Take Snapshot as an example to reveal the governance model of DAO on the chain

This research article is presented by ThePASS team, and we are grateful for the fees from Snapshot for proofreading. ThePASS is a pioneering DAO aggregator and search engine that plays a key role in providing insights and analytics to DAOs.

Intro

Originating from distrust of centralized financial institutions, Crypto uses blockchain, cryptography, consensus protocols, smart contracts and other mechanism designs to build a trustless digital infrastructure outside the traditional world. In addition to deriving innovative applications such as DeFi, NFT, and GameFi, this decentralized infrastructure also implements a new type of organizational collaboration model DAO (Decentralized Autonomous Organization), whose management and operation rules are encoded in the form of smart contracts. On the blockchain, collective decisions are made in a more decentralized, transparent, and trust-minimized way than traditional organizations.

Due to the programmability of blockchain and Token, DAO has contributed a lot of solutions to governance issues in just a few years since its birth, and the low trial and error costs of DAO organizations also provide a stage for experimenting with different governance mechanisms. This article takes Snapshot, the most commonly used governance tool for DAOs, as an entry point to sort out the status quo of DAO governance and clarify some of the latest developments in the field of DAO governance.

DAO Governance Basics

Current DAO governance is almost equivalent to voting on proposals, by giving everyone the right to vote to prevent DAO from becoming a dictatorship or stagnation. There are two main types: on-chain governance and off-chain governance.

On-chain governance fully allows on-chain, open-source governance contracts (OpenZeppelin/Governor) to automatically execute proposals based on token holders' voting results, without the need for a trusted third party, and is by far the closest implementation to the DAO name. However, contracts on the chain require a large amount of transaction and audit costs, which greatly inhibits participation in governance and severely restricts the expansion and growth of DAO.

Off-chain governance decouples voting from on-chain execution. After off-chain voting is completed, a group of trusted people (usually early DAO members or big players) called signers are responsible for executing transactions on-chain to reflect the vote.

It can be seen that since 2021, the number of DAOs has grown tremendously. We believe that, among other objective factors, the emergence of Snapshot played an important role.

Snapshot

Snapshot is currently the most commonly used off-chain voting platform for DAOs. Snapshot offers a lot of customizability and flexibility regarding the number of voting options available, how voting power is counted, how votes are counted, setting conditions for voting participants, which type of token to use, voting duration, etc. Especially useful for protocols that adjust their voting methods over time and require high customizability.

If a DAO wants to use Snapshot to handle proposal voting, they need to create an organizational account Space on Snapshot through ENS. Space is the center of all proposals related to DAO and the source of information for users, allowing to manage the roles of DAO members (Controller/Admin/Author) and customize proposal and voting settings.

Overview

The activity trend of DAO can be seen through the analysis of Snapshot data. Since the end of 2020, Snapshot has generated nearly 20,000 spaces, and more than 50,000 authors have submitted nearly 130,000 proposals. In addition, it attracted more than 2.6 million voters who cast approximately 20 million ballots. Nearly 4k active spaces and 600,000 voters in the past month, equivalent to one-tenth of the population of New York City! However, in 2022 alone, the number of newly established companies in the United States will reach 1.7 million, which is 100 times the number of DAOs. We still have a long way to go.

From the beginning of 2021, monthly new and active Spaces began to increase slowly, and began to grow rapidly in November, and will remain at a high level in 2022 and the first half of 2023. continue to increase. The surge in the number of votes and new spaces since 2023Q2 may be partly due to voting miners, which will be discussed later.

Affected by various black swan events, the TVL and NFT trading volume of DeFi began to decline significantly in the summer of 2022, but the new and retained Voters in the Snapshot did not follow the decline, but maintained a steady increase. Compared with DeFi and NFT, which are strongly affected by market cycles, DAO still demonstrates its resilience and vitality even when the entire encryption market is relatively quiet.

Space

Creating a Space is easy and costs almost nothing, demonstrating the permissionless nature of DAOs. This new form of organization provides a new paradigm for human collaboration, involving various types of social interaction, agreements, investments, creators, services, etc., and is expected to expand to more unknown areas.

As can be seen in the figure below, the active DAOs are concentrated in the leading DeFi and Crypto Infrastructure projects. The cumulative number of voters of Stargate DAO has reached 655k, which is close to one-third of the number of employees of Wal-Mart, the largest employer in the world. As you can see in the figure below, in terms of governance (voters, number of votes), the top spaces are mainly concentrated in DeFi and infrastructure projects. The top space dominates most of the governance activities, and D shows the head effect of DAO. The number of proposals is clustered between 1 and 500; too many or too few proposals can indicate inefficient governance.

The varying nature of different DAOs results in varying levels of proposal and voting activity. The Stargate DAO has the largest number of votes and voters, with an impressive 655,000 voters, nearly a third of the total workforce of the world's largest employer, Walmart. The DeFi lending protocol Aave involves frequent parameter updates and protocol improvements, so the number of proposals is relatively large. Despite the lower turnout, Aave came in second in terms of cumulative total votes.

