Governance and Voting Mechanism Models of DAOs

Decentralized Autonomous Organizations use digital tools and decentralized technology. Read more to learn about the most common DAO voting mechanism models.
Michael Schranz
Michael Schranz
April 6th, 2023

A DAO is a decentralized autonomous organization that cooperates according to transparent rules encoded via smart contracts on the blockchain. 

One advantage of a DAO is that it allows for truly decentralized decision-making, as opposed to many traditional organizations where a central authority makes most of the decisions. This can increase a DAO's efficiency and agility. In addition it is less susceptible to collusion. Since there is per se no centralized authority in charge of a DAO, it is pretty resistant to censorship and corruption. Additionally, because all transactions are recorded on the blockchain, they are more transparent and less immutable than traditional types of organizations.

What are the governance and voting structures of DAOs?

Governance refers to the process by which organizations are controlled and directed. It includes the mechanisms used to make decisions, allocate resources, and manage risks. There are two main types of governance systems for DAOs: on-chain and off-chain. On-chain governance is done through smart contracts, while off-chain governance is done through forums, chatrooms, or other online platforms. Off-chain governance is generally considered to be more flexible and easier to change than on-chain governance. The most important thing to remember about DAO governance is that it should be designed to meet the specific needs of the organization.

The governance and voting structure of a DAO is set up by its creators and can be pretty much anything they want it to be. Some DAOs use a simple majority vote to make decisions, while others use more complex algorithms to overcome drawbacks of the majority voting approach. Whichever system is used; the goal should always be to allow everyone who has a stake in the DAO to have a say in how it is run.


Voting mechanism models for DAOs

The tension triangle of the DAO is mainly balanced by its governance mechanism and the decision-making process. 

A single system alone may not be able to address all the designing challenges we have with DAOs. So, most of the time, a combination of approaches is used to achieve better results. In the next part of this blogpost we present and explain some of the decision-making or voting mechanisms.

Generally, voting is of course a key part of governance in DAOs. It can be used to elect leaders, make decisions on resource allocation, and set organizational policies. DAOs often use some form of liquid democracy for voting. This means that members can delegate their vote to another member they trust to make decisions in their best interest. This allows for a more efficient decision-making process and ensures that everyone’s voice is heard. But of course it also causes some risks which we already explained in the first blogpost about DAOs: DAO 101 - Introduction to Decentralized Autonomous Organizations

The most common voting mechanism models for DAOs 

  • Token-based Quorum Voting

  • Quadratic Voting

  • Holographic Consensus

  • Conviction Voting

  • Multisig voting

Token-based Quorum Voting

A token-based quorum voting is a mechanism used by DAOs to make decisions. In this system, each member of the DAO is issued a certain number of tokens, which represent their ownership or stake in the organization.

When a vote is called, each member can use their tokens to cast a vote. The total number of tokens used to vote is referred to as the "quorum." In order for a decision to be made, a certain percentage of the total number of tokens in the organization must be used to cast votes. This percentage is known as the "quorum threshold."

If the number of tokens used to vote exceeds the quorum threshold, then the vote is considered valid and the decision is made based on the outcome of the vote. If the quorum threshold is not met, then the vote is considered invalid and the decision cannot be made.

One of the advantages of token-based quorum voting is that it ensures that decisions are made by a majority of the organization's members. This helps to prevent a small group of members from making decisions that are not in the best interest of the organization as a whole. Additionally, it provides a way for members to have a say in the decision-making process and to hold the organization accountable.

Quorum voting is actually the simplest and most basic mechanism that is used in the DAO’s decision-making process. The system requires a minimum number of votes, set prior to the voting period, for a proposal to be passed. There is a high probability that users will hoard tokens and enjoy more voting power. Relative quorum voting is focused on solving the low participation problem. In relative quorum voting, a proposal will be passed if 51% of the voters have voted in favor of it.

Quadratic Voting

Quadratic voting is a voting system designed to give participants more influence over decisions in a democratic process, by allowing them to express their preferences in a more nuanced way. It was first introduced by economist Glen Weyl and law professor Eric Posner in 2018.

In the context of Decentralized Autonomous Organizations, quadratic voting can be implemented to give members a more effective way of expressing their preferences on proposals, without necessarily giving more power to those who hold the most tokens.

The basic idea is that each voter is given a certain number of tokens (or "voice credits") that they can use to express their preference on a proposal. However, instead of each token counting as one vote, the number of votes a voter can cast is determined by the square root of the number of tokens they have. For example, if a voter has 100 tokens, they can cast 10 votes (the square root of 100).

This has the effect of giving more weight to those who are more passionate about a proposal, while limiting the influence of those who may hold a large number of tokens, but don't necessarily have a strong preference one way or another.

Another important aspect of quadratic voting is that it allows voters to distribute their votes across multiple proposals. For example, a voter could cast 5 votes in favor of one proposal, and 5 votes against another proposal, or they could choose to cast all of their votes on a single proposal if they feel very strongly about it.

Overall, quadratic voting can help to ensure that decisions in DAOs are made in a more democratic and inclusive way, while also allowing for a more nuanced expression of preferences from voters.

Holographic Consensus 

Holographic consensus aims to reach decisions through a more inclusive and participatory process. Unlike traditional voting mechanisms, holographic consensus considers the opinions of all members of the DAO.

The mechanism works by assigning "voice credits" to each member based on their contribution to the DAO. Members who hold more tokens or have made more significant contributions will have more voice credits. These credits are then used to vote on proposals within the DAO.

