Overview

In this short paper I will propose a new method of governance for DAOs that shifts away from current standards of coin based governance. This will be a governance primitive called G100 standing for Governance NFT with 100 shares. The reason why I posit an NFT rather than a coin based method of governance is for their non-fungible properties. The goal is to ensure that a community member, no matter how many tokens they have, have only one vote which cannot be changed, is tied to their wallet, and cannot be transferred to other wallets.

Current methods of governance and their pitfalls

Governance rights are iconic in crypto. People love the idea that through holding a token of a project they love, not only do they get to reap the rewards of the project's success but also play a significant hand in the shaping of its future. I agree with that sentiment, it’s very empowering how much of the development process of a protocol is visible even to the smallest shareholder versus holding an equity in TradFi. The ethos of crypto is by the people and for the people, and inserting governance rights into tokens is an embodiment of that ethos.

However, current methods of coin-based governance, while more transparent than equities, have the same pitfalls. There are three main issues to consider with coin-based governance

  1. Tragedy of commons
    1. Smaller participants in the grand scheme of things have an extremely minimal impact on any decision making and are thus tend to either disregard voting entirely or vote randomly without deep thought
  2. 2 Over-indexation on price
    1. Given coin-holding is the main method in which one can vote, majority coin holders have the strongest say in any governance decision. In many cases whales over-index on considering price appreciation of the asset they’re holding at the expense of other parts of the community which can cause rent extraction.
  3. Conflict of interest
    1. Given whales will be the largest players in decision making conversations, a natural conflict of interest arises when those with the largest amounts of capital are also invested in competing or supplementary projects. This over-exposes the entire project to risk-exposure, in the form of other protocols, from whales and their portfolios

These issues get exacerbated in the presence of malicious actors continually attempting to subvert the system through vote-buying. Economic interest and governance rights are combined in the form of coin governance deliberately in an attempt to align incentives between the success of the project and governance. However, it’s quite easy to separate though two if you imagine that a bad actor could buy votes in an effort to vote for a proposal that benefits their economic interests but goes against the economic and governance interests of the DAO.

Thus, we have established that the current method of coin governance within protocols and DAOs is riddled with issues. A secondary question arises though, is decentralized governance even important? Should we care about it at all?

The importance of Decentralized Governance

Vitalik posits two very rational needs for Decentralized Governance with protocols.

  1. One is the funding of public goods in the form of layer-1, layer-2, and etc. research that benefit the entire ecosystem but in themselves have no business model within which to make profit and be self-sustaining.
  2. The other is the maintenance and upgrades to the protocol in areas within which it might not remain consistent.
    1. For example, take Uniswap and its transaction fees. What if in the future there’s the need for Uniswap to actually increase/decrease their standard take rate to maximize profit for current market conditions? We need a method to decide how much to turn that knob with the community.

That’s the rational argument for the importance of Decentralized Governance, but let me bring forth a more sentiment based one. If you’re like me, and you were drawn to crypto because it’s a beautiful amalgamation of technical depth, economics, and a social movement into one you should care about Decentralized Governance. DAOs are bringing a new social model of operation that breaks the molds of this panopticon society and will allow all of us to be free of the chains that bind us today in archaic nation states. No longer will we have to live cookie cutter lives attempting to be a part of the “in” group by playing identity politics and banding together based on citizenry, race, or geography. No, rather we can actually come together as a spectrum of collectives each unique in our lived experiences, but united towards the same goal. To that end DAOs are proof positive of that future, and for us to grasp that light before it dies out is to constantly improve and hone our current methods of Decentralized Governance so that they may be so strong no one can deny them and all will come to them.

Now we both have rational and emotional arguments for the existence and importance of Decentralized Governance , and so let us go onto my proposed solution.

New methods of governance

Futarchy, as discussed by Robin Hanson and Vitalik Buterin, in the context of DAOs is a method in which individual responsibility is allocated for poor voting decisions rather than fully socializing the cost of those decisions. Meaning we want all voters to have some sort of skin in the game so that they are incentivized to do research and vote properly. To a broader end we want to solve the three issues we mentioned before: the tragedy of commons, over-indexation on price, and over exposure to conflicts of interest.