Voting Mechanisms & Incentives for Governance in DAOs

My Private key was compromised.

This is where I originally posted all my research & investment thesis:

Hence, I’m re-uploading all my writings to this account.

Please subscribe to this new account and support me in my research.

This research was originally posted on April 24, 2023


Earlier this year, I explored the concept of Governance & Growth in Modern Society, where I identified two different societies emerging in modern economies.

  • On the one hand, we have a global society of consumers with unprecedented mobility and access to information.

  • On the other hand, we have organizations with digital sovereignty (DAOs) approaching to take power from the hands of corporations.

In that research thesis, I explored how organizations, especially DAOs, can scale and what motives (profit or growth principle) drive them to scale and operate at a higher level.

This research thesis focuses more on how governance is enabled in DAOs through

  • Voting incentives,

  • Pricing Mechanisms & Prediction Markets, and

  • Oracles for data-driven decisions

Further, this research delves deeper into analyzing & optimizing interactions between DAO participants through game theory. This is done by exploring the idea of Voting mechanisms & rewards. Also, I examined case studies of MakerDAO, Augur, Gitcoin Grants, Decred & Tezos.

Table of Contents

  • The Concept of Voting Incentives

    • Types of IDPs

    • How does the community view voting incentives?

  • Pricing Mechanisms & Prediction Markets for decision making

  • Role of Oracles in Decision Making

  • Analyzing and Optimizing the Interactions Between Participants in Governance of a DAO

    • How to analyze interactions b/w participants

    • How to optimize interactions b/w participants

  • Laying the Rules for Interactions

  • Categorizing Voting Mechanisms

    • How to incentivize participation?

    • How to implement different voting mechanisms?

  • Impact of Various Voting Mechanisms on Voting Rewards

  • Case Study of MakerDAO, Augur, Decred & Tezos.

  • Conclusion

The Concept of Voting Incentives

Vote incentives involve Independent Distribution Partners (IDPs) that provide users with financial incentives for participating in governance by voting on their held governance tokens.

Independent Distribution Partners (IDPs) are platforms or entities that work on encouraging and facilitating voting participation among token holders. Their primary goal is to increase voter turnout by providing incentives, rewards, or other mechanisms that motivate users to engage in the governance process of decentralized projects or organizations.

IDPs can take various forms or operate in different ways, such as:

Third-party platforms: External platforms can integrate with a decentralized project's governance system, offering participants an easy and user-friendly way to vote on proposals and receive rewards for participation.

  • Tally: A decentralized governance platform that facilitates easy voting and proposal creation for multiple DeFi projects, including MakerDAO, Bancor, Synthetix, and more.

    • Tally connects with various web3 wallets, allowing users to manage their voting activities across different protocols from one place.

    • Each protocol may determine incentives for participation but can include rewards in the form of governance tokens.

  • Aragon: An Ethereum-based platform that helps users create and manage decentralized organizations.

    • It provides a suite of tools for DAOs, including governance, proposal creation, and voting modules.

    • Aragon integrates with multiple projects to enable seamless decentralized governance. Depending on each DAO's governance tokenomics, users may receive rewards or incentives for participating in voting activities.

  • DAOstack: A decentralized platform for the creation and management of DAOs. It offers a modular and extensible framework for governance, including tools for proposal creation, voting, and delegation.

    • DAOstack integrates with several Ethereum-based projects, allowing participants to engage in voting and decision-making activities.

    • As with other platforms, incentives for voters are determined by each specific DAO's rules and token economics.

Native ecosystem integrations: The IDPs can be built into the native governance ecosystem of a project, providing a seamless experience for token holders and making it more convenient to participate in the voting process.

  • By integrating IDPs directly into a project's native ecosystem, developers foster a more cohesive environment where token holders can easily access and engage with the governance process.

  • This approach elevates the user experience and encourages greater participation from the community, ultimately benefiting the project’s decentralized decision-making process.

  • Additionally, native integrations can facilitate a more secure and trustless voting system, as they often leverage the project's existing smart contracts and security measures.

Collaborative organizations or networks: These IDPs can be groups or consortia of companies or projects that work together to support and promote the adoption of blockchain-based governance systems and enhance voter participation through incentives.

  • In this setup, multiple organizations join forces to create a more democratic and decentralized decision-making process.

  • These collaborative arrangements can pool resources, share knowledge, and develop mutually beneficial incentive programs to encourage active participation in voting initiatives.

  • The collaborative nature of these networks enables projects to learn from one another and continuously improve their governance structures while striving to create a more engaged and active community.