However, the holographic consensus mechanism also allows members to delegate their voice credits to others who they believe are better equipped to make informed decisions. This delegation can be temporary or permanent, allowing for fluid and dynamic decision-making within the DAO.

Furthermore, holographic consensus allows for a more nuanced approach to decision-making by allowing members to vote on multiple options, rather than just a simple yes or no. This allows for a more accurate representation of the consensus within the DAO.

Overall, holographic consensus is designed to create a more inclusive and democratic decision-making process within DAOs, where all members have a voice and decisions are made based on the consensus of the group rather than the majority.

Conviction Voting

Conviction voting is a mechanism used by DAOs to facilitate decision-making and allocate resources based on the strength of individual preferences.

The basic idea behind conviction voting is that DAO members are given a certain amount of voting power that increases over time based on their level of commitment and conviction to a particular proposal. Members can then use this power to vote on proposals and allocate resources according to their preferences.

The key feature of conviction voting is that it incentivizes members to carefully consider the proposals and only vote for those they truly believe in, rather than simply casting a vote based on their personal biases or interests. This is because the more voting power a member puts behind a proposal, the more they stand to gain or lose if the proposal succeeds or fails.

Here's how Conviction Voting works in practice:

  1. A proposal is submitted to the DAO, outlining the details of the proposal and the amount of funding or resources that it requires.

  2. Each member of the DAO is given an initial allocation of voting power, which they can use to vote on the proposal.

  3. Members can choose to cast their vote immediately, or they can hold onto their voting power and wait until they are more confident in their decision.

  4. As time passes, the voting power of each member increases depending on how long they retain their voting power without casting a vote. This rewards members who carefully consider their options and only vote when they are confident in their decision.

  5. Once the voting period has ended, the proposal is accepted or rejected based on the total amount of voting power that was cast in favor of the proposal. If the proposal is accepted, the requested funding or resources are allocated accordingly.

Overall, conviction voting is a powerful mechanism for DAOs because it encourages members to carefully consider proposals and only vote for those that they truly believe in. This can lead to more informed decision-making and better allocation of resources, ultimately with the goal to establish a more effective and efficient DAO.

Multisig voting

Multisig voting is a type of voting mechanism used by decentralized autonomous organizations that requires multiple parties to approve or reject a proposal before it can be executed. In a multisig voting system, a certain number of individuals, or "signers," is required to provide their approval or signature to authorize a transaction or proposal.

Here's how multisig voting works in a DAO:

  1. First, the DAO sets up a multisig wallet that requires a certain number of signers to approve any outgoing transactions. For example, the wallet may require 3 out of 5 signers to approve a transaction before it can be executed.

  2. When a proposal is submitted to the DAO, the members of the DAO can vote on it using a smart contract-based voting system. If the proposal is approved by a majority vote, it moves to the next step.

  3. The proposal is then sent to the multisig wallet, where it requires the approval of the required number of signers. Each signer can approve or reject the proposal using their private key, which is linked to the wallet.

  4. Once the required number of signers have approved the proposal, the transaction is executed, and the funds or assets are transferred as specified in the proposal.

Multisig voting is often used in DAOs to ensure that no single member or group of members has too much power or control over the organization's funds or assets. It adds an extra layer of security and accountability to the decision-making process and helps to prevent fraud, misuse of funds, or other types of abuse.

The challenges of DAO governance

Decentralized autonomous organizations have emerged as a new type of organization that is powered by decentralized technologies, such as blockchain. While DAOs offer many advantages, they also come with challenges, particularly when it comes to governance.

  • One of the key challenges of DAO governance is the need to strike a balance between decentralization and centralization. Too much decentralization can lead to decision paralysis, while too much centralization can result in the concentration of power and control. Finding the right mix of decentralization and centralization is crucial for DAO governance to be effective.

  • DAOs face a lack of regulatory clarity. Because DAOs are still fairly new, there is little guidance from regulators on how they should be governed.

  • Another challenge is that DAOs are often reliant on rules and regulations that are constantly changing. This can make it difficult for DAOs to stay compliant and operate smoothly.

  • Finally, DAOs face the same challenges as any other decentralized organizations, such as coordination among multiple stakeholders, software bugs and hacks.

How does the voting structure of a DAO impact its governance?

Decentralized autonomous organizations, DAOs, are a relatively new phenomenon in the business world. These organizations are characterized by their decentralized nature, which means that they are not subject to the control of any central authority.

The voting structure of a DAO can have a significant impact on its overall governance. For example, if a DAO has a voting structure that gives more weight to votes cast by larger investors, then this may lead to decisions that favor the interests of those investors over the interests of other members. Conversely, if a DAO has a voting structure that gives more weight to votes cast by smaller investors, then this may lead to decisions that favor the interests of (sm)all members more equally.

The voting structure of a DAO affects its governance in two ways: First, it determines who has the power to make decisions. Second, it determines how those decisions are made. 

The decentralized autonomous organization offers a new way of governing that is more efficient and democratic. The use of voting and blockchain technology makes this governance model more transparent and accountable.

Recap on governance and voting mechanisms in DAOs

DAOs are decentralized autonomous organizations powered by smart contracts on blockchain, allowing for truly decentralized decision-making, less corruption and collusion and more transparency. DAO governance can be on-chain or off-chain, and voting can be done through various models such as token-based quorum voting, quadratic voting, holographic consensus, conviction voting and multisig voting. Each model has its own advantages and disadvantages and is chosen based on the specific needs of the DAO. DAOs offer a lot of promise as a new way of organizing communities and projects in the crypto space.

If you need assistance to setup your next DAO project, do not hesitate to contact us. More information about our services you find here: Custom Blockchain and Web3 Software Development Services