Introduction

Throughout human history, governing bodies have been characterized by a large degree of centralization and in many cases — inequity. People have routinely rejected authoritarianism, choosing to instead govern themselves through democracy. The power to govern and enact law in most democratic societies is given to a handful of people who are entrusted to make decisions in the best interests of their constituency, which has often gone awry. When people feel as though they are not being democratically represented within their systems of governance— they have a right to challenge the status quo.

With blockchain technology, people are now choosing an equitable solution to the issue of abused power and misrepresentation: DAOs.

What is a DAO?

DAO stands for Decentralized Autonomous Organization, and represents a radically different approach to governance. Within a DAO, every member is given a voice in order to enact policies that most benefit the organization, achieved through blockchain technology. Voters in this system are token holders who vote directly on the blockchain, ensuring the results are immutable and verifiable by any other member of the DAO.

The power of each user’s vote is determined by the quantity of the token they hold in their wallet. A DAO member with 1000 tokens has 2x the voting power of another member with 500 tokens. While this does raise some concerns about wealthier members taking control of the project, there are market forces that drive transparent and benevolent behavior.

Take for example, a DAO in which 10 members control 40% of the token supply. If these people vote on a specific proposition the overall vote is likely to skew in their favor due to their vast holdings, effectively giving them control over the entirety of the project.

However — if the changes being voted upon make the DAO undesirable to the rest of the community, those people might sell and cause a sharp drop in price. This would in turn devalue the holdings of the 10 powerful members, effectively creating a free market system of checks and balances that can promote honest and selfless voting practices. Incentives are aligned to promote the long-term wellbeing of the project.

DAOs are built directly on the blockchain utilizing smart contract technology, which in turn creates a system in which the only way to change the protocol is through a communal vote. There is no possibility of developer back doors or expected trust in a DAO; it is completely decentralized and democratic. Any change or resource allocation, from small contract fixes to moving millions of dollars, is voted on by members of the DAO.

Examples of Successful DAOs

Structurally, DAOs are a fairly common method of governance in decentralized finance. Let’s take a look at some of the largest and most successful DAOs out there, and what functions they perform.

Uniswap

Uniswap is a successful web3 based decentralized exchange serving the Ethereum blockchain. Holding the UNI token gives individual people the right to vote on the operations of the protocol, creating a system of community driven stewardship. The process of voting on and enacting governance proposals is a unique 3 step process outlined as the following on the Uniswap website:

1. Temperature Check - After a 2 day voting period, the proposal with a 25k vote majority wins and moves onto the next stage. If a sufficient lead for one proposal is not present, the voting is closed at this stage. This is in order to ensure that any potential changes challenge the status quo of the organization's governance.

2. Consensus Check - Incorporating feedback from the previous stage, a formal discussion around the previously voted-on proposal is established. In this stage there is another round of voting enacted, with a 5 day voting window. If at the end of 5 days there is a proposal with a 50k token majority, that proposal wins.

3. Governance Proposal - In the final stage, voting is limited to those holders with a balance of over 2M UNI tokens. This voting period lasts 7 days, and a proposal must garner a 40M token-vote lead in order to win and be enacted on-chain.

Decentraland

Decentraland is a decentralized and fully virtual gaming space in which users can explore, create, and play in a myriad of games and open-worlds. Users in Decentraland can also engage in traditional economic activities such as buying, selling, and trading ‘LAND’, Estates, Avatars, and more in the form of on-chain NFTs.

By becoming a part of the Decentraland DAO, users are able to vote on policies including but not limited to the following:

1. Adding additional features to the in-game estates and land holdings.

2. The fees and taxes associated with the NFT marketplace, proprietary to Decentraland.

3. New community servers.

4. Electing and ousting security council members, similar to a traditional democratic election.

MakerDAO

MakerDAO is a decentralized financial system that supports the Dai currency, a popular stablecoin. Additionally, MakerDAO seeks to assist in the adoption of digital currency into real world applications, such as incorporating Dai into brick-and-mortar businesses.

Participants in this DAO can vote on a variety of proposals pertaining to the governance of MakerDAO. Recent initiatives include the following:

1. Onboarding real world asset vaults, which would hold large sums of the Dai token.

2. Parameter changes as outlined by the Maker Open Market Committee.

3. Disabling direct deposit modules as part of the larger financial plan of the company.

Key Takeaways

DAOs are an innovative and fresh take on the traditional system of governance which heavily favors the desires and interests of individual representatives. By using blockchain technology, DAO-based companies have created decentralized and immutable solutions to said issues, ushering in a promising new age of voting in which each and every participant is given a voice.