Voting Governance in DAO Tool

Enhancing Voting Processes for DAOs Using a Governance Tool

Author: Heitu; Source: Wai Bo Sangguan

With the development and popularization of blockchain technology, the distributed autonomous organization (DAO) has gradually become a new form of social organization. However, DAOs have been particularly focused on automated governance in theoretical research, but in practice, there is a lack of automation. In order to improve the level of automation in DAO governance, various DAO tools have emerged. This article aims to analyze the current state of DAO governance, mainly analyzing the theory and practice of voting governance, discussing the strategy model that voting governance should have from the perspective of rational individuals, summarizing several basic issues that DAO should pay attention to when selecting voting governance tools, and combining them with the current situation in China, and finally, the article makes some predictions about the development trend of DAO and governance, in order to provide some reference for researchers of DAO tools.

01 Historical Background

DAO has multiple different definitions in practice and literature, generally translated as distributed autonomous organization. The core features of DAO include distribution and autonomy. In most theoretical and practical contexts:

Distribution generally means that participants are equal in power and obligation, and there is no authoritative node. The decision-making process is based on irreversible blockchain technology;

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Autonomy generally means that the process of participants participating in consensus decision-making is independent and free, and it is implemented through smart contracts automatically.

In theory, DAO governance is the research on how to establish the consensus mechanism for the distribution of rights within DAO and the deployment of related smart contracts. However, in practice, many DAOs still rely on offline governance methods and do not rely solely on smart contracts. The main reason for this is the lack of complete support from DAO tools. The main reason why DAO tools are disconnected from theoretical research is:

DAO governance research involves human behavior. On the one hand, this is a problem of the unity of subjectivity and objectivity. In the research process, it is difficult for researchers to completely separate subjective consciousness from objective facts, which may be easily influenced by personal values. On the other hand, due to the diversity, complexity, and susceptibility to external factors of human behavior, related issues are difficult to explain with simple cause-and-effect relationships and cannot make precise predictions like natural sciences through experiments and observations.

Take reputation or salary management as an example. In a centralized system, leaders can simply set an objective standard and strictly enforce it. However, in a decentralized system, it is difficult to achieve consensus among all members on this objective standard itself. Due to differences in participants’ backgrounds, different people may have different value evaluations for the same objective problem. The existence of this cognitive conflict issue may be due to differences in language, culture, customs (and the resulting differences in values, beliefs, or positions), or differences in knowledge backgrounds (and the resulting differences in information acquisition and processing methods), in order to handle cognitive conflicts between individuals and reach decision consensus and benefit allocation, voting based on collective decision-making is a fundamental means of handling this.

Generally, voting governance can be considered to consist of six steps: proposal, review, voting, execution, dispute, and arbitration. Among them, proposal and review can be seen as the preprocessing stage of voting, voting process is the core of voting governance, execution can generally be completed by smart contracts. When some members are dissatisfied with the voting results or believe that cheating has occurred during the voting process, it enters the dispute stage, and if the dispute is accepted, it will enter the arbitration stage. DAO Tool focuses on disputes and arbitration (such as decentralized court platforms). We believe that after the full development of smart contract technology, the above process can be reduced to two stages: proposal and voting, or even just one proposal voting stage.

This article mainly discusses voting governance issues in DAO Tool. As a consensus mechanism, voting strategies attempt to replace bad decisions with good ones, or replace decisions that benefit the majority with those that benefit the minority. There are generally ten common models: one person, one vote and the principle of majority rule; one coin, one vote system and the principle of majority opinion; proxy voting; liquid democracy voting; quadratic voting; rage quitting; conviction voting; holographic consensus; weighted voting and reputation voting; knowledge background voting KEV.

In traditional social practices, different voting governance models reflect a variety of issues, including economic issues, cultural issues, social and institutional issues, and so on. However, for DAO organizations, their birth coincides with the thriving development of WEB3. Therefore, there are no historical social or economic institutional issues. Different decision models reflect more cultural beliefs and mechanism correction issues caused by dynamic game. Therefore, in the following, we would like to explore how to design relevant governance decision models from the perspective of rational individuals.