A more in-depth data analysis of Spaces reveals that most Spaces are "meaningless DAOs" with very few (less than 10) followers, proposals, and voters, and lacking basic features such as websites or social media addresses. element. These DAOs could be created by voting miners (for airdrops like Gitcoin Passport), submit few proposals, or be filled with meaningless proposals like "Will BTC drop below $30,000?" Is the quarterly crypto market bullish?" or "Are you all participating in the airdrop?" If you define more than 100 voters as an actively active DAO, the number is around 2k.

Proposal

Most spaces only allow a limited number of authors to submit proposals, so the number of proposals follows a similar pattern to the number of active spaces. Slow growth in 2021, stable growth in 2022, and significant growth in the second quarter of 2023.

Voters

Voters and vote counts have grown steadily, relatively unaffected by external market conditions. In addition, the gradual accumulation of existing voters also reflects the expansion of real users (excluding voting miners).

Network

The activity of DAOs in the network can show the adoption of the network and the preference of DAOs to a certain extent. From the perspective of the network, no matter in terms of the number of active Spaces or the number of votes, Ethereum has undoubtedly been the number one, accounting for about 70% of the share, which is consistent with its leading position in the blockchain.

Before 2022, Alt-L1 such as BNB, Polygon, and Avalanche once occupied a large share of monthly votes. From the beginning of 2022, Layer 2 such as Optimism and Arbitrum began to emerge, weakening the development momentum of Alt-L1. After February 2023, the number of Optimism monthly votes will drop sharply, which may be related to the end of its governance airdrop.

Voting s

One of the main challenges of DAO governance is to design an effective voting mechanism, which defines how users vote and how the final result is calculated. Snapshot already supports voting systems including Single choice, Basic, Weighted, Quadratic, etc., which can be configured at the Space setting or individual proposal level. However, according to the data analysis of the share of votes and proposals in different voting systems, simple Single-choice voting and Basic voting are the most popular voting systems, accounting for more than 90% of the shares. This shows that DAO users still prefer the easiest way to vote.

While simple mechanisms are easy to use, they can lead to problems such as poor flexibility and low engagement. If the novel voting mechanism is to be adopted, it may need to rely on long-term user education, so as to effectively tap the wisdom and resources of the group and serve the goals of the organization.

Voting Strategies

A voting strategy is a set of conditions used to calculate a user's voting power, enabling Snapshot to calculate the final vote for a given proposal. Strategies are defined in the Space settings, and each space can choose up to eight voting strategies. Snapshot has more than 400 voting strategies, and the default strategy is erc20-balance-of, which calculates the balance of predefined ERC20 tokens for each user.

According to the number of votes, the strategy does not show a single polarization, but a variety of richness. Even the most popular strategy, erc20-balance-of, has less than 20% share and gradually decreases over time. Various voting strategies such as erc20-balance-of-delegation, erc721, ticket, mulitichain, etc. ensure that DAOs of different types and purposes can customize the power distribution mechanism according to organizational characteristics. These interesting voting decision-making strategies will be tested and competed by the market, inspiring people to innovate and explore the DAO governance mechanism.

Worth mentioning is the rise of voting strategies with delegation. Compared with private companies, DAO also needs charismatic community leaders and efficient execution, but democracy should give priority to efficiency. But that necessarily leads to less engagement, and it doesn't give more weight to people with more expertise. Delegated voting allows voters to delegate their voting rights to other individuals who may have more time to investigate proposals, participating in governance through proxy. The number of votes using the voting strategy with the delegation function began to increase rapidly at the end of 2022, accounting for nearly 50% of all votes in just half a year.

Subdivided into specific DAOs, take Apecoin DAO related to NFT and Balancer related to DeFi as examples. In both DAOs, the percentage of votes using the delegation strategy has gradually increased slowly but steadily.

It is worth noting that despite the small percentage of voting power using delegation strategies, the percentage of voting power using delegation strategies has spiked significantly over the past year. Now, Apecoin DAO has obtained more than 50% of the voting power through delegation, and the proportion of Balancer is even more than 90%. In the long run, delegation is likely to become the default choice for DAO voting strategies.

Summarize

In this article, we select Snapshot, the most commonly used voting tool in DAO governance, to analyze the development of DAO. Compared with traditional organizational forms such as companies, DAOs are still in their infancy, both in terms of the number of active DAOs and the number of participants.

However, we also observed that the vitality of the DAO was not affected by the volatility of the cryptocurrency market. DAO is redefining human organizational structure and political system from scratch, and its iteration speed is a thousand times faster than the traditional historical process. The innovation and exploration of voting strategies in Snapshot embodies one aspect of this evolution.

The governance design of DAO has gone beyond the technical boundary of the blockchain and returned to the basic idea of human organizational structure. We believe that the fundamental purpose of DAO is to reduce the cost of organizational coordination through technology. Once we grasp the core "primitives", the door to innovation in DAO operations will open.