Decentralized Autonomous Organisations (DAOs) were created with the aim of providing a new, democratized, and (hopefully) transparent voting structure. The goal of DAO structure is to facilitate processes taking place in businesses, projects, and online/offline communities. This facilitation gives the opportunity to any member that is part of such communities to vote on organizational decisions by casting their votes on the blockchain.
The major issue arising from the current voting consensus at DAOs is the uneven distribution of voting power. Holders of the governance token from each respective DAO can obscure and direct voting results. Large amounts of voting power derive from crypto-wallets that hold a significant number of these governance tokens, and which can affect the decision-making process within the organization.
“Where’s the problem?”, you may ask.
There has been an enormous negative sentiment against the voting mechanisms of DAOs. DAOs were supposed to decentralize power and give a “voice” to each individual to do it on-chain.
But the data says otherwise!
A fantastic analysis from Chainalysis has shown that less than 1% of all holders, across several major DAOs, have 90% of the voting power.
Not so crazy for those that followed along DAOs and understood how fundamentally rigged DAO governance is. Think that a small percentage of holders, e.g 1%, can win over the voting results from the remaining 99%. This has meaningful implications for DAO governance. Small holders in this case are being thwarted and feel that their vote’s contribution, to each proposal process that takes place, is literally useless.
The governance bottlenecks extend, also, to other metrics that are being taken into consideration. One is that a user must hold between 0.1% to 1% for creating a proposal and another is that a user must hold between 1% and 4% to pass it forward.
It doesn’t take a lot of thought to understand how unfair and un-democratizing these voting mechanisms are.
So, now, you may be wondering, is that it?
There’s no better solution than what we have?
Of course not!
Thankfully we have better solutions to work around these issues.
And we should give our thanks to the Ethereum mastermind who is none other than Vitalik Buterin, along with Zoe Hitzig and E. Glen Weyl. In their seminal paper named “A Flexible Design for Funding Public Goods”, they propose a design that is special in the sense that it applies concepts inspired by quadratic funding to funding public goods.
Quadratic funding is where an alternative solution lies…!
Quadratic funding has some specific features that make it a better method for initiating collective decision-making systems. As a voting concept, quadratic funding encourages voters to distribute and cast their votes across a variety of pressing issues that need to be taken care of instead of directing voters’ budgets to a single issue.
Similar to quadratic funding, quadratic voting (QV) incentivizes individuals to contribute their vote by “buying in” the projects that deserve to be funded by donations.
Weyl proposed allowing individuals to buy votes, by “paying” the square of the votes they “buy in”. He argued that under standard assumptions in large populations quadratic voting leads to approximately optimal decisions on public goods.
The QV mechanism improves on existing voting mechanisms which present flaws. It allows for greater flexibility in the set of decisions to be voted and funded. This is done by eliminating the assumption that individuals (in our case holders) have complete information and by satisfying the incentives for each participant voter to engage in the voting process.
Let’s assume we have 3 proposals:
The members of the community can vote by “burning” as many tokens as they are willing to spend to support their favorite proposal. At the moment the voting starts, the supply of the governance token is 1,000,000 and we will use this value as a reference to calculate the voting results and the winning proposal:
Proposal 1 = 200 tokens x 5 voters = 1000 tokens
Proposal 2 = 5000 tokens x 1 voter = 5000 tokens
Proposal 3 = 50 tokens x 20 voters = 1000 tokens
If we apply the 1 token = 1 vote approach, it is easy to grasp what the winning proposal is going to be. It obviously is the number 2 and you can appreciate how this approach is biased towards big holders.
Okay, here it is:
For each proposal, we sum the square root of each contribution and then we multiply the result by itself.
Let’s apply the Formula to each proposal:
For having a better understanding of what these numbers represent we will transform them into percentages(%).
How can we now turn these values into a percentage(%)?
We will take each proposal’s first step result, we will divide this number by the sum of all proposals’ first step results and finally, we will multiply this value with the supply value (1,000,000):
To get the final percentages we do a simple percent proportion calculation:
The winning proposal is number 3!
And this, if you have followed the route of calculations so far, shows how powerful small contributions can be.
We can see that they matter more than the absolute number of tokens.
For this same reason, they become crucially important for decentralizing decision-making and voting power (as much as it’s feasible).
In every historical inflection point where change is needed, there is acceleration and a need for transformative solutions, practical tools, and innovative ingenuity. Decentralized frameworks, sparked profoundly right after the 2008 financial catastrophe, have provided the breeding ground for blockchain technology and consequently DAOs. Several individuals and communities around the globe went in quest of alternative technological paths that could enhance autonomy and sovereignty in areas where it was angular or even non-existent.
As we know, decentralization still faces many challenges.
There are ongoing issues that revolve around:
Efficient governance and decision making
Successful coordination of tasks
Attracting the right talent
In real-life applicability
One thing remains as true though…
Limitations that originated themselves from the old tech infrastructure are being hectically swapped by revolutionary solutions that show immense promise. And we firmly believe they hold great potential for the future generations to come.
DAOs are such an example. They provide a platform for applying innovative business operational structures, which are only limited by game theory and imagination.
And those structures can transform entire industries, unsettle the status quo and establish new paradigms. In the same fashion, quadratic voting is extending one step further the disruptive nature of DAOs. As a voting method, it reflects the intensity of people’s preferences when collective decisions are made.
The tyranny of the majority and the interests of those with “heavy” wallets are greatly mitigated.
For sure, there is significant room for improvement in the quadratic voting method. Continuous experimentation around QV can reveal possible weaknesses of its mechanism, create novel model designs and build awareness.
If we could show to the masses how beneficial such a voting system is and how much more fair and democratized DAOs could operate…
It is then only that we can talk about DAOs being collectively owned by a community of like-minded folks that share the same mission!
Also published here.