02 Relevant Issues and Business Scope

(I) Voting Strategy and Problem Analysis

Among the voting models discussed in the previous section, the one person, one vote and the principle of majority rule is the simplest and most feasible strategy model, but its disadvantages are also obvious:

① This strategy is unfair to members of the organization because different members have different resources and expected benefits invested in the organization;

② This strategy cannot prevent related interest groups from buying votes to conduct malicious attacks based on the principle of majority (or governance attacks, some DAO organizations have disbanded because of such attacks);

③ This strategy lacks appropriate incentives for voter participation. When voters’ efforts are greater than the voting incentives, it is easy to cause governance indifference phenomenon (some organizations often fail to reach the minimum number of votes required by law when holding a general vote because of this reason);

④ The interests of minority opinion holders are ignored.

Regarding drawback①, a feasible improvement is to implement a “one coin, one vote” and majority rule principle. Although the improved strategy considers the fairness of stakeholders’ economic aspects, it also suppresses the voting enthusiasm of small stakeholders. To address this issue, a new voting strategy is introduced, namely quadratic voting. Although quadratic voting can reduce the influence of large stakeholders to some extent, it still lacks an effective strategy to enhance the voting enthusiasm of small stakeholders, thus unable to solve drawback②, ③, ④.

Regarding drawback②, a feasible improvement is to implement representative democracy. Representative democracy shields malicious attacks based on majority principles, improves decision-making efficiency, and makes collective decisions more rational. However, it also introduces a new problem: it cannot ensure that the representatives can uphold the interests of all represented parties. This is because determining the interests of the represented parties itself requires governance decisions. Therefore, it is necessary to establish an incentive system between the representatives and the represented parties. To address this issue, a feasible improvement strategy is to implement fluid democracy voting. When the represented parties are dissatisfied with the representatives’ votes, including indirect representatives delegated multiple times, they can choose to vote directly or reassign other representatives to vote. However, fluid democracy voting still does not completely solve the incentive problem of representatives upholding the interests of the represented parties, and similarly, it does not solve problems③, ④.

Another strategy for addressing drawback② is to adopt belief voting or weighted voting, which attempts to weaken governance attacks or effectively collect community preferences by increasing the cost of holding positions for voters. However, this solution obviously exacerbates problems③, ④. In addition, introducing reputation voting or knowledge token voting also fails to effectively solve problem④. Moreover, reputation or knowledge itself is a value judgment issue that requires decision-making, which tends to deviate voting governance from the rule of law and move away from the direction of contractual governance in WEB3.

One strategy to address drawback③ is to adopt holographic voting, which establishes a prediction market parallel to the voting mechanism by allowing members to bet on proposals. The intention is to incentivize participants to act in the best interest of the majority. However, the logic of the bettors is whether a proposal will be passed, rather than whether a proposal should be passed. This further distorts the market and exacerbates problem④.

One strategy to address drawback④ is to adopt rage quit voting. Theoretically, this strategy ensures that no member can control the funds of other members, and it improves the ideological unity of the organization. However, this method of exiting when there is disagreement conflicts with the development philosophy of WEB3. Nature is harmonious, and WEB3 organizations should also be able to accommodate different cultures and beliefs. When members have different views, it is only necessary to negotiate a suitable compensation mechanism; there is no need to resort to directly exiting the organization.

There are two additional strategies to address disadvantage ④, namely the Eden mode and the CDao mode. These two strategies are based on the cake-cutting strategy model and have not yet been officially launched. We will analyze their governance models separately.

(II) Allocating strategy that satisfies everyone

When n participants collectively allocate a “cake” C, there are multiple distribution schemes that make all individuals “satisfied”:

Envy-free allocation: If each participant believes they have received a share that is no less than anyone else’s, then the distribution is an envy-free allocation;

Strong envy-free allocation: If each participant believes they have received a share that is greater than anyone else’s, then the distribution is a strong envy-free allocation;

Fair allocation: If each participant believes they have received a share that is no less than the average, then the distribution is a fair allocation;

Strong fair allocation: If each participant believes they have received a share that is greater than the average, then the distribution is a strong fair allocation;

Super fair allocation: A strong fair allocation scheme constructed based on the super fair allocation theorem. It is obtained by neutrally processing N fair allocation schemes and results in a strong fair allocation scheme.

