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Unlocking Active Governance

Governance participation remains a major challenge facing DAOs. One reason for this is a broken incentive structure which fails to effectively maximize value for token holders, delegates and the DAO. Delegating tokens represents a poor tradeoff for token holders because it limits token holders' ability to fully exploit the utility of their tokens. For example, token holders who wish to delegate their voting power may be required to forfeit DeFi participation due to the underlying smart contracts being unable to fully support the voting functionality of governance tokens, breaking their 1:1 voting peg. On the other hand, for delegates, the hard work of active voting often translates into inadequate or inexistent benefits.

Consequently, DAOs continue to seek ways to unlock active governance participation by proposing and designing mechanisms aimed at incentivizing delegation by token holders, and increased participation by delegates. Notable examples include:

• Uniswap DAO: The fee-switch proposal by Uniswap DAO proposed a protocol upgrade to introduce a fee mechanism that rewards active delegation by UNI token holders. Under this setup, token holders would be required to stake and delegate their tokens to receive a share of protocol fees. The DAO would also have control of core parameters including fee generation, collection and distribution. This proposal has passed a temp-check vote, and the staking functionality has been implemented, although the DAO has yet to turn on the fee switch.

• Arbitrum DAO: Tally has proposed to introduce ARB staking in Arbitrum DAO in an effort to incentivize active delegation by ARB token holders. To earn rewards, token holders would be required to delegate to “active delegates” as defined by the DAO, ensuring thoughtful participation and alignment of token holders with the DAO’s interests. The proposal further incentivizes token holders by offering a solution to the issue of delegation affecting token utility. Essentially, token holders would be able to use their ARB in DeFi while maintaining voting power. This functionality would be powered by The Tally Protocol via Governance LSTs, described below in further detail.

The Tally Protocol & Governance LSTs

With the launch of The Tally Protocol, DAOs are presented with a novel approach to unlocking active governance. Through Governance Staking on The Tally Protocol, DAOs can create Governance Liquid Staked Tokens (LSTs) for their native tokens, e.g., stARB for The Arbitrum DAO's ARB token. Under the hood, The Tally Protocol abstracts away the governance utility of the DAO's tokens from its economic utility. The key effect of this is that token holders can delegate the voting power (i.e., governance utility) in their native tokens, while still being able to fully partake in DeFi (i.e., economic utility) using the liquid tokens. This fixes the incentive mismatch between delegation and exploitation of token utility by token holders. The Tally Protocol builds on this primitive to provide other mechanisms for improving governance participation:

• A protocol fee-sharing mechanism for distributing rewards per Governance LST that is actively used in governance/voting, incentivizing participation from delegates;

• A mechanism for distributing un-delegated voting power to active delegates, improving participation in DAO governance.

Metagovernance of Governance LSTs in DAOs

The What

One of the core features of The Tally Protocol's Governance Staking is the metagovernance of Governance LSTs. This entails how the voting power in the LSTs are distributed to delegates when a token holder fails to delegate them from the onset. By default, un-delegated tokens are delegated according to a delegation strategy defined by the Tally DAO. Alternatively, the underlying DAO can define its own custom strategy.

The goal of any delegation strategy would be to define criteria for determining which delegates are qualified to receive un-delegated voting power. Essentially, this would be solving for active and impactful delegates. DAOs may rely on one or a combination of the following two approaches to defining a delegation strategy:

• Provider Definitions: DAOs typically rely on reputation system providers (e.g., Karma, SourceCred) to define who an active delegate is. Provider definitions are primarily informed by metrics such as on/off-chain voting participation and forum engagement, which serve as proxies for governance participation. Based on these metrics, providers use formulas to arrive at scores assigned to each delegate, and those who reach the cut-off defined by the DAO are considered active delegates.

• Custom Definitions: Provider definitions are driven by quantitative metrics that aid automation and objectivity. However, its strict reliance on these limited metrics also constitutes a flaw. Truly assessing impactful governance participation requires tracking other qualitative metrics such as authoring proposals, contributing quality feedback, community engagement, development of key initiatives, and other forms of value-adds that are obvious but difficult to mathematically quantify. DAOs looking to more accurately define their delegation strategy can design mechanisms for measuring these kinds of contributions and whitelisting delegates. Doing this would naturally introduce human subjectivity to the mix, however, this can be mitigated by combining it with the objectivity of Provider definitions.

