Introduction

The challenge of governance is nothing new, as the process of creating and enforcing community or organizational rules has always been complex, largely due to the inherent intricacies of human nature—whether the organization is a digital public good, a corporation, a government, or even an apartment block

In this ‘Decentralised Governance’ series of articles we will unpack some of the important governance developments that we see in the world of crypto and discuss the opportunities that they present. Opportunities that allow

• Builders to decentralize governance while maintaining the values of blockchain technology.
• Communities and stewards to drive value to the protocols and organizations they collectively care about.

This article presents a jumping off point for further investigation.

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Decentralized Governance Landscape

For many it is common to heuristically think of DAOs(token-based governance) when governance comes up, but they are a relatively new development in their current form.

Overall decentralized governance frameworks vary considerably based on the nature of the network, protocol or dApp they intend to govern. Infrastructure projects (blockchains) often have conceptually different governance frameworks that are protocol-driven compared to most tokens.

Protocol-driven simply means that the product(operations)of the network is intertwined to how the network is governed, which varies from token-based governance (DAOs) where ownership of the token is fundamentally disconnected from the operations of how the protocol operates. In the latter case token holders don’t have to contribute to the upkeep of the network directly to have a say about how it is governed.

The table is a simplification of the breadth of the crypto governance landscape. DAOs are significantly different to protocol-driven governance frameworks.

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In a DAO, decisions are typically made through on-chain voting mechanisms, where token holders vote directly on proposals related to the project’s development, resource allocation, or governance rules. The makeup of token holders is naturally very important in projects that have DAOs. This system fosters global participation by allowing anyone who holds tokens to have a say, regardless of their geographic location.

This democratization has had a profound impact by enabling more inclusive governance, where individuals who might otherwise be excluded from decision-making processes. Non-core ecosystem developers are now empowered to contribute to governance, this is important especially where collective building is the goal. It lowers barriers to participation, ensuring that decisions are made by a broader base of stakeholders.

Even though DAOs have become a very common framework and are step away from the developer-centric approach to governance, the current designs still have many limitations. Cryptoeconomics researchers and founders critique DAOs for they lack in providing product-focused value and the administrative(often bureaucratic) overhead DAOs create and place on startups.

To provide further detail, the pros and cons of DAOs are

Pros

• Enabled easy inclusion of community expectations into development efforts.
• DAOs have empowered the most valuable and capable members of the community to drive meaningful impact.
• Reasonable decentralization of ownership not beholden to participant types.

Cons

• A prevailing sense of entitlement among some community members, leading to the proposal of half-formed and impractical ideas, which often results in conflicts between various stakeholders.
• DAO governance is a headache for many builders who prefer focusing on a product rather than participating direct democracy-like forums.
• ‍Focus on token holders rather than other participants in the broader cryptoeconomic system.
• Often oversimplified and used as a justification for the lack of value accrual design elements.

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Long term opportunity of DAOs

DAOs allow for maximizing credible neutrality, a core value of blockchain technology. To create true public goods, decision-making processes must extend beyond founders and core groups. DAOs decentralize oversight and governance by ensuring control is distributed across a broader set of stakeholders. This doesn’t always require direct voting but offers mechanisms for meaningful community input, reducing operational burdens while maintaining transparency.

DAOs also embody kaleidoscopic representation, allowing token holders from diverse roles and backgrounds to contribute to governance. Broad participation ensures that decisions reflect diverse perspectives, enhancing the inclusivity that DAOs are meant to foster. The challenge is to design according to all participants requirements. Some people don’t want to vote, and governance should accommodate this fact.

Finally, DAOs capitalize on the benefits of tokenization, using tokens to create adaptable governance structures. This open governance canvas allows communities to experiment with flexible models, enabling innovation beyond traditional frameworks and driving advancements beyond the current simple implementations.

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Conclusion

The story of DAOs has delivered significant improvements in the fields of community involvement, but current designs often neglect product-specific governance requirements. Protocol-driven governance framework shave limitations but emphasises the product above all else, which often is not the case with DAO governance design. A focus on product is always a North star worth following.

For DAOs to operate at their highest potential, it is crucial to streamline operational and administrative overhead, simplify participation requirements, and incentivize meaningful participation—each of which may seem simple but requires expertise.

Lemma is in a privileged position to see what the innovations some of the brightest minds in social sciences are bringing to the table. Our outlook is that DAOs, through quiet governance and token experimentation, have evolved into complex organizations that increasingly benefit from professional participation in governance."

Governance is complex and it has always been the case, but DAOs are the only organizations and communities in the world experimenting with new governance designs from our viewpoint.