DAOs and On-Chain governance have become a key theme in Web 3 over the past year.
Propelled by events like the GameStop short squeeze and the general public’s disillusionment with top-down centralized institutions, millions of people have turned to DAOs as a more open and transparent alternative to achieving wide-scale governance that benefits the majority of people.
A Decentralized Autonomous Organization (or DAO) is an organization made to operate based on rules that are encoded into a blockchain and executed in a manner that is transparent, permissionless, trustless, and censorship-resistant. Rules are established and can be altered by the majority voting consensus of individuals or entities who typically must stake a governance token in order to vote on any issue.
DAOs can be set up for any type of initiative and are most commonly used to manage the treasury of a blockchain network, where rules for how funding should be allocated are managed by smart contracts.
In the past year, we have witnessed a variety of experiments in on-chain governance.
While many of these experiments ended with mixed results, they also gave people a glimpse into the potential of blockchain technology as a tool for coordinating unified action amongst millions of people to achieve a clear set of objectives.
The most popular of these experiments was Constitution DAO, where just over 17,000 individuals pledged $40 million to purchase a copy of the US constitution in an auction. The median donation is about $200. Though the crowd ultimately lost the auction, it demonstrated the amazing ability of people to raise large amounts of funding to achieve a common goal.
We also witnessed incidents that brought to light some of the growing pains of running a DAO, such as the controversial Uniswap treasury vote that saw $20 million being allocated to a Harvard Law Student group to create a “DeFi Education Fund”. The controversy came from the unreasonably large amount of money that was being requested and the subsequent lack of transparency around where those funds were spent.
In this case, the problem came down to 2 key issues:
- The inability to sync on-chain expectations with off-chain deliverables in a way that is just as verifiable and trustless as if the entire process were on-chain.
- A small number of active voters having the power to make a decision that the majority of inactive Uniswap governance token holders would have otherwise been against.
These core issues prevent DAOs from realizing their full potential as a replacement for traditional forms of governance. They are also issues that we believe Accumulate can solve through its digital identifier (ADI) system.
The Problem with On-Chain Governance Proposals
The problem with on-chain governance is that the effectiveness of what can be governed is mostly limited to only what exists within the network itself. In other words, decisions that are voted on-chain but must be conducted and verified off-chain are far more likely to lead to undesirable outcomes for on-chain voters, leading to greater distrust in the on-chain governance process.
Yet at the same time, the most important decisions that utilize on-chain voting involve dealing with off-chain entities. For example, using funds from a DAO treasury to hire legal, technical, or marketing support or to fund off-chain businesses that could be strategic partners to the DAO. All of these examples require establishing a communication and audit layer between on-chain and off-chain entities in order to enable end-to-end tracking of all events that occur from the casting of the votes to the submission of deliverables.
Accumulate Digital Identifiers (ADIs) are human-readable identities (like website URLs) that can represent individuals, entities, digital assets, or anything else of value to a group of stakeholders operating on a blockchain.
ADIs enable greater flexibility and management of public and private key addresses which can be structured into hierarchies based on the value of the assets they hold and the level of access permissions granted to specific keys.
This technology enables us the possibility to create a unified framework for governance between on-chain entities (within a single blockchain or across multiple chains) and off-chain entities whose members and assets are represented as ADIs on the Accumulate network.
This has many implications for the way future DAOs could operate. For example, we can envision a structure in which all proposals to receive grant funding from a DAO’s treasury to support off-chain projects will require every key stakeholder and asset involved in the off-chain project to be represented on-chain using ADIs.
The distribution of funds to the proposal managers could then be tied directly to status updates of each unique ADI that represents a component of the project.
Let’s use the infamous DeFi education fund as an example of how an ADI-based system could resolve many of the transparency issues.
According to the Uniswap Governance Proposal 005, the objective of the fund was to “allocate one million UNI to create and fund the “DeFi Education Fund,” a 501(c)(4) nonprofit entity based in the United States to provide grants for political, educational, and legal engagement.”
