How to facilitate active participation in DAOs

#11 Governance Series

Recently I have been pondering the problems of fundamental governance properties. One such property is participation. In essence, a DAO operates autonomously but relies upon individuals to perform specific tasks that the automaton cannot perform itself.

In many cases, DAOs live and die on participation.

Let’s stay on task. Participation is one of the fundamental properties of governance. To understand how to facilitate it we must first understand sustainability.

Sustainability relies upon two main roles:

• Those who develop and propose changes

• Those who decide on whether or not to adopt proposed changes

The partition map of governance properties

The goal of remaining sustainable is two fold:

• Sustainable development. A project or DAO must provide incentives via monetary rewards or otherwise. This is to drive successful improvement and beneficial proposals for the DAO or project

• Sustainable participation. A project or DAO must sustain participation. Again, it may do this via monetary rewards or otherwise to ensure continued participants remain engaged and active in the decision-making process

Participation has a cost of engagement associated. This cost may be quantified by objectively measuring the rewards directed towards the two prior mentioned actors. Results may be quantified by gauging voting activity/proposals and deliverables produced by the DAO or project. This is called liveness.

Liveness may be satisfied if a DAO or project is capable of incorporating an input of any given urgency from token/stakeholders and then conducting timely actions/functions to satisfy the urgent demand through a suitable decision-making procedure.

Where problems arise

Pitfalls are everywhere in crypto and especially governance. If configured wrong, sustainable participation can be a double-edged sword.

If incentives (be them monetary, reputation — or merit-based) are too small or deemed inadequate, then the risk of a “moral” decision may become a financial decision. Thus decreasing participation.

Nansen voter participation rate relative to DAO size

With incentives already being a challenging balancing act, we now also have the rise of decentralised finance (DeFi) which has fast become a crucial component to many DAOs and projects. Without financial incentives, it would seem participants lack a significant reason to put their time, money and energy into work, proposals, etc.

Many who participate in DAOs emphasise the recognition they receive for their contributions and enjoy being involved in decision-making. However, as mercenary as this may sound, recognition doesn’t pay the bills, and it doesn’t incentivise sustained participation. Getting paid in crypto is great, it offers unique incentives such as ownership and equity.

Incentives can come in many forms, as we have already alluded to

A few types could include:

• Growth incentives. I.e., capital growth by turning control and cash flows over to the community. E.g., Compound permitting community members the right to control the protocol’s reserve assets

• Yield farming. Giving tokens to not only investors and teams but also users. Holders can then choose to accumulate ownership of sell on the market. E.g., Yearn Finance distributing tokens to capital providers

• Retroactive airdrops. Delivering tokens to current or former participants to build ownership or reward users. E.g., Uniswap’s UNI token launch that retrospectively granted UNI to everyone who had ever used the Uniswap protocol up to that point in time

• Fractionalisation. Splitting ownership rights, participants can own part of a DAOs assets or revenue. E.g., PleasrDAO’s fractionalisation of NFTs for collective ownership of a single artwork

Let’s use Compound to illustrate for an example. They enabled participants to “lock” their capital in the protocol (i.e., using it as collateral to transact in the protocol via borrowing and lending). As a result, they received earnings in the form of DAO governance tokens. By using COMP in this way, they were able to incentivise growth and expand their DAO participance.

The launch of COMP was a huge success. Kain Warick, founder of Synthetix offered praise regarding its launch.

Kain Warick’s tweet concerning COMP token release

Solution suggestions

Care must be taken not to create participation that relies solely on participants wanting to drive the underlying DAO token up. DAOs that fail to hire effectively or incentivise inadequately (i.e, their treasuries run out and/or their participation runs dry) may be faced with serious issues.

It may serve DAOs well to develop participatory budgeting practices to enable team members and participants to work together within an adequately optimised compensation structure.

It usually happens once a DAO or project is large enough and mature enough or has the budget to do so. Thought should be invested into hiring people and organisations who will channel their energy full-time into maintenance, communications, administrative tasks and future growth and development. A prime real-world example is StableLab’s Element.fi proposal.

StableLab announcement of a recent Element.Fi proposal, illustrating their continued performance as an active and professional delegate

StableLab helps to provide a wide range of product-specific services such as business development, fundraising, token design, liquidity providing, marketing and governance. This allows us to effectively consult on and work with teams and projects regarding participation in its varied components.

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