While IDPs can be essential in fostering broader engagement in decentralized governance, their implementation should be carefully considered to avoid issues related to vote-buying or manipulation. Some of the ways this can be done:

  • designing appropriate incentive structures,

  • maintaining transparent decision-making processes, and

  • minimizing the undue influence on voting outcomes.

The main goal of this approach is to improve voter turnout and engagement in decentralized ecosystems, fostering more robust and active participation in governance.

Some questions I will answer in this research:

  1. What are the types of Vote Incentives that might be available to stakeholders?

  2. What are the pros and cons of each type of vote incentive?

  3. What are the strategies for improving voting quality on a decentralized protocol?

  4. What is the potential impact and advantage of implementing vote incentives for community-driven organizations?

  5. What are the best practices for executing and using vote incentives?

  6. Is there a sample voting system that could be implemented on a blockchain?

The idea of vote incentives can be seen as both positive and negative.

Positively, it results in more users requiring less incentive value to be incentivized to participate. Negatively, it may result in a system that can't be counted on for correct voting results.

Let’s see how Vote Incentives can be seen as both positive and negative features with these 4 reasons

#1: Democratization Tool

Some, including me, believe vote incentives promote democracy within decentralized systems by encouraging more people to vote. IDPs help to facilitate the process by incentivizing users to cast their votes, which can lead to a broader distribution of power, greater diversity of opinions, and ultimately more representative decision-making.

As a democratization tool, vote incentives are considered by some to be a valuable mechanism in promoting more inclusive and diverse decision-making within decentralized systems. The involvement of Independent Distribution Partners (IDPs) in facilitating the process is crucial to this viewpoint. By offering users rewards for voting, IDPs encourage a broader range of people to vote on governance tokens.

This increased participation results in several positive outcomes:

  • Wider distribution of power: With more people voting, the power dynamics within decentralized systems shift, allowing for a more equitable distribution of influence over decision-making processes.

  • Greater diversity of opinions: Encouraging a broader range of people to vote leads to various perspectives being heard and considered, enhancing the quality of decisions and supporting more innovative solutions.

  • More representative decision-making: As more people participate in voting, the resulting decisions better reflect the community's collective interest, improving overall governance and promoting long-term sustainability within the decentralized ecosystem.

Voting incentives, when utilized effectively, can be a powerful tool to further democratic principles within decentralized systems, fostering healthier governance and more equitable outcomes.

#2: Vote-Buying

On the other hand, some critics argue that offering financial incentives for voting might encourage vote-buying, which could distort the governance process. In this scenario, IDPs may attract users with the promise of monetary compensation, potentially leading to biased voting behavior and manipulation of the results. This would ultimately compromise the fairness and legitimacy of the governance decisions.

Vote-buying, as a potential downside of vote incentives, is a critical concern that must be acknowledged when discussing using financial incentives in decentralized systems.

Critics argue that the use of Independent Distribution Partners (IDPs) and financial incentives may result in issues such as:

  • Distorting the governance process: Monetary incentives shift users' focus from making informed decisions based on their beliefs and values to making decisions driven by the promise of financial gain, thus leading to biased voting behavior.

  • Role of IDPs: In this perspective, Independent Distribution Partners, by offering financial rewards, unintentionally attract users who prioritize monetary compensation rather than genuine interest or understanding of the issues being voted upon.

  • Manipulation of results: Vote-buying could result in power being concentrated among those who can offer the most incentives, leading to an imbalance in the governance process and increased vulnerability to manipulation.

  • Compromising fairness and legitimacy: The potential for vote-buying raises questions about the integrity of governance decisions made using incentives. When financial rewards rather than well-considered perspectives primarily influence decisions, the overall fairness and legitimacy of the governance process may be compromised.

  • Biased voting behavior: When financial incentives are offered, users might be more likely to vote based on monetary gain rather than considering the underlying proposals' merits. This could lead to a skewed decision-making process that no longer accurately reflects the preferences of the broader community.

  • Manipulation of results: With monetary compensation in play, powerful entities might attempt to sway decisions in their favor by colluding with IDPs or exploiting vulnerabilities in the system. This could severely undermine the integrity of the voting process.

  • Compromised fairness and legitimacy: If vote-buying becomes prevalent within a decentralized system, it erodes trust in the outcomes, as these decisions would not arise from an impartial assessment of the proposals but rather be influenced by financial gains.

In light of these concerns, careful consideration must be given to implementing vote incentives in decentralized systems to ensure they do not endanger fairness and legitimacy instead of contributing positively to the overall governance process.

