The Non-Negotiables of Operating a DAO

Author: @kafcrypto, @contentguildxyz

Published on: 02.02.2024

Abstract: Managing a DAO is not just about following best practices; it is about fostering a culture of growth and evolution.

DAO Meta

DAOs represent a significant shift in our understanding of collective management and ownership. These entities are governed by code and operate on blockchain networks, challenging traditional concepts of team collaboration and decision-making.

The concept of a DAO may vary depending on whom you ask, but fundamentally, a DAO is a decentralized entity that operates on a blockchain and is democratically managed by its community members. They are known for their decentralized structure, avoiding any central authority or traditional hierarchy. Their operational rules and decision-making mechanisms are embedded in smart contracts, which are self-executing code on the blockchain that ensures transparency and fairness.

This groundbreaking framework is reshaping the dynamics of business and community interactions. DAOs are paving new paths in areas such as corporate governance and project management, empowering every member with a meaningful and impactful voice.

In this article, we will explore the "non-negotiables" of DAO operations, including governance design and the balance between robust and adaptable structures.

The Importance of Governance Design

One of the cornerstones of a DAO's success is its governance design. The governance design of a DAO not only shapes how decisions are made but also reflects and reinforces the community's values and goals.

Transparency is key to a DAO, with blockchain technology ensuring that members can see and verify every decision and transaction. This transparency builds trust within the system and fosters deep-rooted accountability.

Effective DAO governance ensures inclusivity, allowing every member's voice to be heard, contrasting sharply with the top-down decision-making of traditional organizations. This inclusivity enriches decision-making with diverse perspectives and deepens member engagement and commitment.

The governance of each DAO should reflect its unique principles and objectives, aligning its structure with community values to promote cohesion and a shared sense of purpose. This alignment is crucial for maintaining member engagement and focus, especially in complex decision-making scenarios.

The foundational phase of a DAO is determined by token distribution and initial voting rights, which are critical in shaping its governance. Founders must choose between establishing governance from scratch or implementing basic rules early on. This choice, along with initial decisions on voting delegation and proposal processes, will significantly influence member participation and set the trajectory for the DAO's future governance model.

Ensuring Robust and Adaptive Governance

Robustness and adaptability are key to DAO governance, essential for maintaining its integrity and longevity, and crucial for addressing risks such as governance attacks and incentive misalignment.

Effective governance is vital for preventing decision-making loopholes, from vote manipulation to misleading proposals. A strong governance system requires safeguards to detect and mitigate such threats, ensuring the integrity of the DAO.

Moreover, given the diverse interests of members, a well-designed governance system must balance these differences to prevent conflicts or biased behavior. Aligning individual incentives with the broader goals of the DAO is essential for making decisions that benefit the entire community.

On-chain vs. Off-chain

Source: Tally Docs

To ensure robustness and adaptability, DAO founders must make strategic decisions about when to leverage the advantages of on-chain governance and when to consider off-chain solutions.

On-chain governance has key advantages: transparency and security. It eliminates trust issues associated with central authorities, as smart contracts autonomously execute approved proposals. This allows voters to control parameters, funds, and upgrades while ensuring that all decisions are permanently recorded on the blockchain, preventing undue influence. It also leverages the security of the blockchain, reducing intermediaries and promoting inclusivity among token holders.

Notable projects that adopt on-chain governance include MakerDAO, Arbitrum, Uniswap, Optimism, and Aave. The governance design approaches of these protocols focus on security, scalability, and community engagement, providing a robust model for DAOs seeking to maintain integrity and longevity.

On the other hand, off-chain governance occurs outside the blockchain, often using external tools like Snapshot or traditional social platforms like Discourse and Discord. While it emphasizes efficiency and flexibility, it introduces the necessity of social trust. Participants must rely on one another or a central authority to execute decisions.

The on-chain approach in DAOs offers a higher degree of transparency, security, and decentralization, as voters do not have to rely on trust in a central authority. With smart contracts automatically executing approved proposals, power is genuinely in the hands of the voters. Tally is committed to on-chain processes and transparent governance, making it a valuable ally for achieving true decentralization and trust within DAOs, and a preferred choice for those seeking robust and reliable on-chain governance solutions.

Best Practices for On-chain DAOs

Tally offers a range of recommended practices particularly relevant to any DAO looking to optimize its operations. These practices cover various factors, from technical considerations (such as using the latest version of OpenZeppelin contracts) to governance strategies (such as ensuring fair token distribution and defining reasonable quorums and voting periods). This approach is not merely theoretical; it has been validated in practice. Under Tally's guidance, over 500 on-chain DAOs are currently operational, managing over $10 billion in treasury assets. This impressive track record highlights Tally's significant influence in the DAO space.

Let’s break down these recommendations for a detailed understanding.

Use the Latest Version of OpenZeppelin Contracts

OpenZeppelin Governor 5.0 is a widely recognized smart contract framework that provides a robust and secure foundation for building DAOs on the Ethereum blockchain. This framework is crucial for any DAO looking to establish strong and effective governance.

