Since its inception, the blockchain industry has been receptive to change, and its dynamism has facilitated its rapid growth and ability to influence whole sectors. However, the relatively young sector has ample room for improvement—for example, in DAOs.
Like many blockchain-based innovations, DAOs are upgrades to traditional governance systems. And like other blockchain-based innovations, there is a significant chasm between the lofty expectations for this novel system of democratic governance and its current state.
What are DAOs?
A decentralized autonomous organization (DAO) is a structure of leadership consisting of stakeholders, without any central leader or entity, with exclusive rights to vote on decisions affecting the ecosystem.
Meeting the minimum requirements offers specific rights reserved for the DAO. However, it differs from a traditional board of directors structure because token holdings do not amount to shares in the company.
Based on this definition, DAOs describe decentralized democratic systems—fitting for DeFi systems. DAOs function in different models, even though they share common characteristics.
- Globally distributed members that communicate on social channels such as Discord, Telegram, or specific forums.
- Flat hierarchies.
- Proposing and voting on decisions regarding the project.
- Membership thresholds—usually a minimum token holding or NFT requirement.
However, DAOs also have some inherent flaws and inefficiencies.
For example, DAO membership does not consider competence. Privileged members only need to afford a minimum amount of tokens or NFT to occupy vital decision-making positions.
There is also the problem of irreconcilable differences in the vision for the project. For some DAOs, crucial spots are filled by token holders and profit-oriented members prioritizing immediate success over long-term sustainability.
DAO membership based on holding requirements is skewed by uneven token distribution. For example, team members, airdroppers, or scalp traders may hold enough tokens to become DAO members and easily undermine the decentralized democratic process.
Finally, DAOs have an all-reward, no-risk model that condones complacency. DAO members can avoid commitments when it suits them and interfere when the situation favors them.
The Way Forward for DAOs
Blockchain technology was supposed to upgrade traditional governance systems. However, few DAOs operate at the same level of efficiency and success compared to traditional boards at equivalent levels.
The DeFi space must also avoid deviating from the original democratic intent and making membership criteria too stringent while raising the bar and introducing more structure to DAOs.
Projects need clear goals and unambiguous mission statements. Everyone who buys the tokens and commits to becoming a DAO member knows what the project represents. Even when projects evolve and their methods and goals need revision, it still helps to maintain a clear direction for the project and its DAO members.
Most DeFi participants, including DAO members, measure success using incomprehensive metrics such as token price and community growth. However, these short-term highs lead to poor decision-making that eventually snowball into bug-filled programs and failed projects that eventually affect token prices.
DAO members should know better to avoid these common pitfalls and erroneous decisions.
Forward Protocol’s DAO
The Forward Protocol project aims to resolve the blockchain adoption problem through a suite of blockchain, dApps, and smart contract templates suitable for Web3, DeFi, NFT, and other decentralized value-based ecosystems. That is the project’s goal, and it presents a clear path to achieving this, including its DAO model.
The Model
Forward Protocol employs a stratified DAO model, with two layers responsible for different levels of project decisions.
The first level—the common DAO—uses a simple minimum token requirement to admit members. However, these members can only vote on simple and straightforward matters.
The second DAO level is also open to every ecosystem participant—with technical requirements. It focuses on encouraging informed decisions from responsible decision-makers in the community’s best interest.
Some of the checks and balances implemented in the second level include the following –
- Zero tolerance for passive membership—every member has to vote “yes” or “no” on every DAO decision. Unwilling participants forfeit their rewards and risk getting banned for actions that affect project growth.
- Unrewarded staking smart contracts to prove commitment and deter passive membership. DAO membership rewards are based on the revenue their decisions bring to the project.
For example, DAO members must vote before admitting any third-party developer application into Forward Factory. Their rewards come from revenues (fees) generated from using these applications. Hence, they are motivated to only admit applications with long-term advantages for the project’s ecosystem.
- DAO activities and voting processes attract fees so that every decision becomes significant.
The project aims to shake off stragglers through all these extra layers of requirements. DAO members that commit to these requirements are not only attracted to the passive income that DAOs offer because their rewards depend on the overall performance of the project—not just when tokens appreciate or preset rewards are issued.
The Future of DAO Governance
The motivation behind implementing DAOs is not flawed, but the current model needs improvement. DAOs will continue to improve, and it will require conscious decisions to implement critical requirements to becoming DAO members.
The keys to maintaining DAO efficiency and relevance are incentivizing performance, dissuading passivity, setting clear goals, and encouraging fair systems.
About Mr. KEY—Karnika E. Yashwant (Mr. KEY) is a blockchain expert with a passion for education reform. He is the founder of KEY Difference Media, a top-3 blockchain marketing agency with over 350 team members. He is also the co-founder and CEO of Forward Protocol.
Mr. KEY has actively pursued his passions for more than a decade. His opinions on topics with local and global relevance are based on his extensive knowledge of blockchain technology, decades of marketing experience, and advocacy for education reform.
