Introduction

‍Decentralised governance for many industry participants heuristically brings up the topic of DAOs. DAOs are directly associated with all decentralised governance designs because they are token-based. Financialization (tokenization) of governance rights creates the ability to have any arbitrary distribution of governance rights to any party. DAOs have been a key topic in the crypto industry that has attracted a lot of excitement, but also scepticism. Scepticism is justified by the bandaid approach taken by many token designers struggling to find token-product fit and plugging governance utility as a justification for launching a token, the result of which creates long-term value accrual concerns if the governance is not designed well. Initial attention in DAOs waned as designs standardised and struggled to present tangible operational benefits for the products they are supposed to amplify.

As with many things that are given time to prove a plan, several maturing DAOs that started off relatively simple have evolved and attempted solutions to some of the harder human coordination problems.

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The change in participants‍

A common strategy for projects to increase participation in a specific area is to deploy incentive programs. Incentive programs can attract builders, capital, and various service providers (e.g. nodes or code auditors). The incentives trend has found its way to DAO governance as participation is low and organizational structures have become more detailed and set complex participation requirements. Alternative sophisticated actors are becoming more involved in projects beyond the standard technical ecosystem development incentives historically found in bug bounties and grant programs. These governance-focused sophisticated actors are adept at solving coordination, regulation, and many other social challenges faced by open-source protocols.

Sophisticated participants follow incentive programs, and the types differ based on the participation requirements. Participation by sophisticated actors has already had an impact on the culture of the DAO’s community and the broader ecosystem they inhabit, a development most prominent with the advent of professional governance delegates.

Maintaining alignment between sophisticated participants who are agnostic (shorter vested interest), core supporters/participants of protocol (longer vested interest), and founding team wishes is difficult. Consequently, there are ongoing challenges faced in designing governance frameworks that balance professional participation with sustained, deep-rooted community participation and protocol growth. The benefit received across the spectrum of work that DAOs pay for varies, but that is a topic worth unpacking in a different article.

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Incentivised governance‍

The earliest participants in DAOs were retail token investors because institutional token investors (VCs) have taken a less involved stance, often cautioning founders to delay handing over control to the DAO while distancing the core team and investors from governance participation due to regulatory concerns. a16z, for example, have delegated an enormous amount of Uniswap UNI governance rights to student organizations.

Governance incentives are mostly applied at the delegate level, where delegates (token holder representatives) are incentivised to contribute to governance. This is still a new development whose goal was to increase the number of votes cast on proposals.

From early analysis, delegate incentive programs increase participation in DAOs. An analysis by SEEDGov indicates that Arbitrum’s delegate incentive program led to a low double-digit increase in participation on voting platforms like Snapshot and Tally. However, our opinion is that governance incentive programs should primarily return value by increasing the quality of participation and not necessarily the amount of participation.

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Effect of professional delegates‍

Delegate incentivisation is analogous to a modern representative democracy, where there are professional representatives and thus paid for fulfilling governmental roles (In pre-modern eras, representatives were not compensated and thus largely made up of wealthy individuals who could afford the costs associated with serving the public pro bono). The result is that the governance participation spectrum now ranges from core community participants—those aligned with the project's vision and values and often have vested interests—to professionals who engage more for financial incentives. DAOs must carefully balance professionals who can drive effective governance with ensuring that the core community's voice remains influential.

It is worth noting that the spectrum is broad, as community participants possibly include abstract vested parties in the protocol. While professionals participating in governance recently include institutional node infrastructure operators, investors, accountants, legal experts, media houses, research firms, academics, and many other individuals.

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Governance Design‍

Sound governance design is not just about getting votes cast; it's about ensuring that a diverse group—from core community members to professionals—can engage meaningfully in decision-making where it makes sense. Communities are also responsible for continuing to experiment with designs to enhance the quality, scale, and diversity of participation.

Sky (formerly MakerDAO) is a noteworthy case study of how a DAO’s governance requirements can become more complex, especially if a protocol grows horizontally. Sky’s approach to solving this is through the use of multiple governance layers referred to as sub-DAOs, an approach that has allowed for operational efficiency in different verticals.

Another development worth highlighting in the earlier design phases is the implementation of tiered approaches to DAO governance participants (especially with delegates). The result is multiple layers of responsibility, ranging from low-effort participation to strategic proposal management.

Moonwell, for instance, is adopting a tiered delegation framework that enables participants to engage at diverse levels based on their expertise and commitment. This model not only provides pathways for community members to become more involved but also allows for segregation of responsibility, making it easier for professionals to apply their expertise where it is most needed.
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Conclusion‍

There is no one-size-fits-all solution for DAO governance design. Each DAO must design its governance system to increase the efficiency of achieving its unique needs and goals. Governance designers should strive for efficiency while ensuring that those with a vested interest in the project are appropriately represented.

When designing incentive programs, it is important to target high-quality participation—not just to increase overall engagement but also to ensure that contributions drive growth and align with the project's long-term success.

We believe it true that DAO governance is valuable not because of the token; DAO governance is valuable because of the token holders.

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