The specific objectives of the fund included the following:
- Policy-maker education
- Thought leadership and research
- Legal firepower
- Grassroots advocacy
- Best practices
As anyone can see, this proposal was lacking specifics and seems far too vague to warrant raising $20 million. Even if specific milestones were to be included for each objective, the ability to track milestones for each object and reward funds accordingly would be very difficult to achieve without real-time reporting of off-chain activities on-chain.
Through Accumulate, this proposal could be restructured in such a way that enables all stakeholders involved in completing the objectives to be represented on-chain as a unique ADI for the purpose of tracking their involvement in the project overtime.
The following table below illustrates how each of the high-level objectives could be broken down into specific stakeholders, assets, and metrics that could all be represented as ADIs on the Accumulate Network.
Every stakeholder and asset is represented on-chain using ADIs, allowing all recorded metrics to also exist on-chain
|Policy-maker education||Specific policymakers or groups||Courses & Programs||Track completion of education programs and issue certificates on-chain|
|Thought leadership and research||Foundations, Universities, Research Institutions||Written & Video Content issued as NFTs||Publish required amount of content on-chain and track engagement|
|Legal firepower||Law firms||Smart contracts for processing legal fees||Provide verifiable proof of legal expenses|
|Messaging||PR firms, Marketing agencies||Written & Video Content issued as NFTs||Publish required amount of content on-chain and track engagement|
|Grassroots advocacy||Influencers||Podcast interviews with policymakers, Tweets, Blog posts||Publish required amount of content on-chain and track engagement|
|Best practices||DeFi projects, Lawfirms||Documentation||Publish a required number of best practice documentation on-chain|
Those in charge of the DeFi Education fund could receive the requested 1 million UNI to their ADI addresses in multiple stages based on milestones that are trackable on-chain using ADIs to represent all critical aspects of the project.
The owner of an ADI can create multiple accounts and sub-identities based on a hierarchy of keys which give sub-identity owners custom access to certain data.
This would allow all components of a project to be linked to the initial fundraiser’s ADI.
It would also enable each stakeholder to have sub-identities representing individuals or assets, giving them control over what types of data they wish to make public for the purpose of verifying that target metrics are being met in order to hit the milestones required to receive additional funding.
Using ADIs to Weigh Votes based on Reputation
Furthermore, by tying every voting member to an ADI, DAOs could more easily design a weighting system for votes that allows each member to perform certain tasks that can improve their reputation and earn them the right to have a greater say in the direction of a proposal.
For example, in order to encourage more members to participate in the voting process, the weight of each member’s vote could be directly tied to the number of unique ADIs that they were able to convince to join the network and vote on a different proposal.
This way, all proposals have an equal chance of getting a large number of members to vote, reducing the likelihood that a small minority of highly active users could approve proposals that the less active majority would not agree to.
The ADIs that carry the most votes will be the ones that have contributed the most to the growth in unique votes across all other proposals.
ADIs can be the key to improving transparency and accountability for on-chain proposals that require off-chain deliverables. This would be achieved by representing all off-chain stakeholders and assets that are relevant to the proposal as unique ADIs on the Accumulate network.
With every relevant stakeholder and asset being represented on-chain using ADIs, DAOs could more easily allocate grant funding in portions based on objective milestones that anyone could observe and verify proof of completion using on-chain metrics.
Accumulate would serve as the communication and audit layer for DAO-based proposals that require the participation of both on-chain and off-chain stakeholders.
In addition, apathy towards active participation in governance often leads to a passionate minority of voters dictating the policies that the silent majority are subject to.
Accumulate can resolve this problem by tying the weight of a member’s vote directly to their ability to convince others to vote on different and unrelated proposals.
Such an incentive scheme could only be set up using a transparent digital identity layer where you can track the votes of each ADI and assign sub-identities to those who were referred by the original ADI to cast votes on other proposals (this would also allow you to easily scope out collusion).
Ultimately, the viability of on-chain governance, particularly when it comes to funding proposals through a DAO treasury, relies on all members being able to look to a single source of truth to determine who is involved, what are the deliverables, and are those deliverables are being met in a verifiable way.
Accumulate can serve as this single source of truth, enabling DAOs to support real-world projects and initiatives in a manner that is open and permissionless, while still managing to hold people accountable and reward those who produce objective outcomes.