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 magical solution that leads directly to better results. To really get the most out of a decentralized organization, steps need to be taken to regulate weighted voting and tokenomics. If not carefully balanced, DAOs can implode — and some have already done so.
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 built to be decentralized, token weighted governance – where users with the most tokens have most of the voting power – can inadvertently hand over control to a few wealthy participants and take away the many. As is immediately apparent, this completely undermines the philosophy on which DAOs are built and gives rich whales a disproportionate say.
Related: DAOs are more focused on community than profit. This is why
This can do more damage than just centralization; token-based voting systems can lead to hostile takeovers by DAO token whales and other malicious actors, such as with the takeover of the Build Finance DAO. In February, the DAO fell victim to an attacker who had sufficient resources to push through a proposal that gave them total control over the project.
Due to the token-based governance model, this acquisition was completely in line with the rules, leaving developers or the community little choice but to split the project and start from scratch. Clearly, voting weighted by asset allocation is not the best way forward.
Solve DAO Problems
The point is that asset-weighted voting is not the ideal tool for decentralized governance systems, especially if they want to replace legacy models. The long-term goal is to be able to run companies, organizations and even countries with a decentralized system that meaningfully gives a voice to each individual, but also takes into account what that member has to offer. Various forms of personalized blockchain-enforced IDs, as well as a meritocracy-based voting structure, may be just what it takes to balance the equation.
Imagine a new model, one where voting members are judged against certain key performance indicators (KPIs). This may include engagement and development metrics within the DAO, and if these KPIs are not met, that user’s voting rights may be reduced or removed altogether. Taking this approach would encourage all entities to make decisions that are in the public interest of the community, not just their own.
It can also apply to almost any factor of the platform, such as future technological developments or how community funds are allocated. It could even create new social organizational structures for charities, environmental groups, and entire governments — for greater motives than just capital gains.
Related: Decentralization, DAOs and Current Concerns About Web3
NFT communities have already shown that they can encourage actions that benefit the collective, such as participation as a condition of being “whitelisted” for an NFT drop. It’s not uncommon for successful Web3 projects to provide some sort of common, mutually shared purpose, and existing leadership systems don’t provide that direct incentive to participate. Take, for example, modern governments, in which citizens vote for an individual to come into the position of centralized power. Web3 and DAOs show how things could work differently, through mutual benefits and incentivized participation.
This is only one vision, but the starting point remains. New structures need to be explored to ensure that decentralized organizations remain incorruptible. There are too many attack vectors affecting key projects, and if DAO governance is to grow into a global movement and ever see implementation outside of crypto, 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 cap of more than $5.4 billion in 2022. It was crowdfunded with 30,000 BTC, which represents the second largest successful crowdfunded blockchain project (after Ethereum). The name refers to his background as a theoretical physicist and to the recently discovered gravitational waves predicted by Einstein a century ago.
This article is for general information purposes only and is not intended and should not be construed as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author only and do not necessarily reflect or represent the views and opinions of TBEN.