Verisoul - Henry LeGard, CEO
Introduction
Many are familiar with the governance crisis DAOs face: the vast majority of today’s DAOs are governed by a plutocracy in which each blockchain governance token represents 1 voting power (Token-Weighted Voting). Although governance tokens can be distributed based on merit - such as for contributions to the DAO or its community - each token can be transacted for currency, giving each one a monetary value. Therefore, the governance is fundamentally based on wealth, unlike most democratic governments today.
But many may not realize how challenged the current Plutocratic voting systems are, why they are core issues that need to be solved, and why DAOs haven't adopted different governance models. In this first of a two-part blog post, I will explore the problem and its impact on centralization, user engagement, and the longevity of DAOs. In part 2, I will explore possible solutions to this crisis, and will explain why other governance models haven't been widely implemented.
🪙 Token-weighted voting is widely adopted due to simplicity and incentive alignment
Token-weighted voting is the most common method of DAO governance, because it is simple to implement, easy to understand, and creates clear early-stage incentives for investors, founders, and contributors.
i) Easy to understand
Standard token-based voting is easy for new users to comprehend: each governance token has 1 voting power. Hence, more tokens = more power. And by transitive property, because tokens = money, money = power.
ii) Simple to implement
There already exist tools and vetted smart contracts that allow DAOs to implement token-weighted voting, so they don’t need to innovate or develop to adopt this model. It speeds time to deployment or time to go-live for DAOs.
iii) Aligns incentives
Token-weighted voting creates incentive alignment between the DAO treasury & token value and the holders of the token. Because each marginal token has an equally marginal voting value, there is a straightforward economic drive to purchase each token, and owning a marginal token is as meaningful as owning the prior token.
- A counterfactual is seen in quadratic voting, in which each marginal token has a square root marginal voting power, so therefore has marginally less governance value, and therefore (all else equal), less economic value
Initial and subsequent sales of the token by the DAO treasury drive funding to the DAO. The prospect of token sales creates an incentive model for early founders/contributors, investors, speculators, etc., because there is a clear monetary / value reward system in the short-term - whereas different governance models may result in different reward systems and incentives.
👤 Token-weighted voting leads to high centralization and low participation
However, this model has several long-term drawbacks. For example, because governance tokens have currency value, new members must buy tokens to garner voting power - creating a Plutocracy in which the wealthiest members control the governance of the DAO. Invariably, this results in highly centralized bodies of a few members with outsized sway. And over time, lack of voice for the average member discourages their participation and drives user churn.
🏦 DAO voting power is more concentrated than wealth in the US
The Plutocratic voting systems have centralized DAO governance power within the few wealthy. On average, according to a study done by Chainalysis, just 1% of DAO members control 90% of DAO governance power. In The United States, by contrast—which many disparage for its wealth gap—the top 1% own just above 40% of the country's wealth.
📞 DAO voter participation is less than a cold call conversion
Given this level of power concentration, the average DAO member's vote means nearly nothing. If the top few members hold the overwhelming majority of the decisioning power, there is no reason for the average member to vote.
The result? The average DAO suffers from voter apathy unlike any organization we've explored. The average global voter turnout for political races: 64%; the average DAO voter turnout: 0.6%. A 100x difference. Furthermore, the average cold call success rate is more than 3 times higher than the participation rate of a DAO's existing members.
⚠️ Centralization and apathy threaten the longevity of DAOs
The current token-weighted governance model, although attractive at setup, threaten the longevity and livelihood of DAOs. Centralization and voter apathy increase the likelihood of governance attacks, create a vicious cycle that leads to user churn, and threaten the long-term success of DAOs.
i) Governance attacks
With so few voters per average proposal, and declining, the entire governance system of DAOs lacks resilience (and decentralization). In a poorly-attended vote, or if someone were to socially engineer or create fake identities (sybils) - the entire governance system could become compromised.
ii) Vicious cycle
High centralization and low participation create a downward spiral that is tough to reverse. If people don’t feel that their vote counts:
- They are more likely to churn → churn increases centralization → decreases marginal member voting power → increases likelihood of churning → ….cycle
…Coming in Part 2