Decentralized Voting

May 14, 2023

The World of Decentralized Voting

Just like traditional organizations, decisions within decentralized organizations need to be made for things to get accomplished. Without a central authority however, this can present a challenge: DAOs need to gather feedback from the community in order to reach consensus on the best path forward. Gathering input from a community of thousands is a challenge, but one that decentralized communities have created a plethora of solutions for. Today in this article, we will explore (at a high level) a number of voting mechanisms utilized by DAOs to arrive at amicable outcomes across the community, each with their own benefits and drawbacks.

The OG: Simple Token-Based Voting

The most basic voting scheme for a DAO is intuitive - most DAOs have governance tokens, someone puts up a decision to be voted on, whichever decision receives the most votes is the one that moves forward. So simple you probably remember doing this in grade school when your teacher would ask you to "raise your hand if... ". Unfortunately simplicity comes at a cost, in this case being an extremely serious one: minority decision-making. 

Take a scenario where you run a 10,000-memberDAO with 1,000,000 tokens issued - one of your members (who holds 100,000 tokens) puts up a vote to withdraw $100,000 from the treasury to buy a new car. Your DAO requires votes to run for 24 hours, so he launches this vote at 2am on the day of a major public holiday. The vote concludes, and only 50 smaller wallets have voted - 100,000 tokens in favor and 8,000 tokens against. Under simple Token-Based Voting, this passes and the DAO would be required to send this individual $100,000.

This example highlights a number of problemseach of the following voting mechanisms seek to address, mainly:

  • Voter Turn-out (should 0.1% of the population be able to make decisions? 0.5%? 5%? etc)
  • Timeframe to Vote (is 24 hours enough time for the DAO to consider a proposal? 72 hours? one week? etc)
  • Centralized Voter Power (if one member holds 10% of the tokens, do decisions truly reflect the community or personal interests?)
  • Acceptable Request Screening (can members post proposals to "sack the treasury"? Who decides what is acceptable?)

So what are the alternatives that address these problems?

The Standard: Token-Based Quorum Voting

The most common variation of the simple token-based variety above, Quorum voting seeks to set baseline expectations across a number of the problems highlighted above to alleviate those concerns while still remaining simple and easy to understand. This differs from simple voting in one key way: Minimum Voter Turnout Requirements.

In this system, a "Quorum" is set (typically in constitution documents for the DAO) which requires that a certain threshold is passed before a vote becomes binding. The most common is a token-based quorum (ie: "5% of all votable tokens" or "1% of total token supply" are required to vote), however there are experiments with wallet-based quorums that still developing. If a vote fails to meet this quorum within an allotted time, the vote fails. If it meets this quorum, then whichever decision is made becomes the binding will of the DAO. Setting an appropriate quorum figure is also incredibly important; too small and the quorum can be met effortlessly, too large and no votes can pass (including votes to change the quorum!). Many DAOs who choose to implement this right from the start will not have a clear picture on how many active voters will exist within their eco-systems.

A number of assessments have been conducted across DAO voting structures which point to average participation rates between roughly 1% of allocated tokens for large communities to around 10% for small connected ones, with the majority falling closer to 1%-3%.

While the immediate questions become "why are more people not voting?" and "are these decisions truly the will of the DAO if only 3% vote?", the answers are not always as clear-cut. In many scenarios, the answers derive from how holders of DAO governance tokens view their tokens - are they keys to govern an organization, or are they investments held for future profit? People who hold the former view are much more likely to utilize their voting rights than people who hold the latter. This is not a new concept; we need only look to traditional corporate stocks to see parallels, as each stock entitles it's holder to vote during annual meetings yet very few choose to exercise that right.

It's also important to consider that the vast majority of DAO governance tokens are typically held by centralized organizations, or individuals tied to them. Many DAOs have Labs or Foundation companies working to execute the decisions made by the DAO (more on these in a later article), and these companies often have 10% or more of the DAO token supply at their disposal. Similarly, team and investor allocations are also typically large portions of the overall circulating supply, while the largest holders of public tokens often also consist of institutional investors seeking exposure to the long-term growth and profit of the DAO - all of these entities are very likely to not engage with governance for various reasons. For some, decisions could be taken as using insider knowledge to direct a public vote; it could be seen as engaging in managerial functions, which some argue supports securitization; it could be seen as subverting the will of the DAO, adding negative exposure to the investor. All of this is to say that participation numbers under 10% is not all the surprising when you consider who the other 90% are and why they hold their tokens.

The benefit here is that it alleviates the "Voter Turnout" concern above - if voters don't turn up, bad actors cannot push through undesirable proposals; it requires that at least X% of the DAO is aware of a vote before the DAO is held to it's decision. This also remains one of the easiest systems to explain, and some argue one of the most "pure" forms of decision making a DAO can implement as it does not modify the votes made by token holders in any way; one token remains one vote. Considering the majority of democratic elections are run in a similar way and have been for hundreds of years, it is easy to see why people gravitate towards this voting scheme (or a variation of such) in the vast majority of DAOs that exist today.

Unfortunately this system does still contain a number of drawbacks from the simple token system, plus introduces some new ones as well. To start, this system purposely does not inherently address centralized voting power or request screening - individuals with high numbers of tokens can still sway votes and pass proposals benefiting themselves if they have enough tokens.