As a potentially negative aspect, vote incentives promote vote-buying, negatively affecting the decentralized systems' governance process.

Acknowledging these concerns, exploring ways to balance the potential benefits of vote incentives while minimizing the risks associated with vote-buying behaviors and ensuring the integrity of decentralized governance processes is essential.

There is a fine line between fostering democracy within decentralized systems and engaging in vote-buying behavior that undermines good governance.

#3: Pricing Mechanisms

Pricing mechanisms are crucial in determining resource allocation and consumer behavior in various markets.

I want to explore two case studies— Film exclusivity windows and Rake in Poker—to illustrate the impact of pricing mechanisms and underscore the need for more efficient pricing systems.

Let's examine these examples in more detail:

  • Film exclusivity windows: These windows refer to the period during which a film is exclusively available in a particular platform or format (e.g., theaters) before being released to other channels (e.g., streaming services or home video).

    • This mechanism maximizes revenue by segmenting the market and capitalizing on consumer willingness to pay for early access.

    • However, this can also lead to inefficiencies, such as piracy due to limited accessibility, suboptimal release timeframes that fail to utilize demand, and potentially alienating some consumer segments.

  • Rake in poker: Rake refers to the commission fee that poker rooms and casinos charge players for participating in poker games. While rake enables these establishments to operate profitably, it can also have negative consequences.

    • For example, high rake rates might deter more casual players, leading to a less diverse player pool and limiting growth potential.

    • Additionally, competing pricing models, like time-based rakes, can result in inefficient allocation of resources as players might make suboptimal decisions based on time constraints.

Pricing mechanisms significantly impact resource allocation and consumer behavior, sometimes leading to inefficient outcomes. But how do we decide on appropriate alternatives?

By evaluating the effectiveness of existing pricing models, which is through Oracles.

#4: Oracles

There is a need for a certain level of centralization or trust in Oracle systems that supply crucial data to the decentralized platforms.

Augur, for instance, relies on a decentralized network of oracles to report and verify real-world event outcomes, which determine the payout of prediction market bets.

Oracle solutions often require some degree of trust in the data sender, which may present potential security risks, inaccuracies, or manipulations. This contradicts the inherent nature of decentralized systems, which typically seek to minimize trust in any single party or authority.

One possible solution to this challenge lies in using trust-minimization technologies like Arbitrum. Arbitrum is an off-chain scaling solution that offers a protocol for running smart contracts with minimal trust requirements between the parties involved. It achieves this by enabling the execution of contracts off-chain while maintaining the same security and dispute resolution capability as on-chain solutions.

Arbitrum can improve the current limitations faced by decentralized oracle systems by reducing the reliance on trusted parties and enhancing data reliability, ultimately leading to the more secure and efficient operation of blockchain-based prediction markets. In this context, exploring and implementing trust-minimization solutions like Arbitrum may pave the way for more robust and resilient decentralized oracle systems that better serve users' needs and maintain the decentralization ideals at their core.

Why are Prediction Markets Important for Voting Incentives?

Prediction markets provide an effective mechanism for aggregating information, fostering collective intelligence, and incentivizing informed decision-making.

Prediction markets play a critical role in incentivizing well-informed voting, utilizing the collective knowledge of participants, enabling real-time decision-making, and building trust in DAO governance. These features make them a valuable tool for enhancing voting incentives and achieving better decision outcomes in DAOs.

Why are oracles important for voting incentives in DAO governance?\ Oracles are important for voting incentives in DAO governance since they provide the interface between off-chain data sources and on-chain smart contracts, enabling effective integration of external information in decision-making. In the context of DAO governance, oracles play a crucial role by:

  • Data-driven decision-making: Oracles provide accurate, up-to-date, and reliable off-chain data that feeds into voting decisions made by the DAO members. This helps to create a more informed and data-driven voting process, improving the quality of governance decisions.

  • Facilitating conditional outcomes: In some scenarios, DAO governance decisions might be based on external events or conditions not native to the blockchain. Oracles reduce this dependency by fetching the required external data and reliably feeding it into the DAO’s voting mechanisms, allowing for more versatile and adaptable DAO governance.

  • Enhancing transparency and trust: Reliable oracles contribute to the trust in the DAO governance process since members can verify the accuracy and reliability of off-chain data used in decision-making. This trust drives more active participation and engagement from the DAO members, enabling better-informed voting.