The importance of OpenZeppelin Governor in the DAO world lies in its ability to protect valuable assets and manage a large number of participants. To date, OpenZeppelin Governor protects over $5 billion in assets and has over 1 million participants, with its reliability and scalability setting it apart in the field.

The benefits of using OpenZeppelin Governor include enhanced security through audited smart contracts, customization flexibility, and ease of use, making it the top choice for DAOs that prioritize security and customization.

Customize OpenZeppelin Contracts

Customizing OpenZeppelin Governor contracts is a key step in adapting the governance model to the specific requirements of the DAO.

This customization can include selecting appropriate arbitration and voting mechanisms, as well as defining custom operations or permissions, such as the ability to cancel proposals. For example, a DAO may require specific quorums or voting periods that align with its decision-making nature and member participation.

To customize contracts, DAOs can utilize tools like OpenZeppelin's contract wizard, which facilitates the interactive generation of contracts and helps understand the components provided in OpenZeppelin contracts.

Token Distribution

Ensuring long-term consistency among DAO participants requires implementing appropriate token distribution strategies. The manner in which tokens are distributed can significantly impact member participation, governance, and overall DAO stability.

One possible approach is performance-based token distribution, rewarding contributors who actively advance the DAO's goals, thereby enhancing their commitment and engagement. At the same time, a gradual vesting schedule can prevent short-term speculation by unlocking tokens over time, anchoring recipients to the DAO's enduring success.

A well-executed strategy can not only boost member participation and commitment but also ensure a decentralized democratic governance structure. Additionally, it can prevent power consolidation and foster a diverse and vibrant community dedicated to the DAO's mission.

Set Reasonable Quorums and Voting Periods

A quorum is the minimum number of members required to participate in voting for a proposal to be considered valid. A balanced quorum is crucial for ensuring the legitimacy and representativeness of decisions while preventing excessively high participation requirements that could lead to the failure of most proposals due to lack of participation.

On the other hand, the voting period should be long enough to allow members to evaluate and vote on proposals, but not so long as to unnecessarily delay decision-making. A voting period that is too short may not give members enough time to participate, while one that is too long could hinder the operational efficiency of the DAO. Achieving an appropriate balance between these factors is key to maintaining effective governance and encouraging active member participation in the DAO.

Encourage Voting Delegation and Accountability of Delegates

Voting delegation and the accountability of delegates are key elements in DAO governance. This practice allows token holders to delegate their voting rights to other members, which can promote greater participation and informed decision-making. Delegates assume the voting responsibilities of their constituents. Therefore, DAOs must encourage responsible delegation and establish mechanisms to ensure the accountability of delegates.

We recommend using OpenZeppelin's delegation tools as an effective way to empower loyal and active voters, giving them a more significant voice in the DAO.

Maintain Clear and Understandable Documentation

Clear and understandable documentation is not only a recommended practice but also a fundamental necessity for the success and longevity of any DAO. It serves as an essential guide, enabling both newcomers and experienced participants to navigate the complexities of the DAO and actively engage in its governance processes.

Documentation should comprehensively cover governance processes, roles, and responsibilities, including rules. It should also detail smart contracts, their functions, and user interactions, ideally providing code snippets and examples. Additionally, custom settings must be transparently explained, with reasons and impacts documented for community tracking.

Ongoing updates to documentation are crucial for accuracy amid governance changes. It should be easily accessible, provide multilingual support when needed, and promote transparency, inclusivity, and community engagement.

Learn from Other DAOs

Staying informed and learning from the experiences of other projects is vital for the success of your DAO. DAOs are pioneering new governance models, and the broader community's collective wisdom can provide valuable insights.

By closely observing other DAOs, you can identify effective strategies, governance models, and methods for success. Learning from the challenges and mistakes of other DAOs can help you avoid similar pitfalls. Whether it’s security vulnerabilities, controversial decision-making processes, or other issues, understanding what went wrong for others can strengthen your DAO's defenses.

Observe how they interact with members, foster collaboration, and maintain active engagement. By monitoring other projects, you can identify potential synergies and collaboration opportunities. Joint initiatives, partnerships, or shared resources can enhance the capabilities and impact of your DAO.

The world of DAOs is still relatively young, and no one has all the answers. The DAO ecosystem thrives on shared knowledge and collaboration. DAOs that embrace open innovation and cooperation are more likely to achieve long-term success.

In Conclusion

As we have seen, DAOs present a revolutionary approach to governance and decision-making. Looking ahead, they are poised to further reshape our digital and community landscapes, prompting us to rethink collaboration and collective action.

Some of the practices and strategies we are exploring are essential for the success of your DAO and are non-negotiable. However, it is important to view them as the starting point of a journey of continuous adaptation and learning. As pioneers in this field, we have a responsibility to stay abreast of the latest developments, learn from the experiences of other DAOs, and embrace innovation with an open and adaptive mindset.

Managing a DAO is not just about following best practices; it is about fostering a culture of growth and evolution. DAOs are living entities shaped by the collective wisdom of their members. As we stand at the forefront of this digital governance revolution, it is not just code that shapes our future, but the vibrant spirit of community collaboration that drives DAOs forward.

Go onchain!