Using the example of allocating an irregular cake among two people (the results are similar for more than two people, but the process is more complex), let’s explore the differences in the details of several allocation schemes:

Assuming that two participants, p1 and p2, have preferences for different parts of the cake (p1 likes the red part and p2 likes the black part), two possible allocation results are as follows:

p1 cuts the cake and p2 chooses, assuming the fair cutting point is at position a,

p2 cuts the cake and p1 chooses, assuming the fair cutting point is at position b,

Obviously, points a and b are the critical points for fair allocation or envy-free allocation. Any cut made between a and b would result in a strong fair allocation and an envy-free allocation. A super fair allocation is a neutral processing of two fair allocations, searching for a middle point c (the specific location of c depends on the preference strength of p1 and p2).

Eden is based on the envy-free allocation model, and its method of resolving disputes is as follows:

Within a small group, “both sides of the argument propose a dispute resolution method, and then an impartial jury randomly selects one that is considered more “fair”. This is similar to the cake-cutting model where one child divides the cake into two pieces, and the other child chooses which piece they want. When there are more participants, Eden achieves consensus within small groups (such as 3 to 5 people), elects a leader for the small group, and then recursively resolves consensus within large collectives, eventually reaching a final decision.

CDao is based on a super fair distribution model, and its method of resolving disputes is as follows, taking co-creation of NFT as an example:

A, B, C, D, E, five people co-created an NFT and planned to divide this NFT equally after its creation.

The relevant processing steps are as follows:

(1) The platform conducts a time-limited voting estimation for the five people. Suppose the five individuals respectively evaluate the price of the NFT as: 3 tokens, 5 tokens, 7 tokens, 8 tokens, 9 tokens.

(2) The platform calculates the following results through the contract:

E pays 6.68 tokens and obtains the NFT.

A receives compensation of 1.12 tokens; B receives compensation of 1.52 tokens;

C receives compensation of 1.92 tokens; D receives compensation of 2.12 tokens;

(3) The analysis of the super fairness of the relevant governance results is as follows:

In E’s subjective world: The price of the NFT is 9 tokens. Based on the principle of equality, E should compensate the other four individuals with 4 * (9/5) = 7.2 tokens. The actual payment is 6.68 tokens, which exceeds the fair value by: 7.2 – 6.68 = 0.52 tokens;

In A’s subjective world: The price of the NFT is 3 tokens. Based on the principle of equality, A should receive compensation of 3/5 = 0.6 tokens. The actual compensation received is 1.12 tokens, which exceeds the fair value by: 1.12 – 0.6 = 0.52 tokens;

In B’s subjective world: The price of the NFT is 5 tokens. Based on the principle of equality, B should receive compensation of 5/5 = 1 token. The actual compensation received is 1.52 tokens, which exceeds the fair value by: 1.52 – 1 = 0.52 tokens;

In C’s subjective world: The price of the NFT is 7 tokens. Based on the principle of equality, C should receive compensation of 7/5 = 1.4 tokens. The actual compensation received is 1.92 tokens, which exceeds the fair value by: 1.92 – 1.4 = 0.52 tokens;

In D’s subjective world: The price of the NFT is 8 tokens. Based on the principle of equality, D should receive compensation of 8/5 = 1.6 tokens. The actual compensation received is 2.12 tokens, which exceeds the fair value by: 2.12 – 1.6 = 0.52 tokens;

In summary, in the subjective worlds of A, B, C, D, and E, each person’s benefit exceeds the fair value by 0.52 tokens.

CDao believes that in addition to equality for all and equal voting power for all, each proposal (based on different cultural beliefs or thought patterns) should also be equal. Therefore, when a proposal has no opposition, it can be considered that no one’s rights are harmed. Since the proposer’s rights are increased, according to the Pareto improvement principle, the proposal should be automatically implemented by the system. However, once someone voices opposition, it indicates that the interests of some members will be harmed, and the damaged interests should be evaluated.

