How Chainlink Powers Decentralized Governance
Decentralized Autonomous Organizations, or DAOs, are organizations that aim to limit centralized points of authority or control. Instead, these organizations are communally governed through democratic processes, facilitated through smart contracts that lay out a clear and specific set of rules for the organization.
In simple terms, DAOs offer a transparent and decentralized way to crowdsource decisions. Commonly, DAO participants are able to submit proposals for certain initiatives, and then the proposals are collectively voted upon by members of the DAO. This decides the DAO’s direction and the key actions it will take to achieve its vision.
How DAOs Are Governed
DAOs take many shapes and forms. Each implementation is based upon the DAO’s vision, the services it provides, and the different actors within the organization.
However, most DAOs share a set of common features.
In any DAO, there needs to be a way for independent members to propose ideas to the community. DAOs must define which members can submit proposals and the potential scope of any individual proposal.
All DAOs need a dedicated voting mechanism. While the specific implementation can change, DAOs follow a basic framework that defines how votes are weighed, the requirements for a quorum, and the threshold for a successful or failed vote.
The vast majority of DAOs today use a token governance model. Any entity that holds the DAO’s underlying token is a DAO member, allowing them to vote, submit proposals, and more.
Usually, the weight of any DAO member’s vote is determined by the number of governance tokens they hold. Often, the more tokens you hold, the more your vote matters to the overall outcome of any proposal, although other models do exist, such as quadratic voting.
The defining feature of a well-functioning DAO is its ability to decentralize points of control and the level of transparency surrounding all operations.
In theory, this is accomplished through token governance, on-chain voting, and permissionless access to proposals. Anyone can enter the DAO, create proposals, and participate in community votes, making outcomes truly community-driven and free of centralized control.
However, as is the case for all decentralized systems, the devil is in the details.
The Limitations of Decentralized Governance
Governance tokens, on-chain voting, and permissionless access to proposals are the basic building blocks of decentralized governance. However, these mechanisms often require additional support to ensure that the DAO is decentralized and secure against bad actors.
Below are a few emergent limitations of basic DAO governance structures.
Centralized Token Ownership
Consider a simple token governance model in which one token is equal to one vote. Depending on the initial and ongoing token distribution model defined by the DAO, it’s possible that a single DAO member, or small group of DAO members, could hold a vast degree of influence over the voting process and the DAO’s direction—exercising centralized control over the DAO.
Low Voting Participation and High Voting Costs
A DAO is only as decentralized as the number of participating voters. If a DAO has thousands of token-holding members but only a small percentage of these members participate in votes, the core of the DAO—the decision-making process—is controlled by only a few members.
On-chain voting compounds this potential issue. In order to submit votes on-chain, users must submit a transaction and pay the associated transaction fee. In times of high network activity, increasing fees can disincentivize DAO members from voting.
Completely permissionless proposals can lead to spam and dilute contributor attention. For example, uneducated DAO members can incorrectly structure proposals and bad actors can use the proposal board as a means to freely post about unrelated topics. With enough of this behavior, the proposal board can become a mess of irrelevant ideas, ultimately harming the DAO’s ability to execute.
Unreliable Execution of DAO Functions
The scope of DAO functions is vast and differs greatly from DAO to DAO. However, the core concept behind execution is the same: How does a DAO ensure that a passed proposal is actually executed?
The pursuit of reliable and effective execution is a never-ending process of directly tying a passed vote to the execution of a particular smart contract function. For example, a DAO vote that rebalances treasury funds or locks up core contributor tokens until a later date. These functions must be triggered by an entity—creating a single point of failure.
How Chainlink Powers DAO Transparency and Decentralization
DAOs are still in a nascent stage. Most are blockchain-native and exist entirely on-chain in both their functions and the services they offer.
Chainlink offers a wide range of secure off-chain data and computation services that can help DAOs with all of the aforementioned functions, both now and in the future as they become more integrated with the real world. Below are a few examples of how.
Solving Unreliable DAO Execution With Chainlink Keepers
DAOs are becoming more intricate in their functions. Chainlink’s wide range of off-chain data and computation services help DAOs build truly automated and decentralized processes for end-to-end execution from proposal to action.
