Governance Innovations

Unlike corporate and public governance, DAO Governance is both public and open source. The principles of the open-source community, which anyone can copy and reuse for free, provide many opportunities for governance innovation––some of which we have shared below.

Metagovernance, Hybrid Governance, and Market Governance are three categories of governance innovation that may offer practical solutions concerning our problem space.

Metagovernance

Metagovernance, in the context of DAOs, is the term commonly used to describe any activity where one governance mechanism, typically a protocol or a DAO, exerts influence on the governance of another DAO.

Metagovernance is a transparent, often automated, vote-buying mechanism that incentivizes a target DAO's token-holders to take an action that benefits the mechanism's stakeholders, e.g., influence over governance decisions and the direction of token emissions.

Metagovernance creates a secondary set of incentives, or meta-incentives, that augment the behavior of the target DAO's stakeholders.

In one-off instances of metagovernance, such as in the case of Fei and Index Coop, the Fei team gained influence in AAVE's governance using Index Coop's AAVE holdings.

There are also extended forms of metagovernance with DAOs whose entire purpose is to control the governance of other DAOs, such as Convex Finance.

Curve emissions with Convex Finance

Convex maximizes control over CRV emissions on the Curve protocol.

Convex works by reimplementing Curve's vote-escrow token mechanic to pay CRV holders with CVX emissions in exchange for locking their CRV tokens in Convex's contract.

Convex, in turn, locks these CRV tokens using Curve's contracts to maximize their CRV emissions, which they share with CVX holders, and voting power, which they use to vote for increased token emissions for pools selected by CVX holders.

As of this writing, the Convex protocol controls 51% of all vote-escrowed CRV, an indicator of the effectiveness of meta-incentives in one-token, one-vote governance mechanisms.

Redacted Cartel, Hidden Hand

Hidden Hand from Redacted Cartel facilitates vote-buying campaigns for participating DAOs.

Vote buyers, or bribers, can deposit bribes for governance proposals at participating DAOs, and users can delegate governance tokens to the Hidden Hand protocol. The protocol then distributes votes to maximize returns for its users in exchange for a 4% commission of bribes received.

For example, as of September 7, 2022, $851,364 worth of bribes were deposited on Aura Finance and $2,346,024 on Balancer.

Hidden Hand also allows its partners to operate bribe marketplaces so their token holders can sell votes to bribers directly.

FEI Asset Listing on AAVE with Index Coop

Index Coop, a provider of token indexes, actively encouraged metagovernance for a small number of the tokens held in their DeFi Pulse Index, namely Maker, AAVE, and Compound--a service they promoted as metagovernance-as-a-service.

Under this arrangement, holders of INDEX tokens could use governance tokens held as part of the index service to make or vote on proposals within MakerDAO, AAVE, and Compound.

In September 2021, Fei protocol, a stablecoin issuer, created a proposal to list the FEI token on AAVE, using the AAVE token holdings in Index Coop's DPI.

AAVE's governance requires 80,000 AAVE tokens before a holder can make a governance proposal. At that time, AAVE was trading at $327.04, setting the cost of proposal creation on AAVE at over $26m.

As a result of metagovernance, the Fei team used $4m of INDEX tokens to control over 118,000 AAVE, worth ~$36m, allowing the team to list their token on AAVE successfully.

Hybrid Governance

Hybrid governance combines two or more governance models within a single DAO governance mechanism.

DAOs typically pursue this approach where DAO governance designers believe they can better align outcomes to the DAO's objectives by limiting the influence of stakeholders whose preferences are over-represented in a one-token, one-vote model.

Implementing hybrid governance can also give greater weight to the preferences of a group of stakeholders who are underrepresented or have no means to express their preferences except to "vote with their feet," which is a loss for all stakeholders.

Hybrid governance modulates the influence of one set of stakeholders by distributing voting rights to another set of stakeholders, especially groups that may be marginalized by the preferences of dominant voters.

Voting power is redistributed until each group can provide sufficient checks and balances on the power of other groups.

Lido's stETH Dual Governance

LidoDAO’s is governed by LDO holders. Unfortunately, users that stake ETH in the Lido contract receive stETH, which confers no voting rights to the holder.

This structure allows Lido holders to make decisions that benefit LDO holders at the expense of stETH holders.

The goal of Lido's Dual Governance proposal "is to prevent the Lido DAO governance from changing the covenant between the protocol and stakers without consent from the latter."

The proposal grants stETH holders a vetocracy over proposals deemed to break the agreement under which users stake their ETH on Lido. stETH holders can signal their disagreement with a proposal by staking stETH in a vote escrow contract. Once staked stETH reaches a threshold, the proposal is temporarily blocked to allow the community to negotiate. stETH holders can vote to block, amend, or pass the proposal after negotiations.

This power gives stETH enough power to limit opportunism by LDO token holders without burdening stakers with ongoing governance overhead.

Optimism's Hybrid Governance

Optimism, through the Optimism Collective, has implemented a bicameral legislative process comprising a 'Token House' which grants voting powers through token ownership, and a 'Citizens' House,' which grants voting powers through non-transferrable NFTs or "soulbound tokens."

The Citizen's House reserves its remit for retroactive public goods funding. In contrast, the Token House's remit is closer to traditional DAO governance, e.g., governance fund grants, protocol upgrades, director removal, and so on. The team explains that this approach is "a large-scale experiment in non-plutocratic governance," but so far, there are few details.

Market Governance

Market Governance is co-opted from Market Governance Mechanisms to describe a mechanism that leverages the competitive forces of the open market to influence the behavior of stakeholders.

As DAOs have scaled in scope, market cap, and contributors, token-based governance has created opportunities for corruption and in-fighting, especially where the DAO's operations are complex.

As the range and diversity of stakeholders increases and the potential set of actions and decisions expand, governance must increase its throughput to accommodate without creating a self-serving bureaucracy.

MakerDAO’s MetaDAOs

The solution proposed by Rune in Endgame constitutes a decomposition of MakerDAO into a single core DAO housing the main functions of the Maker protocol and a collection of smaller "MetaDAO" governance units with their own governance and governance token. "MetaDAOs" can pursue any viable market opportunity while leveraging the resources of the core DAO.

This innovation allows MakerDAO to maintain several governance-controlled parameters for the core protocol. At the same time, the market provides the incentives to steer MetaDAO governance to pursue new market opportunities.

MakerDAO is in the process of deploying this governance upgrade, so its effects are yet to be measured.