The problem of Voter Turnout is also not entirely mitigated, and this system brings in two new problems; Voter Fatigue and Voter Apathy. In short, quorum requires voters to pay attention to what is happening within the DAO and vote accordingly in order to make votes binding. If there are a high volume of votes, eventually voters get tired of having to review each of them and will either stop voting or stop researching and simply vote for the currently winning option.

When this happens, quorum voting typically reduces the number of active voters over time (especially on less interesting or attention-getting proposals). As an example, we can look to ApeCoin DAO where every holder of $APE is eligible to vote on proposals. There were over 120,000 wallets holding ApeCoin as of June 1, 2023 according to on-chain Etherscan data, however the vote for AIP-195 (which ran for an entire week) met quorum with less than 350 wallets participating (a voter turnout of roughly 0.3%).

In scenarios where this occurs, small subsets of the community can direct the entire DAO, for better or worse. This can be exacerbated with the advent of innovative technologies and investment tools, which we saw in 2020 during a particular MakerDAO vote that gained significant attention. BProtocol, a developer on a MakerDAO project, used a "Flash Loan" from dYdX during an election process to withdraw $7 million in votable DAO tokens, use them to vote, then repay them back to dYdX which caused the vote to pass.


Variations on Quorum Voting

A number of DAOs have identified the problems noted above with quorum-based voting and created systems that aim to alleviate those without re-inventing the wheel. Among those are the following:

  • Locked Token Voting - Individuals are required to lock their tokens for a particular amount of time in order to vote. Some systems add additional voting power based on the length of time you are willing to lock up your tokens. This system requires voters to stand behind their decisions, but can reduce voter turn-out for those who do not want to have their tokens locked during volatile market conditions.
  • Reputational Voting - Wallets are assessed based on previous contributions, with active contributors building a better "reputation" that translates to their voting ability. Proposals then require either a specific reputation threshold, or modify voting power based on reputation. This     improves trust and community sentiment within votes which can ensure votes reflect the will of the DAO's active contributors, however this system favors veterans rather than new members and the balance of how reputation is built is a trade-off; too easy and bots can do it, too hard and real people are discouraged from participating.
  • Conviction Voting - Similar to Locked Token, but your tokens gain voting power the longer you have them locked prior to the vote. This prevents last-minute attacks which can wildly change the result and ensures that those who believe strongest in the project are incentivized to participate early, however this system often discourages active discussion and opinion changes as the act of switching your vote will reset your accumulated  voting power which results in more people "sticking to their guns".
  • Delegated Voting - Rather than every individual needing to vote, individuals can "delegate" their tokens to someone else who votes on their     behalf. This can alleviate the voter apathy point and improve utilization of tokens in votes while allowing the person delegating some level of     control over this votes by re-delegating if their current delegate doesn't represent them well. However, this exacerbates the Centralized Voter Power issue (which some argue is antithetical to DAOs in principal), can result in unaligned interests (ie: when a delegate holds very few tokens personally, they may be incentivized to vote for self-serving proposals against community wishes), and ultimately presents many of the same     problems people identify with the "elected representative" system most democratic countries across the world currently utilize.
  • Quadratic Voting - Rather than one token being one vote, this systems calculates voting power based on a quadratic curve to reduce the overall impact of "whale" voters while incentivizing smaller voters to get involved. This means one token is worth one vote, four tokens is worth 2 votes, nine tokens is worth 3 votes, and so on. This prevents large voters from swaying the vote as much, which works to combat the Centralized Voter     Power issue, but also presents new threats of potential attack as smaller voters can now hold larger sway in proposals. Combating circumvention also becomes a problem (especially in digital assets, where spinning up a new wallet is free) as large holders can spread their votes across multiple wallets to improve voting power.

Other Voting Systems

While the majority of DAOs choose to use a Quorum-based system, there are a growing number of alternatives that also make appearances. This area is constantly being developed, with new experimental systems being created regularly.

  • Council Voting - Known by a few names and variations ("Liquid Democracy", "Political Voting", "Multi-Sig Voting", etc), but the principal is ultimately the same. A number of key decision makers are selected to make decisions on behalf of the DAO without requiring full votes across the entire DAO - essentially identical to how the elected representative system works. We referenced this in Delegated Voting above, however Council Voting is different in that non-Council members have no ability to vote whatsoever. This system is efficient and timely, with the Council being personally accountable to their respective communities, but this system is also very centralized and prone to self-interest.
  • Predictive Market Voting - Sometimes called "Holographic Consensus", this system is truly unique in attempting to solve the "Acceptable Request Screening" problem we flagged earlier. Essentially, every time a new proposal is submitted, DAO members can bet their own tokens on whether that proposal will pass or fail (this is NOT voting on the proposal itself). Based on the results, the DAO can see which proposals members are willing to stake money on passing which can help identify promising proposals to all voters. This is not in-and-of-itself a voting system on proposals, but a method of combatting voter fatigue and initial screenings as bad proposals are bet on to "fail" and good proposals to "pass". The downside is the DAO typically puts up some amount of financial incentive (ie: a "pot") so the voters have incentive to participate, which can be costly, and this system can encourage a spam of bad proposals (just so people can vote them to "fail") if this incentivization is done poorly.