  • Enabling automation and efficiency: Oracles can trigger specific actions or changes in DAO governance based on predefined conditions, automating certain aspects of the governance process. This can lead to higher efficiency, responsiveness, and adaptability within the DAO ecosystem.

  • Encouraging innovation and diversity: By providing access to off-chain data and information, oracles enable various voting incentives and mechanisms, allowing DAOs to experiment with and adopt innovative governance models tailored to their specific needs and goals.

Today and in the coming future, Oracles will play a vital role in the governance process of DAOs.

By leveraging oracles, DAOs can create more effective governance models that incentivize well-informed voting and improve overall decision outcomes.

Now that we have discussed the good and bad of voting incentives, it’s time to put a framework of how to operationalize Voting Incentives.

Analyze and Optimize the interactions between participants in the governance of a DAO through game theory.

Analyzing and optimizing the interactions between participants in DAO governance through game theory involves identifying key actors, their objectives, available strategies, and the rules governing interactions.

By understanding the incentives and potential outcomes of different strategies, it is possible to design a governance mechanism that encourages optimal behavior and maximizes the overall utility for the participants.

How to Analyze Interactions b/w Participants.

In a DAO, the key actors typically include

  • token holders,

  • proposers,

  • developers, and

  • oracles.

Each stakeholder has different objectives and priorities, influencing how they interact with the governance process.

After identifying critical actors in a DAO, we can further analyze their objectives, priorities, and impact on the governance process.

Understanding the objectives and priorities of these key stakeholders allows the DAO to design appropriate incentive mechanisms and governance structures that optimize cooperation, decision-making, and overall utility for all stakeholders.

By addressing each stakeholder’s concerns and priorities, the DAO can create an environment that fosters collaboration and drives the organization toward its goals.

Once we have identified the individual objective and priorities, we can then structure the shared objectives of the entire DAO:

  1. Maximize overall value and growth of the DAO: All actors share a common goal in promoting the growth, adoption, and value proposition of the DAO to ensure its long-term success and sustainability.

  2. Ensure smooth functioning of the DAO: Stakeholders collectively desire an effective governance process that supports decision-making, encourages cooperation, and maintains the overall stability of the organization.

  3. Work towards the organization's mission: All participants in the DAO governance process aim to align their actions and decisions with the organization's overarching mission and long-term goals.

By clearly defining each key stakeholder’s individual and shared objectives, DAO governance can consider these motivations when designing the appropriate incentive structures and governance mechanisms to optimize cooperation and decision-making across stakeholders.

Once we have done that, each stakeholder may have different strategies available based on their roles and capabilities within the governance structure. These strategies can include voting on proposals, submitting proposals, influencing other participants through discussion, and abstaining from voting.

In DeFi protocols and DAOs, various actors can access different strategies based on their roles and capabilities. These strategies can help actors participate and engage effectively within the governance structure.

Let's consider the key actors that we have previously discussed to outline the strategies available for each:

By understanding and leveraging these strategies based on their roles, actors in a DAO or DeFi protocol can work together to influence the governance process, address common goals, and ensure the platform's long-term success.

This involves outlining the mechanisms governing voting, communication, and other participant interactions.

Now, Let’s Discuss the Rules of Interactions

In the context of DAOs and DeFi protocols, the rules of interaction outline the core mechanisms governing voting, communication, and other interactions between participants.

These rules are crucial for creating an effective and transparent governance process, and they allow the platform to function smoothly while ensuring stakeholder involvement.

Here are the primary rules of interaction:

These rules and guidelines are essential for creating an effective, transparent governance process, enabling the platform to function smoothly and ensuring stakeholder involvement.

Let’s discuss each category in detail:

Voting Mechanisms:

  • One Token, One Vote: In most DAOs and DeFi protocols, voting power is typically determined by the number of governance tokens a participant holds. This can translate to a "one token, one vote" system, where the user's voting influence is proportional to their token holdings.

  • Quorum Requirements: To avoid decision-making with low community involvement, a minimum quorum—a specific percentage of total tokens or eligible voters—may be required for a vote to be valid. The quorum ensures a broad consensus for proposed changes.

  • Proposal Approval Thresholds: DAOs and DeFi platforms may have predefined approval thresholds to be met for a proposal to be considered approved. This prevents a minority from dominating decisions and ensures fairness.

Communication Channels:

  • Public Forums: To encourage open discussion, many DeFi protocols and DAOs utilize public forums or discussion boards where participants can share their views, opinions, and proposals. This can include platforms like Discourse, GitHub, or dedicated community forums.

  • Community Calls or Meetings: Regular community calls or meetings can be organized to gather feedback, discuss pressing issues, or address technical details that may be more challenging to handle in text-based communication.