  • Framework for Recognized DelegatesA practical approach for DAOs seeking to develop custom definitions would be to establish a Framework for Recognized Delegates that provides guidelines for whitelisting active delegates. DAOs like Aave, Maker and Uniswap have tried to implement similar frameworks, although for different purposes. This framework should make key specifications such as:

    • The criteria for becoming a recognized delegate, which could include qualitative metrics such as proposal authorship and feedback, attendance of community calls/events, quality and speed of voting rationales communicated, holding roles, and exceptional contributions.

    • A DAO-elected committee to implement the framework and key responsibilities such as structuring an application process and an appeal process for rejected applications, maintaining a list recognized delegates, and proposing changes to qualification criteria for DAO approval.

    • Establishing a cadence for re-evaluating already recognized delegates. This should ideally be in close sync with the cycle for re-distribution of idle voting power.

• Other Considerations

  • Parameter changes: The chosen strategy should be flexible and allow delegation parameters to be adjusted when needed.

  • Delegation caps: In distributing un-delegated voting power, it could be helpful to implement delegation caps. This will help to prevent over-concentration of voting power or plutocracies by a few delegates. The drawback is that it limits incentives for large delegates which can potentially lead to an overall decrease in participation. Also, delegation caps may also be hard to implement in practice since it can be easily circumvented, for instance, using multiple wallets.

  • Re-delegation: The DAO can also implement a mechanism for re-delegation when delegates lose qualifying criteria.

The How

DAO-Tally Advocates

• DAOs seeking to integrate with The Tally Protocol will need to define a metagovernance strategy from the onset, including persons to manage the communication and strategy development with The Tally Protocol. DAOs can achieve this by appointing advocates or working groups to carry out this function. The Arbitrum DAO adopted this approach when it established staking rewards and delegation working groups for this exact purpose. Specifically, the DAO-Tally Advocates would be responsible for:

  • Proposing metagovernance/delegation strategies for Governance LSTs, for the DAO’s approval:

    • Developing and proposing custom definitions for “active delegates,” including whitelisting delegates if required by the DAO

    • Proposing, on/off-boarding of new, additional or unwanted reputation system providers

    • Reviewing and proposing parameter adjustments for Provider definitions in use by the DAO, including recommending formulas for calculating delegate participation scores, and proposing cut-off marks

  • Implementing DAO-approved delegation strategies

  • Reviewing and proposing delegate incentives, including fee-switch and fee-distribution proposals

  • Interfacing with The Tally Protocol on behalf of the DAO

  • Reporting and providing feedback to the DAO

Pilot Phase

A good first step for DAOs would be to kick off with a pilot phase where integration with The Tally Protocol is done at a smaller and more controlled scale to bound the risks of an experiment and monitor results. Both the DAO and The Tally Protocol can leverage learnings from the pilot program to implement a successful and larger-scale integration. An effective pilot design may entail following Uniswap and The Arbitrum DAO’s approach of simply activating governance staking on The Tally Protocol without turning on rewards for token holders. This allows DAOs to test the functionality of The Tally Protocol, including metagovernance strategies, without exposure to financial risks.

Governance Steps

Depending on the DAO, there may be additional steps in the governance process that would need to be completed before the proposed integration with The Tally Protocol and the accompanying metagovernance strategies can be deployed. Existing committees in the DAO may be required to go over proposals to conduct further research and impact analysis. For The Arbitrum DAO, the ARB Staking proposal first went through a research and security analysis conducted by the Arbitrum Research & Development Committee (ARDC) before progressing to a final DAO vote.

Way Forward for DAOs

The Tally Protocol represents a unique approach to unlocking active governance within DAOs, by offering a protocol-layer incentive mechanism that programmatically rewards governance participation by both token holders and delegates. DAOs can leverage The Tally Protocol’s functionality to ensure that idle voting power is automatically redistributed to active and aligned delegates. However, doing this would require DAOs to be involved in the metagovernance of their Governance LSTs, defining effective delegation strategies for redistributing voting power. This may start out as a “manual” process where selected strategies are iteratively implemented and adjusted before encoding the logic to create an objective, custom and fully automated system. Professional advisers play a key role in helping DAOs achieve this. Areta, as a strategic partner, will help address some of the larger strategic questions at the intersection of DAOs and Governance Staking and will play a key role in supporting DAOs as they establish and manage committees that interface with The Tally Protocol.

Read the full Tally Protocol Whitepaper

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