DAO Governance
What Is a DAO
A DAO (Decentralized Autonomous Organization) is an organization operated by smart contracts. Instead of a CEO or board of directors, token holders make decisions through voting.
Key characteristics:
- Decentralized: No single authority
- Autonomous: Rules executed by code
- Transparent: All decisions on-chain
Most DeFi protocols are operated as DAOs.
Why DAOs
Problems with Traditional Organizations
- Centralized decision-making
- Opaque operations
- Privileged minority stakeholders
- Trust required
DAO Solutions
| Problem | DAO Solution |
|---|---|
| Centralization | Distributed voting by token holders |
| Opacity | On-chain proposal/voting records |
| Privilege | Codified rules |
| Trust | Smart contract automatic execution |
Governance Tokens
Concept
A governance token is a token representing decision-making rights in a protocol.
Major Governance Tokens:
- UNI (Uniswap)
- AAVE (Aave)
- MKR (MakerDAO)
- CRV (Curve)
- COMP (Compound)
Powers
What token holders can do:
1. Proposal:
- Propose protocol changes
- Usually requires minimum token holdings
2. Voting:
- Vote for/against proposals
- Voting power proportional to token count
3. Delegation:
- Delegate voting rights to another address
- Delegates vote on behalf
Token Value
Value of governance tokens:
1. Protocol Control:
- Fee rate decisions
- Treasury usage
- Protocol direction
2. Economic Benefits:
- Fee distribution (some protocols)
- Staking rewards
- Airdrop eligibility
3. Speculation:
- Future value expectations
- Market supply/demand
Governance Process
General Flow
Idea → Forum Discussion → Snapshot Vote → On-chain Vote → Execution
1. Idea and Discussion
Forum:
- Usually Discourse-based forums
- Share draft ideas
- Community feedback
Temperature Check:
- Informal voting to gauge interest
- Uses Snapshot, etc.
2. Formal Proposal
RFC (Request for Comments):
- Write detailed proposal
- Technical specifics
- Impact analysis
Minimum Requirements:
- Minimum token holdings to propose
- Uniswap: 2.5M UNI
- Compound: 100 COMP
3. Voting
Snapshot (Off-chain):
- No gas fees
- Vote with signature only
- Not legally binding
On-chain Voting:
- Actual transaction
- Gas fees apply
- Automatic execution
4. Execution
Timelock:
- Waiting period after passage before execution
- Usually 2~7 days
- Time to detect malicious proposals
Automatic Execution:
- Anyone can execute after timelock ends
- Smart contract applies changes
Voting Mechanisms
1 Token 1 Vote (Token Voting)
The most basic method.
Characteristics:
- More tokens = More voting power
- Plutocracy concerns
- Used by most DAOs
Quadratic Voting
Voting power = √(Number of tokens)
Characteristics:
- Reduced influence of large holders
- Increased influence of small participants
- Vulnerable to Sybil attacks
Conviction Voting
Voting power increases over time.
Characteristics:
- Favors long-term staking
- Reduces short-term speculator influence
- Complex mechanism
Delegated Voting
Delegate voting rights to experts.
Characteristics:
- Reduced participation burden
- Professional delegates emerge
- Possible power concentration
Major Protocol Governance
MakerDAO
Token: MKR
Characteristics:
- Oldest DeFi governance
- Executive (Core Units) + MKR voting
- Emergency shutdown authority
Decisions:
- Add collateral types
- Adjust stability fees
- Set DAI Savings Rate (DSR)
Uniswap
Token: UNI
Characteristics:
- 1B UNI issued (4-year distribution)
- High proposal threshold (2.5M UNI)
- Protocol fee switch inactive
Debates:
- Whether to activate fees
- License policy
- Multi-chain deployment
Aave
Token: AAVE
Characteristics:
- Safety Module (staking insurance)
- Guardian (emergency powers)
- 2-stage voting (Snapshot → On-chain)
Decisions:
- Asset addition/parameters
- Risk settings
- Treasury usage
Curve
Token: CRV, veCRV
Characteristics:
- Vote-Escrow: Lock CRV for up to 4 years → veCRV
- Voting power proportional to lock duration
- Gauge Weight voting
Curve Wars:
- Gauge weight determines CRV incentive direction
- Convex, Frax, etc. accumulate veCRV
- Governance influence competition
Compound
Token: COMP
Characteristics:
- Pioneer of liquidity mining
- Simple governance structure
- Guardian powers
How to Participate in Governance
1. Acquire Tokens
Methods:
- Purchase on exchanges
- Protocol usage rewards
- Airdrops
2. Delegation
If direct voting is difficult, delegate.
Method:
- Choose a trustworthy delegate
- Delegate via protocol UI
- Can change/revoke anytime
Delegate Selection Criteria:
- Voting history
- Publicly stated values
- Community reputation
3. Direct Voting
Process:
- Check proposals on forum
- Understand and evaluate content
- Vote on Snapshot/on-chain
- Pay gas (on-chain)
4. Write Proposals
Requirements:
- Minimum token holdings
- Prior forum discussion
- Technical understanding
Governance Problems
1. Low Participation
Reality:
- Most token holders don't vote
- Participation rates around 5~10%
- A few whales decide
Causes:
- Apathy
- Complex proposals
- Gas fee burden
- Irrelevant to personal interests
2. Plutocracy
Problem:
- More tokens = More influence
- Wealthy participants/VCs dominate
- Centralization under "decentralization" banner
3. Vote Buying
Forms:
- Direct token rental
- Bribery platforms (Votium, etc.)
- Compensation for proposal passage
4. Governance Attacks
Covered in detail in the next article.
5. Apathy
Problem:
- Flood of unimportant proposals
- Voter fatigue
- Lack of meaningful change
Governance Best Practices
1. Information Accessibility
- Easy-to-understand proposal summaries
- Multi-language support
- Educational materials
2. Active Delegation
- Diverse delegate profiles
- Delegate performance tracking
- Delegation incentives
3. Staged Voting
- Temperature check → Forum → Snapshot → On-chain
- Feedback incorporated at each stage
- Early filtering of bad proposals
4. Power Distribution
- Diverse token distribution
- Team/investor lock-ups
- Small participant protection
Summary
DAOs are decentralized organizations operated by smart contracts, where governance token holders make decisions through voting. The process typically involves forum discussion → Snapshot voting → on-chain voting → timelock execution. Major DeFi protocols like MakerDAO, Uniswap, Aave, and Curve operate DAOs in their own ways. Various mechanisms exist including token-based voting, quadratic voting, and delegated voting. Issues like low participation, plutocracy, and governance attacks remain, but token holders can participate by voting directly or delegating to trusted delegates.
Next article: Governance Attacks - DAO Vulnerabilities