DAOs mark a significant evolution in our understanding of collective management and ownership. Governed by code and operating on blockchain networks, these entities challenge traditional notions of group collaboration and decision-making.
The concept of a DAO can vary depending on who you ask, but at its core, a DAO is a decentralized entity that operates on a blockchain and is democratically governed by its community members. They stand out for their decentralized structure, eschewing any central authority or conventional hierarchy. Their operational rules and decision-making mechanisms are embedded in smart contracts, self-executing codes on the blockchain, which guarantee transparency and equity.
This pioneering framework is reshaping the dynamics of business and community interaction. DAOs are carving out new avenues in areas like corporate governance and project management, empowering each member with a significant and impactful voice.
In this article, we'll explore the “non negotiable” aspects of DAO operations, including governance design and the balance between robust and adaptable structures.
One of the cornerstones for the success of a DAO is its governance design. The governance design of a DAO not only structures how decisions are made but also reflects and strengthens the values and goals of the community.
Transparency is key in DAOs, where blockchain technology ensures that every decision and transaction is visible and verifiable by members. This transparency builds trust and ingrains accountability within the system.
Effective DAO governance ensures inclusivity, allowing every member's voice to be heard, in contrast to traditional organizations' top-down decision-making. This inclusivity enriches decision-making with diverse perspectives and deepens member engagement and commitment.
Each DAO's governance should mirror its unique principles and objectives, aligning structures with community values to foster cohesion and a shared sense of purpose. This alignment is crucial for active and dedicated member participation, particularly in complex decision-making scenarios.
A DAO's foundational phase, determined by token allocation and initial voting rights, is pivotal in shaping its governance. Founders must choose between crafting governance from scratch or implementing basic rules early on. This choice, along with initial decisions on vote delegation and proposal processes, significantly shapes member participation and sets the trajectory for the DAO's future governance model.
Robustness and adaptability are key for DAO governance, crucial for preserving their integrity and longevity, and vital in addressing risks like governance attacks and misaligned incentives.
Effective governance is imperative to safeguard against decision-making vulnerabilities, from vote manipulation to misleading proposals. A robust governance system needs protective measures to detect and mitigate such threats, ensuring DAO integrity.
Furthermore, given the diverse interests of members, a well-designed governance system must balance these differences to prevent conflicts or biased actions. Aligning individual incentives with the DAO's broader goals is essential for decisions that benefit the whole group.
Source: Tally Docs
To ensure robustness and adaptability, DAO founders must make strategic decisions regarding when to leverage the advantages of onchain governance and when to consider off-chain solutions.
Onchain governance offers key advantages: transparency and security. It removes the need for trust in central authorities, as smart contracts independently execute approved proposals. This empowers voters to control protocol aspects, like parameters, funding, and upgrades, while ensuring all decisions are permanently recorded on the blockchain, preventing undue influence. It also leverages blockchain's security, reducing intermediaries and fostering inclusivity among token holders.
Well-known examples of projects that adopt onchain governance include MakerDAO, Arbitrum, Uniswap, Optimism, and Aave. These established protocols’ approach to governance design, with its focus on security, scalability and community involvement offers a strong model for DAOs seeking to maintain integrity and longevity.
On the other hand, offchain governance takes place outside the blockchain, often using external tools like Snapshot or conventional communication platforms like Discourse and Discord. While it emphasizes efficiency and flexibility, it introduces the necessity for social trust. Participants must rely on one another or a central authority to implement decisions. A recipe for miscommunication & human error during organizational processes.
The onchain approach in DAOs offers a higher degree of transparency, security, and decentralization, as voters do not have to rely on trust in a central authority. With smart contracts automatically executing approved proposals, the power truly rests with the voters. Tally, with its commitment to onchain processes and transparent governance, serves as a valuable ally in achieving genuine decentralization and trust within DAOs, making it the preferred choice for those seeking a robust and reliable onchain governance solution.
Tally offers a series of recommended practices that are especially relevant to any DAO seeking to optimize its operation. These practices cover a range of aspects, from technical considerations such as using the latest version of OpenZeppelin contracts to governance strategies like ensuring equitable token distribution and defining reasonable quorum and voting periods. This approach is not just theoretical; it's proven in the field. With Tally's guidance, over 500 onchain DAOs effectively manage assets exceeding $10 billion in treasuries under DAO management. This impressive track record underscores Tally’s significant influence in the DAO space.
Let's break down these recommendations one by one so you can understand them in detail.
Using the Latest Version of OpenZeppelin Contracts
The OpenZeppelin Governor 5.0 is a widely recognized framework for smart contracts, providing a robust and secure foundation for building DAOs on the Ethereum blockchain. This framework is crucial for any DAO looking to establish strong and effective governance.
The importance of OpenZeppelin Governor in the world of DAOs lies in its ability to protect significant assets and manage a large number of participants. With DAOs safeguarding over $5 billion in assets and having more than a million participants, OpenZeppelin Governor stands out for its reliability and scalability.
