Why DAOs are choking on majority rule and democratic ideals

The recent attention-grabbing dissolutions of the decentralized autonomous organizations (DAOs) behind Hector Network on the Fantom blockchain and Parrot Protocol on Solana have laid bare the shortcomings of Web3’s iconic governance structure.

The community behind Hector, a fork of the Olympus DAO, voted in mid-July to distribute its entire US$16 million treasury after suffering severe losses from a June hack and the July collapse of bridging protocol Multichain. The vote came amid a lengthy crusade by a group called Risk Free Value Raiders to portray the project as mismanaged — a tactic it had previously used to undermine other projects.

The team behind crypto lending project Parrot, meanwhile, won majority support for its proposal to use US$50 million of its US$73 million treasury to buy out token holders — at a fraction of what they originally paid. The proposal passed despite widespread anger in the community, in part because insiders unlocked a big tranche of unvested tokens.

The possibility of such mission-destroying proposals being pushed through — either by malicious outsiders or insiders without the project’s best interests at heart — is only one of the deficiencies of the common DAO structure. These flaws have become increasingly evident as the ideal of collective governance faces the cold light of lived reality. 

The problem DAOs face is a major one. But that doesn’t mean it can’t be solved. The key to achieving good governance without sacrificing the principles of Web3 lies in technology — specifically, in automation.

DAO ideals

The decentralized autonomous organization was originally conceived as the best and most democratic way to manage Web3 projects while staying true to the core values of self-sovereignty, transparency, and freedom from centralized control. 

Rather than top-down management by C-suites and closed-door decision-making, DAOs were meant to enable collective oversight by token-holders who would vote on proposals via smart contracts. 

The concept had widespread appeal, and there has been recurrent talk about wider applications for the structure that go well beyond Web3. 

The reality, though, has often fallen short of the ideal. 

Downsides of collective governance

As the demise of Hector and other projects targeted by campaigners shows, majority-rule systems, if poorly designed, can leave DAOs uniquely vulnerable. These systems are at high risk from organized assaults where hostile outsiders come into the community, accumulate a critical mass of voting power, and take control in order to line their own pockets, with no concern for the goals of the project. 

A reliance on collective decision-making can create other issues as well. 

Participatory governance requires just that — participation. In an ideal world, each project would be propelled by a collaborative community invested in its objectives and willing to make and give thoughtful consideration to proposals. Engaged communities would help spread the word about a project’s achievements, drive adoption, and generate innovative grassroots ideas. 

In reality, though, engagement levels for many projects can be very low, and community members often don’t vote.

Institutional investors can be reluctant because of the uncertain regulatory environment in crypto’s sliding scale of decentralization. And many retail investors seem unwilling to invest the time. 

Projects can try to stimulate interest by holding Discord discussions, issuing token airdrops, or rewarding standout contributors. But since participation is entirely voluntary, there is no way to compel members to take part.

Low participation rates give rise to a number of real and practical problems that can seriously interfere with a project’s growth and evolution. 

Not only can they leave a DAO vulnerable to being hijacked by an outside group, but they can also introduce friction and slow down decision-making. And in an industry as fast-changing as Web3, windows of opportunity don’t stay open for long. 

Some DAOs have tried to fix these issues by re-centralizing portions of the governance process. But handing an “emergency override” button to an individual or a small group of actors in this way is, at best, a fudge. It runs contrary to Web3’s commitment to transparency and freedom from central control, opening the door to precisely the kind of secretive, “room-where-it-happens” decision-making that blockchain was meant to relegate to the past.  

There is a better way.

Tech cures for DAOs’ human shortcomings

Automation through smart contracts can help solve many of the DAO concept’s most pressing problems. 

The great strength of the smart contract is its ability to automate key parts of the governance process. By allowing smart contracts to handle important operational decisions for a DAO, projects can eliminate bottlenecks and boost efficiency while still ensuring full transparency for members. 

Automation of key measures would help prevent bad actors from pushing proposals that undermine a project’s best interests — i.e. treasury liquidation — or from voting down proposals that would advance them.

To ensure the community remains the decisive voice, projects going this route should require robust feedback on which calls are automated and which will continue to require their direct action.

For those decisions left in the hands of DAO members, founders and development teams should work to boost engagement through mechanisms such as vote delegation, whereby a person delegates their vote on a particular topic to another member whose expertise they value. This can maintain broad empowerment while alleviating many of the bottlenecks to wider participation in governance. 

It should go without saying that complementary automation and delegation programs should be carefully designed to protect against the very raiders and other bad actors that have made them necessary in the first place. Unless thoughtfully implemented, any system can become vulnerable to exploitation. 

Still, with care, clear communication, and community input, it is possible to balance all these cross-pressured requirements and create a governance system that is at once fully decentralized, completely transparent – and nimble enough to take advantage of the myriad opportunities available in DeFi. 

Let’s get started.