Since all proposals are equal in terms of execution rights, but in reality only one strategy is allowed to be executed, the unexecuted proposals should be compensated according to the previous allocation strategy. By having all members vote on the proposals, the support received for each proposal is subjectively evaluated based on the subjective value assessment of the execution right: the voting token can be used as compensation for other proposals (when the supported proposal is accepted through collective decision-making), or it can be used to calculate the compensation one can receive (when the supported proposal is not accepted through collective decision-making).

Since a proposal needs the broadest support in order to be accepted, each member who supports a proposal has the motivation to vote for it to pass. Similarly, each unaccepted proposal and its supporters will be compensated. This will also inspire community members to reasonably voice their objections (the effectiveness of proposals can be improved by setting standards), and for members who do not participate in voting, there will be no voting compensation.

Therefore, the relevant governance strategy not only increases participants’ willingness to participate, avoiding governance apathy, but also protects the rights of minority opinions.

(III) Analysis of DAO Organization Issues

For a DAO organization, different domains should be able to choose different voting governance strategies. However, as the DAO organization expands, it will also have different business departments like a company, and these different business departments should also adopt different voting governance strategies. Therefore, rather than focusing on the type of domain of the DAO, we should pay more attention to which voting type is suitable for the different business departments within the DAO organization.

First, let’s take a look at the business aspects of the DAO organization that require voting governance. Generally speaking, there are six types of business that a DAO organization needs to govern:

(1) Modification of DAO rules: such as amending the articles of association, governance agreements, voting mechanisms, etc.

(2) Member management: such as deciding on the acceptance of new members, removal of members, setting members’ rights and obligations, etc.

(3) Treasury fund management: such as deciding which projects to invest in, investment amounts, investment terms, token issuance, etc.

(4) Project profit distribution: how to allocate profits at the end of a project investment;

(5) Community governance: such as deciding how to handle community disputes, address violations, formulate community rules, etc.

(6) Other decisions: such as deciding the development direction of the DAO, partners, brand image, etc.

Among the governance business mentioned above (5), there are roughly the following types:

First type, involving the core goals of the DAO:

This type of governance is essential to the existence of the DAO and must be approved by all members, such as ⑴;

Second type, not related to the core goals of the DAO, but involving profit distribution:

This type of governance decision often affects the interests of some people, usually benefiting a small group within the DAO, such as project teams, for example ⑶, ⑷; This type of governance requires the determination of ownership, whether it is dividends from the treasury or incentives after the project team’s profits?

Category three, not involving core objectives, nor current interest distribution:

This type of governance often falls under regulatory norms, with the establishment of regulations being binding on all members, and beneficiaries belonging to the entire DAO community, such as ⑵, ⑸, ⑹

The above discussions reveal:

(1) For governance involving the core objectives of the DAO, the most suitable strategy is angry exit voting;

(2) For issues of governance that do not involve core objectives, nor interest distribution, a more appropriate strategy is weighted and reputational voting. However, the difficulty lies in reaching consensus on the reputation strategy model. In this regard, the Eden model can be considered as a possible reference;

(3) For governance issues that do not involve the DAO’s core objectives, but involve interest distribution, angry exit voting is also a viable strategy, but it is not conducive to the development of the DAO. A feasible strategy is to improve the operational model of the DAO, allowing the DAO to form sub-DAOs in the form of forks. This way, disagreements can be avoided through sub-DAOs, and at the same time, sub-DAOs can continue to fork and form the next level of sub-DAOs. When the sub-DAO completes its task and dissolves, it can return to the parent DAO. Overall, for governance issues involving interest distribution, the strategy of sub-DAOs in coordination with the CDao strategy is relatively feasible.

03 The Current Development of Voting Tools

(1) Existing Platforms

In the field of DAO voting governance, some tool teams and platforms have already gained significant market positions.