  • Social Media Engagement: Engaging community members on social media platforms such as Twitter, Telegram, or Discord can help maintain an active dialogue, increase awareness of governance matters, and broaden user participation.

Proposal Submission and Evaluation:

  • Structured Proposal Process: To maintain the DAO and ensure a thorough evaluation, a structured process for proposal submission may be in place. This can include drafting the proposal, submitting it to a public forum for discussion, and allowing changes or amendments before the final vote.

  • Proposal Evaluation Criteria: To ensure objective evaluation, there may be specific criteria for evaluating proposals, such as their impact on the platform's security, usability, efficiency, or alignment with the platform's long-term vision.

  • Voting Timelines: Voting periods can be predefined, allowing participants ample time to review proposals, engage in discussions, or make decisions.

Overall, these rules of interaction are meant to provide a framework for facilitating productive communication, informed decision-making, and transparent governance in DAOs and DeFi protocols.

By incorporating and adhering to these guidelines, the community can foster a cooperative environment, allowing the platform to evolve and adapt to its users' needs continuously.

Now That We Have Analyzed How Stakeholder Interact Within a DAO, It’s Time to Lay Out Rules to Optimize their Interactions

To optimize participant interactions, the governance structure must encourage cooperation, prevent collusion, and minimize conflicts of interest.

Some potential game-theoretic approaches include

Please make sure that participating in the governance process offers rewards or value to the stakeholders.

Incentivizing participation in the governance process is critical to engaging stakeholders and ensuring robust decision-making. By offering tangible and intangible rewards, protocols can encourage various actors to contribute their time, knowledge, and resources toward the platform's ongoing development and success.

Here Are Different Types of Voting Mechanisms that Current Exist

Utilizing voting mechanisms like quadratic voting, token-weighted voting, or time-based voting rights balances the power distribution among participants and avoids a few influential stakeholders' dominations of governance decisions.

In many decentralized governance systems, voting mechanisms are essential to balance power among participants and ensure fair decision-making. They help prevent the domination of decisions by a few individuals and promote preferential power distribution.

These popular voting mechanisms are often employed in DAO and DeFi governance (which we will explore in detail in the following sections), offering different approaches to distributing decision-making power among participants and encouraging engagement in the platform.

Each voting mechanism has its advantages and potential drawbacks.

It's essential to choose a system that best fits the needs of the specific platform and balances access to decision-making while minimizing the undue concentration of power.

A hybrid or multi-tiered approach combining different mechanisms may provide the most effective and equitable participation in some situations,

How can we effectively implement these voting mechanisms?

Here are some ways:

#1: Minimize Free-Riding

Address the "free-rider" problem by designing mechanisms that discourage free-riding or passive behavior, such as lock-up periods for token holders or incentivizing active contributors.

Implementing a governance system that minimizes free-riding is essential for maintaining stakeholders' active participation and decision-making, encouraging participation, and fostering a decentralized ecosystem.

To minimize the free-rider problem, we can consider the following strategies:

  1. Design lock-up periods: Implement time-bound lock-up periods for token holders, hindering them from quickly selling their tokens and incentivizing long-term commitment to the project. This approach discourages free-riding by aligning the interests of token holders with the project's long-term success.

  2. Incentivize active contributions: Offer rewards or incentives to participants who actively contribute to the network, such as developers, content creators, or other stakeholders who provide value to the ecosystem. This strategy can also include a reputation system, allowing active participants to gain recognition and ascend in governance influence over time.

  3. Implement a penalty system: Establish a system of penalties for non-active users or free-riders that reduces their influence in governance decisions. For example, token holders who do not participate in voting or network activities over a specified period may experience a decline in the voting weight or value of their tokens.

  4. Educate stakeholders: Provide educational resources and a supportive community, encouraging participation and fostering stakeholder engagement. Empowering users with knowledge and resources will encourage active participation in governance decisions.

  5. Measure and analyze participation: Regularly monitor and assess the level of involvement in the governance process to identify trends and areas where improvements are needed. Use these insights to refine the incentives and mechanisms over time to minimize free-riding behavior further.

By incorporating these strategies, DAOs can reduce the free-rider problem in their governance systems and encourage active and meaningful participation from diverse stakeholders.

#2: Encourage Sharing of Information Between Participants

Facilitate transparent communication channels and support information sharing among participants to enable better-informed decision-making.

