How to set your DAO governance

In this guide, we'll explore the DAO Governance process and what to evaluate before creating your DAO.

We'll lay out the main differences, risks, and limitations of distributing voting power.

Governance is a large topic and this guide can give you a starting point, upon which you can experiment and iterate from.

What is DAO governance?

DAO governance is who can make decisions and how those decisions are made.

Your governance model impacts:

• Engagement: How much ownership your stakeholders, contributors, and members have in your DAO can impact how engaged they are.
• Effective decisions: Some governance models support effective decision-making better than others. For example, a complex or slow model may lead to ineffective decision-making.
• Efficient decisions: Some governance models make it tough to make decisions quickly, since you may be stalled trying to reach a consensus.
• Safety: It’s important to have a safeguard to prevent malicious proposals from passing and protect your DAO’s treasury and contributors.
  

How to choose the best governance set up for your DAO

TLDR: Starting simple

Governance is a huge and complex topic, and many DAOs are leading the way in experimenting and iterating on new voting mechanisms and best practices. There is a world of governance left to unpack beyond the scope of this guide. But, for most DAOs, starting simple is the best way to make real progress and move forward.

Who can vote?

There are two main choices for deciding who can vote:

1. All token holders: All those who have your DAO’s governance token are entitled to participate.

This is a common choice if your DAO already has a token or if you’d like those with larger token holdings to have more governance power.

2. Specific people / authorized wallets: Only the wallets you authorized can participate.

This is a natural choice if you don’t have a token already, and even if you do have a token, you may decide to use the allowlist approach to introduce an additional gating on who can vote. This method is compatible with NFT-based voting as well: simply make an allowlist of wallets that hold the governance NFT.

Voting mechanism

Now that you’ve decided who you’d like to be able to vote, it’s time to determine how they will cast their votes.

Token-based: 1 token = 1 vote

In 1 token = 1 vote governance, an individual’s voting power is directly proportional to the number of tokens they hold. So, if a token holder has 2% of tokens, they have 2% of the total available voting power.

If you chose “all token holders” as your voting group, then having the token-based voting mechanism is the typical choice.

Advantages:

• Proportional voting is conceptually easy to understand.
• Relatively sybil-resistant. In contrast to wallet-based voting, token voting does not fall into the “sybil-attack problem” where, if contributors don’t link their identities to a wallet, one person can hold multiple wallets and therefore more power.
• Well suited if you want to tie voting power to how financially invested individuals are in the DAO. For example, in an investment DAO, those with more tokens would have a larger say in where the DAO should invest. You may hear this referred to as having more “skin in the game.” The more tokens you have, the more invested you are in the DAO’s success.

Limitations:

• Plutocracy problem - in DAOs with an uneven distribution of tokens, the large token holders (“whales”) control the vote, whereas small token holders have little say. These smaller token holders may feel lower motivation to participate. And, the whales might not vote in the best interest of the smaller token holders, or be missing context that the small token holders have.
• Dark DAOs problem - since votes can be purchased, this may open the DAO up to risks of votes being manipulated, such as an individual or group buying tokens in order to pass a vote. This may be a consideration for DAOs with large treasuries that could be targets of such attempts. See the “What can go wrong, and how to mitigate it” section for more.

When is it typically chosen?

• This is currently the most common approach in DAOs today, especially in DAOs with a large community and many stakeholders.
  

Authorized wallet voting: 1 authorized wallet = 1 vote

In 1 authorized wallet = 1 vote governance, the voting power is the same for every wallet on the allowlist. So, if one wallet holds 2% of tokens, and another wallet holds 5%, they still have the same voting power as long as they're both on the allowlist.

This option is typically used when the DAO doesn't have a token. So, if you have chosen “specific people / wallets” in who can participate, then wallet-based is the typical voting mechanism.

Advantages:

• Simple to understand.
• In contrast to the token voting mechanism, it does not fall into the plutocracy problem or vote buying problem. That's only the case if you can successfully ensure that one single person does not hold multiple wallets. You can do so by requiring contributors to “dox” their wallets, see below.
• Enables multiple mixed approaches to voting (see mixed voting below).

Limitations

• Sybil-attack problem - if you are counting on each person having an equal vote power (1 person = 1 wallet = 1 vote), it is extremely vulnerable to sybil attacks because people could make multiple wallets. There are strategies to limit this risk, such as tying contributors to wallet addresses.
• In some cases, may not feel fair to token holders who are more financially invested.

When is it typically chosen?

