Governance DAO

Governance power is typically proportional to the number of governance tokens a member holds. This creates a system of one-token-one-vote, where voting weight is directly tied to economic stake. Major examples include Compound's COMP and Uniswap's UNI tokens. This mechanism aligns voter incentives with the protocol's success but can lead to plutocratic tendencies.

A formal process governs how changes are suggested and ratified. This includes:

• Proposal Submission: A member deposits tokens to create a formal proposal.
• Voting Period: A defined window (e.g., 3-7 days) for token holders to cast votes.
• Quorum & Thresholds: Minimum participation (quorum) and majority requirements (threshold) must be met for a proposal to pass.
• Timelock: A mandatory delay between a vote passing and execution, allowing users to react to major changes.

Approved proposals are automatically executed via smart contracts, eliminating the need for manual intervention by a central team. This can include actions like:

• Adjusting protocol parameters (e.g., interest rates).
• Allocating funds from the treasury.
• Upgrading core contract logic. This feature is the cornerstone of true autonomy, ensuring that code enforces the collective will.

The DAO controls a community treasury, often holding substantial assets (e.g., native tokens, stablecoins). Governance tokens grant the right to propose and vote on how these funds are used for:

• Grants and funding for ecosystem development.
• Protocol incentives and liquidity mining.
• Operational expenses for contributors. Transparent, on-chain treasury tracking is a critical feature for accountability.

To address voter apathy and increase participation efficiency, many DAOs allow vote delegation. Token holders can delegate their voting power to experts or community leaders who vote on their behalf, creating a representative layer. This system, used by protocols like ENS (Ethereum Name Service), aims to improve decision quality while maintaining broad token-based legitimacy.

A foundational feature of decentralized governance is the ability for dissenting community members to fork the protocol. If a governance decision is highly controversial, a group can copy the open-source code, launch a new instance with a different token distribution, and migrate liquidity. This acts as a powerful check on governance power, as seen in historical forks like SushiSwap's migration from Uniswap.

The primary governance mechanism where voting power is proportional to the number of governance tokens held. This creates a one-token-one-vote or quadratic voting system. Key considerations include:

• Vote Delegation: Token holders can delegate their voting power to experts or representatives.
• Vote Snapshotting: A specific block height is used to determine token balances for a proposal, preventing manipulation via rapid token transfers.
• Gasless Voting: Using off-chain signature-based voting (e.g., Snapshot) to reduce costs, though execution requires an on-chain transaction.

Governance DAOs typically control a multi-signature wallet or smart contract treasury containing native tokens and other assets. Security is paramount.

• Multisig Wallets: Require a threshold of signatures (e.g., 5-of-9) from elected delegates or a core team to execute transactions, adding a layer of security.
• Streaming Payments: Using tools like Sablier for vesting or continuous funding of grants and contributor salaries.
• Asset Diversification: Proposals often involve converting protocol-native tokens into stablecoins or other assets to manage volatility and fund operations.

The structured process from idea to execution, designed to ensure thorough discussion and mitigate rash decisions.

1. Temperature Check: An informal, off-chain poll to gauge community sentiment.
2. Consensus Check: A formal, on-chain vote to establish a clear direction, often with a higher quorum.
3. Governance Proposal: The final, executable proposal containing specific code or parameter changes.

• Timelocks: A mandatory delay between a proposal's passage and its execution, providing a final safety window to detect malicious code.

Governance systems are vulnerable to unique exploits that target their economic and social layers.

• Vote Buying/Coercion: An attacker borrows or bribes to concentrate voting power. Mitigated by vote escrow models (e.g., veTokens) that lock tokens for longer-term power.
• 51% Attack: A single entity acquires majority voting power to drain the treasury. Mitigated by progressive decentralization and quorum requirements.
• Governance Fatigue: Low voter turnout can lead to apathy and centralization. Mitigated by delegation incentives and streamlined processes.

A system where token holders delegate their voting power to knowledgeable representatives or Delegates.

• Delegates often publish governance platforms detailing their voting philosophy and expertise.
• Platforms like Tally and Boardroom provide delegate directories and voting history.
• This creates a representative democracy layer, improving decision quality but introducing principal-agent problems and potential delegate cartels.

The ultimate governance mechanism: if a faction disagrees with a DAO's direction, they can fork the protocol and its treasury (if permitted).

• Example: The Uniswap vs. SushiSwap fork demonstrated how liquidity and community can rapidly migrate.
• Social Consensus: Forking relies on convincing a critical mass of users, developers, and liquidity providers to migrate to the new chain.
• Code as Law: Highlights the principle that on-chain rules are absolute, but social consensus ultimately determines a protocol's value and legitimacy.

Governance DAOs primarily use governance tokens to represent voting power. The most common mechanisms are:

• Token-weighted voting: One token equals one vote.
• Delegated voting: Token holders can delegate their voting power to representatives.
• Quadratic voting: Voting power increases with the square root of tokens committed, designed to reduce whale dominance. This system formalizes stakeholder influence, where voting power is directly tied to economic stake in the protocol.

A formal process ensures structured decision-making. The standard lifecycle is:

1. Temperature Check: An informal forum discussion to gauge community sentiment.
2. Formal Proposal: A structured on-chain proposal is submitted, often requiring a token deposit.
3. Voting Period: Token holders cast votes for a defined period (e.g., 3-7 days).
4. Execution: If the proposal passes predefined quorum and approval thresholds, the associated smart contract actions are executed automatically. This process moves governance from discussion to immutable on-chain action.

A core function of a Governance DAO is the custodianship and allocation of its protocol treasury, which typically holds the project's native tokens and other accrued assets (e.g., stablecoins, ETH).

• Budget Allocation: The DAO votes on grants for development, marketing, and partnerships.
• Liquidity Provision: Decisions to provide liquidity in decentralized exchanges.
• Token Buybacks & Burns: Managing token supply and protocol-owned liquidity. Treasury proposals are often the most consequential and heavily debated votes.

DAOs govern the adjustable levers of their underlying protocol through on-chain votes. Common parameter updates include:

• Fee Structures: Changing swap fees, lending rates, or protocol revenue splits.
• Risk Parameters: Adjusting collateral factors, loan-to-value ratios, or liquidation penalties in DeFi.
• Incentive Emissions: Modifying token reward rates for liquidity providers or stakers.
• Smart Contract Upgrades: Authorizing and deploying new versions of core protocol contracts via a Timelock for security.

To address voter apathy and complexity, many token holders delegate their voting power to knowledgeable community members or specialized firms. This creates a layer of professional governance.

• Delegates research proposals, publish voting rationale, and vote on behalf of their delegators.
• Governance Platforms like Snapshot (off-chain) and Tally (on-chain) facilitate delegation and voting.
• Governance Mining: Some protocols incentivize participation by rewarding active voters with tokens.

Prominent examples illustrate different governance models:

• Uniswap: Uses UNI tokens for off-chain signaling via Snapshot and on-chain execution for major upgrades.
• Compound: COMP token holders vote directly on-chain to adjust interest rate models and add new assets.
• MakerDAO: MKR holders govern critical risk parameters, collateral types, and stability fees for the DAI stablecoin. Essential Tools: Snapshot (off-chain voting), Tally & Sybil (delegate discovery), OpenZeppelin Governor (smart contract framework).