DAO mechanisms are deployed in blockchain protocols via smart contracts to offer higher levels of transparency at the same time minimizing bureaucracy with automatically executing codes. This article explores more on how DAOs work and their voting mechanisms.
Blockchain technology allows inventive ways to exchange information and value while executing tangled processes securely and transparently. DAO (decentralized autonomous organization) is an organization where blockchain applications arbitrate members’ interaction (machines or humans) according to the encoded rules through smart contracts.
The possibilities of blockchain governance are mainly expressed through DAOs, which perform various tasks, such as facilitating cooperation among members, coordinating autonomously with other software, owning smart property, autonomously hiring people, or voting mechanisms, among others.
How DAOs Work
The specific mechanisms that empower DAO differ across various blockchain projects. However, to launch in a supportable manner, there are general stages that a DAO must undergo:
Setting Up Smart Contract
Underlying rules must be established and encoded in smart contracts before deploying a DAO. The set-up phase is the most important in creating an autonomous and sustainable DAO, given that future reforms to DAOs incentive structure, governance system, and operational workflows will require voting for them to take effect. Any overlooked details or initial mistakes can definitively sabotage the project.
After establishment in its governing smart contracts, DAO must be funded for it to operate. Therefore, their smart contracts must include the invention and distribution of internal properties, for example, native tokens, which can be utilized to incentivize various activities, such as voting mechanisms or spent by the DAO. Thereafter, entities or persons interested in taking part in the growth of DAO can buy or acquire the native tokens associated with the DAO, which results in attaining the rights to vote.
Being a decentralized organization, all DAO’s decisions are made through consensus voting after its funded enough to be deployed. Therefore, all individuals with DAOs tokens are stakeholders and can make proposals concerning DAO’s future and how the funds are managed or spent. DAO’s stakeholders will definitely work to ensure they attain the best results for the whole DAO network if the token distribution consensus mechanisms and policy defined in its smart contract are well-defined.
DAOs Voting Mechanisms and Their Impact on Projects
DAO uses different voting mechanisms depending on the blockchain in which it’s deployed. Also, the impacts on projects vary from one voting mechanism to another. The different DAOs voting mechanisms include:
Permissioned Relative Majority
Relative majority voting mechanism compares the total number of votes of those supporting and those against to arrive at a decision. Unfortunately, the relative majority isn’t a feasible DAO governance option because they are easily attacked; a single person can easily deplete funds when other members aren’t alert. However, to curb this, only DAO members need to sponsor proposals to be voted on.
With the relative majority voting mechanism, fewer actions are needed by members, implying less attention is required, thus fewer gas fees. Proposals are easily passed, and this poses a high risk if no one is watching. Additionally, the mechanism is slower by design.
Holographic consensus (HC) is a voting mechanism that connects a prediction market with a proposal. DAOstack spearheaded the concept where predictors can stake funds to support or oppose a proposal they trust will pass or fail. Predictors benefit financially if their prediction is correct. Proposals predicted to pass are ‘boosted’, and the voting shifts to a relative majority from 50% quorum, reducing the barrier to pass proposals.
HC voting mechanisms ideally safeguards projects from heinous proposals because one needs to pay to attack – through funds staking on proposals. Also, it works well for projects with many proposals because community members only need to concentrate on proposals that they have a stake in. Additionally, it permits a DAO to quickly pass proposals, thus saving on time.
Conviction voting is a DAO voting mechanism whereby individuals stake their powers to vote on proposals and gather enough votes to pass over time. This voting mechanism is new and still being experimented. However, in theory, the mechanism hinders persons with strong opinions and large stakes from bridling minority voters. Here, it’s not a requirement for the majority to achieve consensus on each proposal, but rather, token holders (stakeholders) can concentrate on the proposals they promote/support.
This type of voting mechanism can’t be used solely because it’s yet to be battle-tested. Therefore, it needs to be adopted along with other voting mechanisms that are time-sensitive decisions or a better for yes/no.
Token Based Quorum Voting
Quorum voting mechanism requires a particular voters’ threshold for a proposal to pass, for instance, more than 50% quorum. When the threshold is met, the decision with more votes wins. When the quorum threshold isn’t reached, the proposal fails.
This voting mechanism has some issues because plutocracies aren’t the best. Choosing the ‘right’ quorum requirement is a challenge. With a high quorum, proposals become difficult to pass, whereas, with a low quorum, proposals become easy to pass. Also, this form of voting requires a high level of participation or activeness from members to pass a proposal, which is time-consuming and expensive. Free TON blockchain uses this form of DAO voting mechanism.
DAOs are open source, with all activities, transactions, rules, and mechanisms chronicled on the blockchain. The ‘right’ DAO’s voting mechanism plays a vital role in the success of projects in the long-term by permitting members to make the best decisions, with minimal risks and at the right place.