(1) Snapshot

Snapshot and SnapshotX are two products developed by Balancer Labs. They are used for offline and online voting governance, mainly relying on the Ethereum ecosystem, and currently hold a large market share in the field of DAO voting governance.

Supports multiple voting systems: single choice, approval voting, delegate voting, secondary voting, etc.;

(2) Tally

Tally holds a certain market share in the field of DAO voting governance.

It is a frontend for governance contracts that provides voting governance services to DAO teams. Specific functionalities include proposal submission, voting, delegated voting, allocation of DAO treasury funds, and upgrading of smart contracts. It supports the OpenZeppelin governance contract library and interface, including event signature, function signature, quorum setting, voting delay, voting period, etc.

(3) LianGuailadin

LianGuailadin aims to transform voting rights into assets and is committed to improving decentralized governance from a neutral standpoint. It focuses on adjusting incentive measures to enable token holders to vote or elect representatives to participate in voting. It helps high-quality community members build reputation and influence.

(4) Sybil

Sybil is an Ethereum-based DAO voting governance platform developed by the Sybil Labs team. Its main purpose is to provide governance tools for discovery, finding, and delegated representation.

(5) Commonwealth

Commonwealth is a DAO voting governance platform that provides discussion, voting, and project funding services for on-chain communities. It helps users achieve unity between community activities and governance.

(6) Broadroom

Broadroom is a governance management portal for both on-chain and off-chain governance. It provides a universal governance interface and SDK to provide more than 350 high-performance APIs across chains for DAO organizations, including services such as proposal querying, representation, discussion, voting, etc.

(II) Existing Problems and Analysis

In addition to the above-mentioned voting governance tools, organizations such as Aragon and Stake DAO also provide some DAO voting governance tools. However, from the perspective of the functionality of these voting tools, most mainstream tools focus on the application of traditional governance strategies, or in other words, these tools do not fundamentally explore DAO governance strategies. They cannot effectively solve several important fundamental problems faced by DAO organizational governance, including (security and legal issues are not discussed here):

(1) Centralization of governance tokens: In DAOs, when a small number of members control a large number of governance tokens, how to ensure the best interests of DAO members;

(2) Governance apathy: In DAOs, many participants may not have the interest or time to actively participate in the decision-making process. Essentially, this is a problem of lack of incentives;

(3) Protection of the rights of minorities: In DAOs, how to ensure the rights of minorities is not as easily dealt with as in real life because DAO governance is often programmatically automated. This involves governance attack issues that are often a matter of life and death for DAO organizations.

For these fundamental issues mentioned above, we still look forward to the development of more innovative tools (including Eden and CDao), which will provide the most basic guarantee for the rapid development of DAOs.

(III) Choosing a DAO Organization

For a DAO organization, choosing a suitable voting tool platform requires comprehensive consideration. Generally, the following aspects need to be carefully considered:

(1) Whether it supports governance strategy selection and setting of governance strategy parameters;

(2) Whether it supports anonymous voting or identity authentication;

(3) Whether it supports proxy voting;

(4) Whether it supports weighted voting;

(5) Whether it supports quadratic voting;

(6) Whether it supports the separation of voting rights and ownership (support for reputation voting, expert voting, or knowledge voting);

(7) Whether it supports voting incentives (to avoid governance apathy);

(8) Whether it supports proposal compensation (to protect the rights of minorities)…

Of course, in the above options, the weight of each functional item also depends on the organization’s internal white paper or meta-rules settings. Sometimes, a specific function may even have veto power, and this decision itself is a matter of cultural belief or personal preference. When existing tools cannot meet their own needs, independent development is also a viable solution. At the same time, using the APIs provided by the voting governance platform for secondary development is also an alternative (if the corresponding platform can provide the underlying logic).