Implementing a system that encourages information sharing in decentralized governance can enhance collaborative and informed decision-making processes. Here are some strategies that can help achieve this goal:

  1. Transparent communication channels: Establish clear and open channels for discussions, enabling participants to share ideas, opinions, and concerns freely. Platforms like Discord, forums, and message boards can be ideal for sharing information.

  2. Documentation and archiving: Maintain an organized and accessible repository of all governance-related documents and discussions. This ensures that past information is easily retrievable and new participants can catch up on previous chats and decisions.

  3. Regular updates: Periodically update stakeholders about ongoing projects, new initiatives, and pertinent community issues. This can be achieved through newsletters, blog posts, or social media updates.

  4. Collaboration tools: Use collaborative tools, such as shared documents, project management platforms, or virtual whiteboards, to facilitate interaction, brainstorming, and consensus-building.

  5. Incentives for active participation: Reward participants for sharing valuable information, insights, or expertise. In a token-based system, these incentives might take the form of token rewards or governance rights, while in other contexts, they might be monetary or non-monetary perks.

  6. Education and training: Provide resources and opportunities for community members to enhance their knowledge, skills, and understanding of the project and its ecosystem. Workshops, webinars, and shared educational materials can support informed participation.

By fostering an environment that encourages information sharing, decentralized governance systems can create more robust, more resilient communities where decisions are made collectively by informed and actively engaged participants.

#3: Mitigate Collusion

To address the issue of collusion in a decentralized organization or platform, implementing specific mechanisms can effectively ensure a fair and transparent decision-making process.

Here are some ways I believe through which this can be achieved:

  1. Vote delegation: This method enables individuals to delegate their voting power to others, creating a proxy voting system. It allows users who lack expertise or knowledge to delegate their votes to someone they trust. By distributing voting power, vote delegation can help prevent the concentration of decision-making authority in the hands of a few, thus mitigating collusion.

  2. Quadratic voting: Quadratic voting is a system where participants can cast votes with varying intensities, but the cost of each additional vote increases quadratically. This makes it more expensive to influence decisions disproportionately and dilutes the power of small groups trying to collude. Quadratic voting ensures that outcomes more closely reflect the preferences of the collective while discouraging collusion.

  3. Multi-step decision-making process: Introducing multiple rounds or stages in the decision-making process can hinder collusion. Requiring proposals to pass through several steps makes it more difficult for a small group to coordinate and maintain influence over decisions.

  4. Randomized voting mechanisms: Systems like sortition or random sampling can randomly select a subset of participants to decide or form a committee. This reduces the chances of collusion since predicting or controlling who would be selected is more challenging.

  5. Transparency and monitoring: Increase transparency in the voting process and monitor for suspicious behavior or patterns, which may suggest attempts at collusion. Promptly address identified issues to ensure a fair decision-making process.

By incorporating one or more of these mechanisms, decentralized platforms can better mitigate the risk of collusion and create a more diverse and inclusive decision-making environment.

Before we go into the case studies, it’s also essential to understand how different voting mechanisms affect voting rewards provided to stakeholders in a DAO.

Let’s explore that in detail.


Case Study: How Voting Mechanisms Affect Voting Rewards

#1: Token-based voting

In this system, each stakeholder’s voting power is proportional to the number of tokens they hold or stake. Voting rewards can be distributed to users based on their token holdings, incentivizing users with more tokens to participate actively in the decision-making process. However, this leads to the centralization of power in the hands of large token holders, as they may control a significant share of votes.

Case Study: MakerDAO

MakerDAO uses a token-based voting mechanism for governance. Users holding their native governance token, MKR, can stake their tokens to vote on different proposals.

Users with MKR tokens participate in governance by staking their tokens to vote on various proposals that drive the platform's development and functionality.

The core principle of MakerDAO's token-based governance is that voting power is proportional to the voter's MKR token stake, which means users who hold more tokens have a more decisive influence on decisions. This approach incentivizes MKR holders to actively participate in the platform's governance since their tokens' value is directly linked to the quality of decisions made.

Proposals to the Maker community can involve changes to the protocol, adjustments to risk parameters or other aspects of the MakerDAO ecosystem.

After a proposal is submitted, MKR token holders can review it, discuss its merits, and cast their votes. The result of the voting process is based on the cumulative voting power of participating token holders.

Token-based voting systems like MakerDAO have several benefits, such as:

  1. Encouraging active participation in governance by tying voting power to token holdings.

  2. Aligning the interests of token holders with the success and stability of the platform.

  3. Allowing for transparent and auditable voting processes.

However, centralization of power raises concerns about potential unequal representation or undue influence from a few participants who own a significant portion of the tokens.