This is typically chosen if:

• You don’t already have a token and don’t want to create one.
• For your situation, voting power shouldn’t be primarily determined by how financially invested contributors are in the token.
• When you are not at risk from the sybil attack problem because you tie contributors to wallet addresses.
• You have a smaller DAO with fewer stakeholders.

Aside from the most common voting mechanisms mentioned here, there is huge innovation happening in the space. There is experimentation with delegated voting, quadratic voting, predictive consensus, anonymous voting with zero-knowledge technology, conviction voting, and more. We’re continuing to research these areas and will be adding more voting options over time.

How to use wallet voting for different DAO types

Wallet-based voting sounds quite abstract, but it is a way to easily set up some of the most common types of DAOs.

How to start your DAO as a Multisig

You could authorize only five wallets, and effectively function as a multisig - whereby five wallets ultimately have the final say on passing proposals (even if they represent others who vote off-chain, for example).

There are some technical differences between a multisig and setting up five wallets with Aragon (it is technically voting, instead of signing), but in practice, it provides the same governance mechanism. The main practical difference is that by starting with a multisig setup on Aragon, you have the flexibility to change your governance as you grow.

How to function with subDAOs

You may decide you want to have subDAOs, which act as independent DAOs within a larger DAO. For example, you may want to create a marketing subDAO for marketing decisions - implying moving money to a separate treasury only for marketing, which can be decided on by people in the marketing subDAO.

How to gate governance rights

You may decide to gate governance rights to certain people. Here are a few examples:

• You could authorize only people who hold a certain number of your token.
• You could authorize loyal members, such as those who have contributed work to your DAO, or who have held tokens for more than three months, or who are users of your product.
• You could authorize only wallets which bought an NFT, and therefore start your DAO with an NFT sale instead of a token sale. However, if you do this with wallets that bought an NFT, the voting rights won’t be automatically transferred with the resale of that NFT.

While using wallet-based voting for different types of gating is a simplistic solution, it is a good way to get started and try out what works for your DAO.

What can go wrong, and how can you mitigate it?

DAOs risk being attacked through governance, especially those with large treasuries. While all DAOs should be aware of what can go wrong and try to minimize those risks, you should be aware of the complexity that comes with additional layers of governance safeguards.

Some known challenges are:

• Dark DAOs - where malicious actors buy votes in order to skew a vote. This is a threat under token voting.
• Sybil attacks - where malicious actors create many wallets in order to have more voting power. One solution is to use Know Your Customer (KYC) solutions such as BrightID - the tradeoff is that people revealing their identities can lead to fears of being doxxed. Another safeguard is to require proof of effort or attendance via POAPs. In order to have your wallet allowlisted, members would need to earn POAPs by participating in meetings or delivering bounties, which could make it more difficult to exploit the system.
• Centralizing over time - in large communities with tokens, certain investors buy up more and more tokens with the success of the project, leading to a more uneven distribution and lower participation. One way to mitigate this is having mechanisms for distributing voting power, such as an initial fair launch to ensure no one starts out with a huge distribution of tokens or airdrops designed to spread distribution.
  

How to start and how to evolve

Every DAO is different, and the key is starting simple so you can learn and adapt for your situation. A typical evolution might look like:

• Off-chain votes only - running polls in platforms like Discord, Discourse, or Snapshot for the community to start voting on low-stakes topics, which your core team gives their word they will act on (no on-chain, binding execution).
• Offchain + multisig setup - running polls in platforms like Discord, Discourse, or Snapshot for the community to vote, with elected representatives or a predetermined core team acting as multisig signatories who will action the will of the community. But, as an emergency measure against malicious proposals, they can ultimately choose to not carry out vote results.
• Allowlist or Token voting - at this point, the community fully has control of the project, and you can choose between the options here.
• Combining governance mechanisms - as time goes on, you may decide to start making a more complex governance architecture, such as separate subDAOs with their own governance setup and thresholds. Ultimately, the DAO becomes a permission management system where you set different permissions for different roles and actions.

Remember that your governance model doesn’t have to be set in stone. With a vote and the right community process, you can change your governance. This is likely to happen, because your needs change as your DAO grows and learns.

You could approach this by:

• Regularly gathering your community and discussing the governance situation.
• Researching other DAOs similar to yours to see what systems work for them.
• Run small experiments with governance with low stakes - for example, setting up a subDAO for a given initiative with different governance settings.

In DAOs, it’s a healthy practice to keep iterating as your circumstances change.