Specifically, Chainlink Keepers offer an all-in-one solution for the reliable, automatic execution of common DAO functions, such as:
- DAO treasury rebalances
- Unstaking/staking of governance tokens
- Execution once a voting period ends
- Vesting governance token rewards
The core issue behind many DAO limitations lie in the fact that smart contracts cannot automatically trigger themselves. When a DAO vote is passed, there needs to be an entity that triggers a particular function within the smart contract for an action to occur. Chainlink Keepers is the ideal solution, with Keepers run by experienced professional devOps teams continuously monitoring the DAO vote and triggering the smart contract if and only if the vote is passed.
Awarding the Right Contributor With Chainlink Data Feeds
As DAOs become more integrated with the real world, there are opportunities to monitor and track off-chain behavior on-chain in order to create a robust token governance model that awards the right contributors.
Consider the following example of a hypothetical DAO—Reforestation DAO. Reforestation DAO aims to use its DAO treasury to build a global initiative for the reforestation of land. DAO members are tasked with organizing reforestation initiatives across the globe and receive a dedicated portion of the budget to do so.
In order for a token governance model to be effective, the DAO needs a way to monitor off-chain outcomes to give DAO members who reliably execute upon their mission more influence over the DAO treasury through the distribution of governance tokens.
That’s where Chainlink Data Feeds can help. Reforestation DAO could collectively agree on how success is measured through satellite imagery and transfer the real-world data on-chain through Chainlink to directly tie outcomes to governance token distribution—effectively rewarding the right contributors for their role in furthering the DAO’s mission.
Random Sample Voting With Chainlink VRF
Regardless of whether it occurs off-chain or on-chain, voting participation is a hard problem to solve. Robust voter participation is a necessity for any democratic process, and DAOs are no exception.
One solution might lie in random sample voting—picking a group of DAO members at random to vote on a proposal. This can lower quorum requirements in a secure manner while still ensuring that the opinion of the larger community is adequately represented.
Randomized voting mechanisms require the use of a secure, on-chain random number generator (RNG). DAO members must have verifiable assurance on-chain of a provably fair selection process or the integrity of the entire process becomes subject to doubt. Chainlink Verifiable Random Function, or Chainlink VRF for short, offers DAOs a time-tested on-chain RNG that can be used for random sample voting.
Chainlink VRF can also help in certain dispute adjudication models, where an unbiased group of randomly chosen participants decides the outcome of a particular dispute, similar to a court jury. Chainlink VRF enables the verifiably random selection of judges to help ensure a truly fair process.
There are many uses for verifiable randomness when building fairer, more just processes around voting. A case in point: Chainlink hackathon winner D3LAB built a Probabilistic Quadrating Voting (PQV) solution that solves the problem of Sybil attacks in quadratic voting systems for DAOs with the help of Chainlink VRF.
Leveraging Chainlink Any API and Keepers to Relay Off-Chain Votes On-Chain
Currently, many DAO members incur a transaction fee whenever they vote on a proposal on-chain. When gas costs are high, voter participation can trend down and inhibit the DAO’s ability to make truly community-approved decisions.
One potential solution to this problem is to use Chainlink Any API to monitor off-chain votes and relay results on-chain in a secure and reliable manner. Chainlink Keepers can automatically trigger the smart contract to pull in the results for a final decision whenever voting ends. This eliminates the majority of gas costs associated with voting and helps less influential DAO members voice their opinions without losing out on fees.
Here, Chainlink services provide a best-of-both-worlds solution, with users paying less in gas fees while the vote is still binding on-chain.
Reducing Proposal Spam Through Off-Chain Votes Using Chainlink Oracles
Off-chain voting can also help solve the problem of proposal spam. DAOs can use multiple layers of proposals, with an initial proposal required to receive a certain number of votes before it’s formally presented to the entire DAO, to filter undesirable proposals from the start.
This kind of system would require DAO members to independently find supporters for their proposal before introducing it, with the voting threshold for initial proposals stopping low-quality proposals or those submitted by bad actors from being part of an official vote. Normally, extra voting requirements would place more fee burdens on DAO members, but using off-chain voting mechanisms and delivering the results on-chain through Chainlink oracles keeps network costs to a minimum while still enabling erroneous and malicious proposals to be filtered out.
From enhancing core functions to opening up new possibilities, Chainlink provides DAOs with a robust set of infrastructural tools built to help further transparency and decentralization every step of the way.
DAOs are reshaping the way society thinks about social coordination. To continue and accelerate this transformation, DAOs that leverage Chainlink can benefit from enhanced transparency, decentralization, and automation.
If you want to start upgrading your DAO today and need a source of external data or computation, refer to our documentation, ask a technical question in Discord, or set up a call with one of our experts.