A token-based voting system promotes community involvement, but as with any governance model, it has pros and cons. Finding the right balance between incentivizing participation and preventing centralization remains an ongoing challenge.

#2: Quadratic voting

Participants can cast votes with varying intensity, but the cost of each additional vote increases quadratically. Voting rewards could be distributed based on the number of votes each participant casts, but with diminishing rewards as more votes are used. This mechanism incentivizes participants to distribute their votes judiciously and consider the importance of different proposals while minimizing the potential for collusion and centralization.

Case Study: Gitcoin Grants

Gitcoin Grants supports open-source projects in the Ethereum ecosystem by connecting them with philanthropic funding from the community and matching funds from various donors.

Gitcoin Grants employ a variant of quadratic voting called Quadratic Funding to allocate funds to various projects. Quadratic Funding is a variation of Quadratic Voting designed to allocate funds to projects in a more equitable manner. It ensures that public funding reflects the amount of money contributed to a project and the broad-based support it receives from the community.

Users contribute to projects they believe in, and the matching funds are distributed based on the number of unique donors a project has rather than the total amount of contributions. This method emphasizes broad-based support for projects and avoids centralization.

Here's how the Quadratic Funding mechanism works in the context of Gitcoin Grants:

  1. Users (donors) contribute to projects they believe in, making their contributions with Simple Ether (ETH) or ERC-20 tokens.

  2. In every fundraising round, Gitcoin secures matching funds from various sources, such as large donors, grants, and other sponsors.

  3. The matching funds are distributed to the projects based on a quadratic formula that considers the number of unique donors for each project rather than just the total contributions received.

  4. The quadratic formula increases the significance of small donations from many individual donors. For example, projects with more comprehensive community support will receive more matching funds, even if the total contributed is less than that of a project with a few large donors.

This method has several advantages:

  1. Promotes broad-based support for projects, emphasizing the importance of many small financial contributions rather than a few sizable amounts.

  2. Prevents centralization of funding, whereby a small number of large donors dictate the outcomes of funding allocation.

  3. Encourages diverse and healthy growth of projects within the Ethereum ecosystem, fostering innovation and collaboration.

Quadratic Funding in Gitcoin Grants aims to create a more equitable and democratic method of allocating resources to open-source projects. By emphasizing the importance of community support and lowering the influence of large donors, it aims to foster more balanced, sustainable growth in the ecosystem.

#3: One-person-one-vote

Each participant has an equal vote, irrespective of their token holdings or other factors. Voting rewards can be uniformly distributed among participants regardless of contribution, creating an egalitarian voting environment. However, this system may not account for participants' varying expertise and knowledge, leading to less informed decisions.

Case Study: Decred

Decred relies on a ticket-holder voting system for its on-chain and off-chain governance using PoS and Politeia. On-chain validators vote on validating blocks and consensus rule changes, while off-chain ticket holders vote on proposals related to the project’s direction. This structure promotes sovereignty and participation among stakeholders while making stakeholder-based decisions.

It implements a unique hybrid consensus system combining PoW and PoS.

In Decred’s governance model, validators, also known as stakers, participate in on-chain voting by validating blocks and voting on consensus rule changes. Ticket holders participate in off-chain voting by submitting and discussing proposals on Politeia. Both types of voting require locking a portion of DCR tokens to purchase tickets, which provide voting rights.

Politeia, Decred’s off-chain governance platform, allows stakeholders to submit and discuss proposals related to the project.

These proposals can cover many topics, such as protocol upgrades, marketing initiatives, or development priorities. Ticket holders then vote on these proposals using their tickets, and based on the outcomes, decisions are implemented accordingly.

The ticket-holder voting principle in Decred’s governance system offers several advantages:

  • A stake in the system and an incentive to participate in governance

  • Less risk of centralization as large token holders have to lock their coins to vote

  • A diverse range of ideas and opinions considered, potentially leading to more balanced and well-thought-out decisions

However, it’s essential to recognize that ticket-holder voting governance models could face potential drawbacks or challenges, such as community coordination, voter apathy, or decision-making inefficiencies.

Decred’s ticket-holder voting governance system aims to create a sovereign, participatory decision-making process by giving weight to each ticket holder’s opinion.

#4: Futarchy

Futarchy, a concept developed by economist Robin Hanson, improves decision-making by using prediction markets to determine the best course of action based on the expected outcomes of different proposals.

