DAOs Never Work Unless Governance Issues Are Resolved

Decentralised Autonomous Organisations (DAOs) have been hailed as the future of government, allowing for a more democratic approach to decision-making. However, decentralising leadership is not a panacea that instantaneously improves performance. To maximise the potential of a decentralised organisation, weighted voting and tokenomics must be regulated. Some DAOs have already imploded in the absence of proper balancing.

What is decentralised governance?

DAOs provide a paradigm for administering a project or business in which voting rights are distributed among all members. There is often no central authority and simply the collective will. This is the case for specific governance arrangements, though it sounds fair in principle.

DAOs with a token-based voting method may be the most troublesome of all models. Despite being designed to be decentralised, token-weighted governance that allows individuals with the most tokens to have the largest share of voting power might lead to a few affluent players gaining control at the expense of the majority. This utterly violates the idea upon which DAOs were founded and grants wealthy whales disproportionate influence.

This can do more damage than centralisation alone; token-based voting systems can result in hostile takeovers by DAO token whales and other bad players, as was the case with the Build Finance DAO takeover. In February, the DAO was compromised by an adversary with sufficient funds to pass a proposal granting them complete control of the project.

This takeover was fully legal due to the token-based governance architecture, leaving developers and the community with no choice but to fork the project and start from scratch. Voting weighted by asset allocation is not the best way forward.

How to resolve DAO issues?

The organisational structure of DAO. Image courtesy of Seth Bannon.

The issue is that asset-weighted voting is not optimal for decentralised governance systems, particularly if they aspire to replace existing models. The long-term objective is to manage enterprises and organisations via a decentralised system that offers each member a meaningful voice and considers what that person contributes. Various sorts of customised, blockchain-enforced IDs, as well as a voting mechanism based on meritocracy, may be required to balance the equation.

Imagine a new paradigm in which voting members are evaluated by specific key performance metrics (KPIs). These can include engagement and development indicators inside the DAO, and failing to satisfy these KPIs can reduce or eliminate a user’s voting power. This strategy would push all entities to make decisions that benefit the community, not just themselves.

It can apply to virtually any aspect of the platform, such as future technology advancements or the allocation of community finances. It can even develop new social organising systems for philanthropic organisations, environmental groups, and governments, offering motivations beyond monetary gain.

NFT communities have already proved that they reward activities that benefit the group, such as requiring participants to be “whitelisted” for an NFT drop. It is not rare for successful Web3 projects to give a collaborative, mutually agreed objective, but current leadership structures don’t have this immediate motivation to join. Consider modern governments, in which voters elect an individual to a position of concentrated authority by ballot. Web3 and DAOs show how things function differently through reciprocal advantages and engagement.

This is only one perspective, but the fundamental concept remains. Investigating new organisational forms is necessary to guarantee that decentralised organisations stay incorruptible. There are too many attack vectors harming key projects. If DAO governance became a global movement and implemented outside of crypto, the problems must be resolved soon.