DAO governance is to grow into a global movement and ever see implementation beyond crypto, then these issues need to be addressed sooner rather than later.
Sasha Ivanov is the founder of the Waves Platform, a global public blockchain platform that reached a market capitalization of over $5.4 billion in 2022. It was crowdfunded with 30,000 BTC, making it the second largest successfully crowdfunded blockchain project (after Ethereum). The name refers to his background as a theoretical physicist and the recently discovered gravitational waves that Einstein predicted a century ago.
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