Participants bet on the potential outcomes of competing proposals, and the winning bid is predicted to have the most positive impact on the DAO. Voting rewards can be distributed based on the accuracy of participants' predictions, encouraging users to make informed decisions and thoroughly assess each proposal.

Case Study: Augur

The prediction market platform Augur has experimented with a futarchy-inspired governance model.

In it, users can stake their tokens on the predicted outcomes of different proposals, with the winning bid determined by the expected outcome. While not purely futarchy, Augur's approach incorporates elements of this governance model.

In Augur's system, users can stake their tokens on the predicted outcomes of different proposals.

The winning proposal is then determined based on the expected outcome, with users essentially "voting with their wallets" and using the wisdom of the crowd to weigh in on which proposal would lead to better results.

This approach differs from traditional governance models by focusing on the predicted consequences of decisions rather than simply the voters' preferences.

Some advantages of incorporating futarchy-inspired elements into blockchain governance models include the following:

  1. Leveraging the collective intelligence of the community to make more informed decisions.

  2. Reducing the impact of bias or manipulation in the decision-making process by focusing on outcomes rather than preferences.

  3. Encouraging active participation in governance, as users have a financial stake in the results and can profit from accurate predictions.

It is important to note that Augur's governance model is not purely futarchy but borrows specific ideas from the concept to enhance decision-making.

While futarchy has its proponents and critics, the experimentation with governance models like Augur's demonstrates the potential for innovation and adaptation in the blockchain and cryptocurrency space.

#4: Delegation or Liquid Democracy

Participants can delegate their voting power to others they trust. Voting rewards could be given to both the delegator and the delegatee, incentivizing active participation and fostering trust in the community. This system can allow for more informed decisions, as expertise can be concentrated in a smaller group of trusted voters.

Case Study: Tezos

Tezos utilizes a form of liquid democracy for its governance model. This model allows users who may not be able to participate actively to still have a say in the decision-making process by delegating their voting power.

In this model, token holders can delegate their voting power to trusted validators, also known as bakers. These bakers then represent the interests of those who have entrusted their voting power to them and vote on proposals accordingly.

This form of governance allows for more equitable participation, as individuals who might need more time, knowledge, or ability to engage in decision-making processes actively can still have their opinions represented through delegation.

By empowering its community members to delegate their voting power, Tezos enables a more inclusive and adaptive governance system. Liquid Democracy ensures that everyone's voice can be heard while allowing for efficient decision-making within the platform.


We discussed

  1. Various types of voting incentives,

  2. Pricing Mechanisms & prediction markets for resource allocation in DAOs,

  3. How to Analyze & Optimize Interactions b/w Participants in Governance through Game Theory.

  4. Different types of governance models, including on-chain and off-chain governance, as well as futarchy-inspired models like Augur's and liquid democracy models like Tezos'.

As with any aspect of DAO governance, combining different voting mechanisms can balance power, encourage active participation, and prevent collusion or centralization.

The optimal choice of voting mechanism(s) and reward structures depends on the specific goals and values of the community behind the DAO.

It's clear that the field of on-chain governance is diverse and evolving, with each approach offering potential benefits and drawbacks.

On-chain governance aims to improve decision-making and transparency, while off-chain governance enables flexibility and a more human-centric approach to resolving disagreements.

We have seen, Futarchy-inspired models, like the one used by Augur, utilize prediction markets to gain insights into expected outcomes of proposals, effectively leveraging the wisdom of the crowds. In contrast, Tezos' use of liquid democracy allows for more equitable participation and efficient decision-making, allowing users to delegate their voting power to bakers.

I'm still considering the various trade-offs between these models, such as

  1. transparency vs. flexibility, and

  2. centralized decision-making vs. community-driven choices.

The suitable governance model for an on-chain project will depend on its unique objectives and priorities and the desires of its community and stakeholders.

Some questions that I still have are:

  1. How do we weigh the advantages and disadvantages of on-chain vs. off-chain governance models?

  2. As on-chain protocols & technologies mature, how will the balance between decentralization and efficient decision-making change?

  3. Will a dominant governance model emerge as the industry matures, or is there room for multiple approaches to coexist and thrive?

I will definitely be exploring these questions in detail and delving deeper into the nuances of each throughout the year.

Thank you for reading through, and subscribe below for regular post updates.

I’d also appreciate it if you shared this with your friends, who would enjoy reading this.

You can contact me here: Twitter and LinkedIn.

Subscribe to Arhat
Receive the latest updates directly to your inbox.
Mint this entry as an NFT to add it to your collection.
This entry has been permanently stored onchain and signed by its creator.