DAO governance is the backbone of decision-making within a decentralized organization. By defining who can make decisions and how they're made, you lay the foundation for your DAO's operations. Governance can range from a simple majority vote among a small group to an intricate network of individuals participating in large-scale decisions.
As your DAO evolves, so should its governance structure. To kickstart this process, follow these eight steps to establish a robust and adaptable governance system:
Determine voting eligibility
Set the minimum participation threshold, also known as the quorum
Define the pass-rate requirements
Establish the voting duration
Design your proposal process
Outline the proposal structure
Select the appropriate tools for on-chain and off-chain governance
Conduct a trial vote, document the outcome, and refine your approach as needed!
Now, let's explore each step in greater detail!
Determine voting eligibility
At the core of DAO governance is the voting process. It is crucial to decide who can vote and how they vote before selecting any tools or parameters.
In the current DAO landscape, there are two main options:
Token-based voting (using fungible tokens or NFTs)
Wallet-based voting (typically employing multi-signature wallets or multi sigs)
Governance token voting operates on the principle of 1 token = 1 vote, with the weight of a vote determined by the number of tokens a participant holds. The more tokens a person has, the more significant their voting power is.
Governance tokens are cryptocurrencies created by DAOs and used in on-chain votes. They can be traded on exchanges, allowing anyone to buy and speculate on the tokens for potential profit. However, this means that DAO governance tokens may only partially represent the DAO's engaged members.
Token-based voting is typically utilized by DAOs that:
want to give more voting power to those with a higher financial stake;
aim to be Sybil-resistant, avoiding the issue of multiple people holding more than one wallet;
are large-scale and do not require knowledge of contributors' identities;
want to conduct all governance processes on-chain.
In wallet-based voting, specific wallets are authorized to vote, with the rule of 1 wallet = 1 vote. This can be achieved by setting up a multi-signature wallet requiring multiple transaction approvals.
For example, a three-of-five multi-sig wallet would require three out of five linked wallet addresses to approve a transaction before it can proceed.
Wallet-based voting is best suited for DAOs that:
are comfortable with members linking their identities to wallet addresses to prevent sybil attacks (where one person creates multiple wallets to inflate their voting power artificially);
want to eliminate the financial aspect of voting, ensuring voting power cannot be directly purchased.
are smaller in scale;
conduct governance processes primarily off-chain, then execute actions on-chain using the multi-sig.
It is common for DAOs to begin as wallet-based organizations (voting with a multi-sig) and then evolve into token-based DAOs (voting with governance tokens) or more comprehensive governance mechanisms. In most instances, the key to a successful DAO lies in its ability to adapt and change over time.
Establish minimum participation, also known as quorum
Minimum participation, or quorum, refers to the required number of voters for a vote to be considered valid. This figure does not represent the number of "yes" votes but the total number of participating voters.
Large DAOs with widespread token distribution may have relatively low quorums, even as low as 1% of token holders. On the other hand, DAOs that are wallet-based, use multi-sig voting and have highly active voting processes might require a quorum of 50% or more to execute transactions.
Setting a minimum participation rate that is too high for your organization could lead to governance deadlocks. As a result, it might be more practical for DAOs to establish their minimum participation rate after completing a few votes and gathering data on average voter participation.
Define pass rate
The pass rate refers to the required percentage of "yes" votes for approval of a proposal. The proposed action is not executed if a vote fails to meet the specified pass rate.
The pass rate can be adjusted when designing various governance flows for different proposal types. For instance, many DAOs opt for a majority pass rate for basic decisions. They might employ a super-majority (2/3rds) for more critical or contentious decisions, such as amending the charter or minting additional tokens.
Determine the voting period
The voting period is the duration for which a vote remains open. DAO members can cast their votes only within this specified timeframe.
A seven-day voting period is standard among many DAOs, providing a whole week for members to review the proposal and vote. However, if your DAO requires quicker decision-making, a shorter voting period of three or five days might be more appropriate.
In some cases, voting periods are followed by a timelock, which prevents the execution of the vote's outcome within that period. This serves as a security measure, allowing DAOs time to react if a harmful proposal is approved. For instance, with a seven-day timelock, the result of the vote can only be executed once the seven-day period has elapsed, after which the funds can be disbursed.
Establish a proposal process
Having determined the governance parameters—including voting eligibility, minimum participation, pass rate, and voting period—it's time to create a proposal process that informs members how to suggest new ideas and obtain funding for their implementation.
The proposal process outlines the necessary steps for a proposal to evolve from a concept to execution. Consider this a step-by-step guide to securing funding for a new workstream.
A sample proposal process might include the following:
Assemble your team: Identify individuals interested in collaborating on the proposal. Proposals backed by a well-organized team are more likely to receive constructive feedback from the community.
Share the proposal on the DAO's forum for feedback: Obtain input from the broader DAO membership, and consider incorporating a poll to gauge sentiment.
Submit a revised draft if significant edits are needed: If DAO members suggest major revisions, it may be wise to present an updated draft.
Post the proposal for an official vote on your DAO's voting platform: This could involve an off-chain vote, such as on Snapshot, or an on-chain vote using platforms like Aragon or Tally.
Establish your proposal structure
A proposal structure gives teams guidelines for what to include in their proposals. Think of it as a template for drafting proposals.
A sample proposal structure might consist of the following:
Title: The main subject of the proposal.
Brief description: Summarize the proposal's objective in one or two sentences.
Detailed description and funding request: Elaborate on the funding request and the intended use of the funds.
Technical specification: Include this section if your proposal involves code changes or technical details that others may need to review.
Metrics or key performance indicators: How will you assess and report team performance?
Team description: Highlight the team's relevant experience.
Select your tooling stack for on-chain and off-chain interactions
A DAO tooling stack comprises all the tools required to function as an organization. This includes communication channels, contributor payment and rewards systems, and membership tracking tools.
Conduct your initial trial vote, document the procedure, and adapt as necessary
Think about organizing a trial vote that doesn't disburse funds or sends only a minimal amount. This trial vote lets you evaluate whether you need to tweak your governance parameters or modify your tooling stack.
After completing the vote, record the process. This documentation will be valuable when you need to review and adjust your governance process in the future. It's crucial to experiment and adapt as you progress; having this documentation for reference will be beneficial.
Navigating the legal aspects of DAO governance can be complex and challenging. Prokopiev Law Group is here to support your DAO in addressing legal concerns throughout the entire process. Our expertise in the field can help ensure your DAO's governance structure complies with applicable regulations and best practices, allowing you to focus on building and growing your decentralized organization with confidence.
DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. A professional should review any action based on the information discussed. The author is not liable for any loss from acting on the information discussed.