In addition, there are unique environmental issues for domestic DAOs:

First, due to the problem of centralization caused by poor internet connectivity and related policies, this is essentially an institutional regulatory issue that requires the cooperation of all sectors of society and is difficult to solve solely from a technical perspective;

Second, there is a serious problem of formalism during the voting process, where the form is prioritized over content. Many voters are not interested in the content of the issue, leading to phenomena such as vote buying and ballot stuffing, which deviates from the original intention of the voting design. The root cause of this is a design problem with the voting strategy. In theory, if lying can bring benefits, participants have the motivation to lie. In this regard, governance strategies that are incentive-compatible (as in the previously mentioned cake-cutting model) are necessary, just as it is difficult to eliminate corruption by combating bribery and embezzlement, ensuring transparency and fairness of power is the root solution (which is also the advocated strategy of CDao’s non-action governance).

(IV) Ideal Voting Governance Scheme

As analyzed earlier, for a DAO to achieve its goals of decentralization (which can be summarized as equality or fairness) and autonomy (freedom), sufficient attention must be given to two aspects: consensus mechanism and equity distribution. The following strategies are essential:

(1) Being able to support governance token strategy to ensure that members who contribute more resources to the organization obtain corresponding ownership, which can draw on the corporate model.

(2) Straightening out the relationship between governance rights and ownership. This aspect should be different from the traditional corporate model. On the one hand, governance rights come from ownership. On the other hand, the separation of governance rights and ownership must be more beneficial to owners, that is, owners can voluntarily choose to transfer or not transfer governance rights.

(3) In order to maintain members’ freedom of choice and protect the interests of all members, when a unique consensus cannot be reached, the DAO organization should be able to fork freely and destroy freely:

If there are changes in the treasury funds, when the sub-DAO is destroyed and returned, there should also be corresponding handling contracts for the treasury funds, with incentive-compatible plans for profit and loss projects. It is necessary to avoid sub-DAOs falsely reporting profits and losses.

(4) Delegation should be a basic right of members, and the system should support proxy voting:

First, when delegating, the delegate should be able to freely allocate their tokens to different delegates and can reclaim any undisposed portions at any time, and whether or not to allow the transfer of proxy rights should also be specified when delegating;

Second, when disposing of treasury funds with proposals, smart contracts can only dispose of the portion owned by the delegate who supports the proposal and the portion they have delegated. If the supported portion is not the delegate’s entire holdings, it must be paid out proportionally from their delegated portion;

Finally, when an agent transfers delegating authority, they should transfer the proportionate delegated share of all delegates; at the same time, notification should be sent to all delegates who have not signed the delegation authority.

(5) When proposing a motion, it should ensure that the motion incentivizes compatible nature, which will help avoid governance apathy.

(6) When voting on a motion, a Pareto improvement strategy should be implemented to safeguard the rights of the minority.

04 Development Prospects

Although the concept and technology of DAOs have taken initial shape, their practical application and development still face many challenges. These challenges can generally be divided into three categories: social issues, technical issues, and ethical issues.

The primary manifestation of social issues is the legal status and regulatory issues surrounding DAOs. It can be predicted that in the future, DAOs will inevitably enter into the legal and regulatory system like companies;

In terms of technology, on one hand, we hope that in the future, there will be a fair exchange mechanism for governance tokens among different DAOs that does not rely on third-party stablecoins, or in other words, a fair cross-chain transfer mechanism for tokens; on the other hand, we expect to see more advanced security technology and more stable methods for smart contract development;

In the ethical aspect, we also have two points of expectation: first, for the voting governance itself, we hope that the governance strategy is compatible with incentives; second, when voting on a motion, we hope to follow the Pareto improvement strategy.

From the current related research, it is possible to solve the above three aspects within the next few years. Furthermore, we can expect that the entire society may operate as a large-scale DAO in the future.

In summary, as an emerging form of organization, the future development prospects of DAOs are hopeful, but new problems may also arise at any time. Therefore, research and practice on DAOs will still be a long-term process. With the development of technology, the governance process implemented using voting technology may become more standardized and modular. Good voting strategies help streamline governance mechanisms, develop logically consistent DAO tools, and excellent DAO tools can mitigate governance vulnerability attacks, assisting in constructing complete and stable smart contracts. The coordination among voting strategies, DAO tools, and smart contracts will undoubtedly provide us with a fair, transparent, free, and secure DAO society.

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