The benefits of using OpenZeppelin Governor include enhanced security with proven smart contracts, flexibility for customization, and ease of implementation, making it a valuable choice for DAOs seeking secure and tailored onchain governance solutions.
Customizing the OpenZeppelin Contract
Customizing the OpenZeppelin Governor contract is a crucial step in adapting the governance model to the specific requirements of a DAO.
This customization can encompass choosing the appropriate quorum and voting mechanisms and defining custom actions or permissions, such as the ability to cancel a proposal. For instance, a DAO may require a specific quorum or a voting period that aligns with the nature of its decisions and the participation of its members.
To customize the contract, DAOs can leverage tools like OpenZeppelin's Contracts Wizard, which facilitates the interactive generation of contracts and helps understand the components offered in OpenZeppelin Contracts.
Ensuring long-term alignment of participants in a DAO requires the implementation of appropriate token distribution strategies. How tokens are distributed can significantly influence member participation, governance, and overall DAO stability.
One possible approach involves merit-based token allocation, rewarding contributors who actively further the DAO's goals, thereby bolstering their dedication and involvement. Simultaneously, gradual vesting schedules can deter short-term speculation by unlocking tokens over time, anchoring recipients to the DAO's enduring success.
A well-executed strategy not only elevates member participation and commitment but also ensures a decentralized, democratic governance structure. Moreover, it acts as a safeguard against power consolidation, cultivating a diverse and dynamic community dedicated to the DAO's mission.
Setting a Reasonable Quorum and Voting Period
Quorum refers to the minimum number of members required to participate in a vote for a proposal to be considered valid. A well-balanced quorum is essential to ensure the legitimacy and representativeness of decisions made, while also preventing an excessively high participation requirement from causing most proposals to fail due to lack of participation.
On the other hand, the voting period should be long enough to allow members to evaluate and vote on proposals but not so long that it unnecessarily delays decision-making. A too-short voting period may not give members enough time to participate, while one that is too long can hinder the DAO's operational efficiency. Striking the right balance between these factors is key to maintaining effective governance and active member participation in the DAO.
Encouraging Delegation and Delegate Accountability
In the governance of DAOs, vote delegation and the responsibility of delegates are pivotal elements. This practice enables token holders to delegate their voting rights to other members, which can facilitate increased participation and informed decision-making. Delegates take on the responsibility of voting on behalf of those who elected them. Therefore, it's important for DAOs to encourage responsible delegation and establish mechanisms to ensure the accountability of delegates.
We recommend using OpenZeppelin's delegation tools, as an effective way to empower committed and active voters, giving them a more significant voice in the DAO.
Maintaining Clear and Accessible Documentation
Clear and accessible documentation is not merely a recommended practice; it is a fundamental necessity for the success and longevity of any DAO. It acts as the essential guidebook that empowers both newcomers and seasoned participants to navigate the DAO's intricacies and actively engage in its governance processes.
Documentation should comprehensively cover the governance process, roles, and responsibilities, including rules. It should also detail smart contracts, their functions, and user interactions, using code snippets and examples for clarity. Customizations must be transparently explained, with reasons and impacts documented for community tracking.
Continuous documentation updates are crucial for accuracy amidst governance changes. It should be easily accessible, multilingual when needed, and promotes transparency, inclusivity, and community engagement.
Monitoring and Learning from Other DAOs
Staying informed and learning from the experiences of other projects is paramount to your own DAO's success. DAOs are pioneering new models of governance, and the collective wisdom of the broader community can provide invaluable insights.
By keeping an eye on other DAOs, you can identify successful strategies, governance models, and approaches that are working effectively. Learning from the challenges and mistakes of other DAOs can help you avoid similar pitfalls. Whether it's security vulnerabilities, contentious decision-making processes, or other issues, understanding what went wrong for others can fortify your own DAO's defenses.
Observe how they engage with their members, foster collaboration, and maintain active participation. By monitoring other projects, you can identify potential synergies and collaboration opportunities. Joint initiatives, partnerships, or shared resources can enhance your DAO's capabilities and impact.
The world of DAOs is still relatively young, and no one has all the answers. The DAO ecosystem thrives on shared knowledge and collaboration. DAOs that embrace the spirit of open innovation and cooperation are positioned for long-term success.
As we’ve seen, DAOs present a revolutionary approach to governance and decision-making. Looking ahead, they hold the promise of further reshaping our digital and communal landscapes, challenging us to rethink collaboration and collective action.
Some of the practices and strategies we have explored are essential and non-negotiable for the success of your DAO. However, it's important to view them as flexible starting points on an ongoing journey of adaptation and learning. As pioneers in this field, we have the responsibility to stay current with the latest developments, learn from the experiences of other DAOs, and embrace innovation with an open and adaptable mindset.
Managing a DAO isn't just about following best practices; it's about cultivating a culture of growth and evolution. DAOs are living entities shaped by their members' collective wisdom. As we stand at the forefront of this digital governance revolution, it’s not just the code that will shape our future but also the vibrant, collaborative spirit of communities driving DAOs forward.