DAO governance is all about decision-making. When you set DAO governance, you define who can make decisions and how. Governance can be as simple as three out of five people voting “yes” for an idea or as complex as an entire network state of individuals voting on huge decisions.
DAO governance should evolve as your DAO does. Follow these steps in order to get started!
How do you set up DAO governance?
Set up DAO governance in 8 steps:
Decide who can vote: token holders or authorized wallets
Set minimum participation, sometimes called quorum
Set voting period
Build your proposal process
Define your proposal structure
Pick your tooling stack for both on and off chain governance
Hold a tester vote, document how it goes, and experiment from there!
Let’s dive into the details!
1. Decide who can vote: token holders or authorized wallets
The basis for DAO governance is voting. Who can vote and how they vote is a very important question to answer at the outset, before you choose any tools or set any parameters.
In the current DAO landscape, you have two options:
Token-based voting (fungible tokens or NFTs)
Wallet-based voting (typically multi signature wallets, known as multisigs)
What is governance token voting?
Governance token voting is when tokens act as voting chips, where 1 token = 1 vote. The more tokens you have, the more weight your vote has. So, someone with 10 tokens would have 10 times the voting power of someone with one token.
Governance tokens are cryptocurrencies minted by DAOs that are used in on-chain votes. For example, Lido’s $LDO token is used in Lido DAO votes, and Maker’s $MKR token is used in MakerDAO votes.
Governance tokens are traded on exchanges. So, anyone can buy and speculate on the token, meaning they buy it to make a profit. This means that DAO governance tokens can never be a complete representation of a DAO’s base of engaged members.
Token-based voting is often used by DAOs that:
Want to give voting power to people with more financial stake (or “skin in the game”).
Want to be sybil-resistant, meaning they want to resist attacks of multiple people having more than one wallet (wallet-based DAOs fall into this trap).
Are large and don’t necessarily need to know the identities of contributors
Want to hold all governance processes on-chain
What is wallet-based voting?
In wallet-based voting, you authorize wallets to give them permission to vote, where 1 wallet = 1 vote.You can do this by setting up a multisignature wallet, which is a wallet that requires multiple approvals to sign a transaction.
For example, you might set up a three-of-five multisig. This means there are five wallet addresses linked to the multisig, and three of them need to approve the transaction so it can go through.
Wallet-based voting is best for DAOs that:
Want to remove any financialized aspect from voting—meaning you can’t purchase voting power
Are okay with asking members to tie their identity to wallet addresses to prevent sybil attacks (when one person creates multiple wallets to artificially inflate their voting power)
Hold governance processes mostly off-chain, then execute actions on-chain with the multisig
It’s common for DAOs to start as wallet-based DAOs (voting with a multisig) and then evolve into token-based DAOs (voting with governance tokens). In most cases, the key to DAO success is evolving and changing as you go.
2. Set minimum participation, sometimes called quorum
Minimum participation (sometimes called quorum) is the number of voters that need to be present for a vote to be valid. It’s not the number of “yes” votes, it’s just the number of people who need to vote.
Many large DAOs with widely distributed token holdings have very low quorums, even as low as 1% of token holders! DAOs with very active voting that are wallet-based and use multisig voting might have a quorum of 50% or more so they can execute transactions.
Setting a minimum participation that is too high for your organization to reach could lock your DAO in governance stalemates. So, sometimes it makes sense for DAOs to wait to set their minimum participation rate until after a few votes have completed and the DAO has data on average voter participation.
3. Set pass rate
Pass rate is the number of “yes” votes required for a vote to pass. If a vote doesn’t hit the pass rate percentage, it doesn’t pass and the action doesn’t execute.
There are two common options for DAOs setting pass rate:
Majority: 50% or more
Super-majority: 67% (2/3rds) or more
Pass rate is a lever you can adjust when designing different governance flows for different proposal types. For example, many DAOs use majority pass rate for basic decisions, such as funding a workstream. They might use a super-majority for more critical or controversial decisions, like amending the charter or minting more tokens.
4. Set voting period
The voting period is the amount of time a vote is live. DAO members can only cast their votes during that time period.
Many DAOs use a seven-day voting period to give voters a full week to see the proposal and vote. If your DAO needs to move quickly, a shorter voting period like three or five days might make sense.
Sometimes voting periods are followed by a timelock, meaning the results of the vote cannot be executed within that time. This is a security measure that gives DAOs time to respond in case a malicious proposal passes. For example, a timelock of seven days would mean that the result of the vote (maybe funding a workstream) could not be executed until that seven day period has ended, and then the funds could be sent.
5. Build a proposal process
Now that you’ve set governance parameters— including who can vote, minimum participation, pass rate, and voting period—it’s time to build your proposal process so members know how to propose new ideas and get funding to act on them.
Proposal processes outline the steps required for a proposal to go from idea to execution. Think of this as the play-by-play of how a new workstream would get funding.
A sample proposal process:
Gather your team: Find the group of people interested in working on the proposal with you. Proposals with a fully-formed team are more likely to get good feedback from the community!
Post the proposal on the DAO’s forum for feedback: Hear from the broader DAO membership and maybe include a sentiment-gathering poll.
Post a second draft if major edits are required: If DAO members expressed that you should edit the proposal, it might be a good idea to share the second draft.
Post the proposal for an official vote on your DAO’s voting platform: This might be an off-chain vote, like on Snapshot. Or, it could be an on-chain vote on a platform like Aragon or Tally.
6. Define your proposal structure
A proposal structure is what teams should include in their proposals. Think of this as a template that people can use to draft their proposals.
A sample proposal structure:
Title: The primary focus of the proposal.
Short description: Explain the purpose of the proposal in one or two sentences.
Longer description and funding request: Describe the funding request and what you plan to use the funds for.
Technical specification: This part is only necessary if your proposal includes changes to code, or technical details that people might need to see.
Metrics or key performance indicators: How will you measure and share team performance?
Team description: List the team’s relevant experience here.
Next steps: If your team gets funded, what comes first?
7. Pick your tooling stack for on and off chain interactions
A DAO tooling stack includes all the tools you need to operate as an organization. This includes communication channels like Discord and Telegram, contributor payment and rewards like Coordinape and Gnosis, membership tracking like POAP and Guild, and more.
Here are a few areas of tooling you’ll need to think about for setting governance:
Voting: Where will votes be held?
Discussions: How will you discuss votes?
Payments: How will you send funds when a vote is approved?
Gnosis Safe (multisig)
Aragon (multisig or automatic execution)
Tally (multisig or automatic execution)
Gating: Do you need to gate access to your governance channels?
You will likely add to your DAO tooling stack over time, so start with the basics and iterate over time!
8. Hold your first tester vote, document the process, and experiment as you go!
The only way to know if your governance process is set up properly for your needs is to hold your first vote!
Consider holding a tester vote: a vote that doesn’t send funds anywhere or only sends a very small amount of funds. This tester vote is a way to see if you need to adjust your governance parameters or adjust your tooling stack.
Once the vote is complete, document how it goes. This will be helpful to look back on when you are iterating on your governance process in the future. It’s best to experiment as you go, so you’ll want this documentation to look back on!