Table of contents
- DAO whale token holders generally call the shots and can dictate how their communities are run
- DAO participants pay pricey fees in order to go on-chain to vote, thus discouraging greater voter participation
- DAO members have a hard time tracking new proposals due to the poor push notification systems
- A DAO without engagement is an exercise in futility
DAOs — Decentralized Autonomous Organizations’ development and growth appear to have taken a quick progression since 2016 when the first DAO that almost led to the demise of the Ethereum network was launched. By 2019, there were 10 active DAOs which jumped to 76 by 2020. While everyone’s eyes were fixated on the NFT boom in 2021, DAOs are staging a stealthy takeover exploding by over 4400 spaces in 2021, nothing short of a Cambrian explosion.
DAOs are most importantly virtual spaces where different people with shared passion about the same subject converge, hang out and join forces to achieve ambitious goals. We saw this recently in ConstitutionDAO, which sprang up in November and helped attract unusual mainstream attention to DAOs when it attempted to win Sotheby’s auction of a rare original copy of the US Constitution. ConstitutionDAO raised $47 million within 48 hours but failed just by a hair’s breadth to close the bid. Yet, this attracted mass coverage from the mainstream media of how DAOs can help redesign user engagement, primarily the significant disconnect of Web2.
As the numbers swell, so is DAO token and asset under management shooting up as well. Top DAO tokens are currently collectively worth over $29 billion, marshalling around $11.7 billion in AUM. But it’s not all rosy. The overall DAO engagement for some of the most heavyweight DAOs is abysmal when pitched against their AUM.
A quick look at Snapshot shows there are about 4,472 spaces. ENS, Gitcoin, Uniswap etc., rank among the most active DAOs, but that’s just about how far the engagement goes for most DAOs. To get a synopsis of how active DAO engagement is for most DAO members, DeepDAO comes as a veritable tool. For instance, BitDAO, with 14,526 members, ranks second on Deep DAO based on AUM with $1.66B but ranks poorly with just 5 proposals with a paltry 22 voters resulting in 0.2% voter participation. In contrast, with 59,276 members, ENS ranks 9th on the same leaderboard with 7 proposals and overwhelming 100% voter participation among its members.
Understandably, DAOs have exploded as a new form of social expression, crowdfunding, collector group etc., especially in their quests to extract better engagement by individuals compared to the norm obtainable in most Web2 setups. However, engagement between DAO members still ranks low. José Nuno Sousa, Chief Legal Officer of Aragon, a DAO as a Service platform, believes that tokenization of companies will be the next trend that will involve regular shares after the tokenisation of assets. According to Sousa, DAO members will hold company tokens rather than shares that are tradable on different secondary markets, corresponding to different types of “participation—or stakes—in the company” which he says “gives engagement.” But before that kind of paradigm becomes the norm, DAOs have first to tackle the problem of low engagement within their different spaces. In this situation, the most active contributors can get frustrated by the passive level of engagement of the less active ones.
This piece diagnoses the different factors that cause low member engagement for DAOs and ways to alleviate these problems.
DAO whale token holders generally call the shots and can dictate how their communities are run
A DAO by design allows member participation (creating and voting for governance proposals) through tokens. As a distributed autonomous organisation, its members collectively make decisions by voting (through the DAO’s token) to accept or reject a proposal automated through smart contracts. The burning question has always been: to what extent or degree do those who hold a large share of a DAO’s token influence the decisions (proposals and subsequent voting outcome) being made in a particular DAO?
Similar to how large stockholders in a company can sway decision making, whales who hold more DAO tokens usually get their way even if they have to ram it through resulting in an unfortunate side effect of the centralization due to their buying power. This continues to spark up heated debates on how flawed DAOs are especially when it comes to promoting the tenets of decentralisation and protocol democracy which is the basis of most DAOs.
Crypto Twitter is awash with repeated debates on how DAOs are susceptible to centralisation because a few people (especially DAO founders who have allocated massive amounts of the DAO’s token to themselves).
Protocol spaces on Snapshot have over 220 spaces with ENS, SUSHI, Aave, Olympus DAO, Uniswap etc., as some of the most active spaces within this category. A recurring decimal among some of these projects is attracting a large following by airdropping tokens to early adopters. The number of DAO members in these spaces are substantial.
For instance, while a new DAO announced its launch on Twitter streets, one of the concerns a Crypto Twitter member quickly asked was how this doesn’t snowball into centralization, especially as the early adopters may have an undue advantage and amass massive amounts of the DAO token.
Even Vitalik Buterin, the brainchild behind Ethereum that houses most of the DAOs in existence, has demonstrated his doubts on coin voting, which most DAOs practice. In one of his latest treatises, “Moving beyond coin voting governance,” Vitalik argues that small groups of wealthy participants ("whales") are better at successfully executing decisions than large groups of small-holders. His argument was based on the premise that this results in voter apathy from smallholders, which we will discuss in the next section of this article. And because the small DAO token/coin holders have an insignificant influence on the outcome, they have little incentive not to be lazy and vote. According to Buterin, “even if there are rewards for voting, there is little incentive to research and think carefully about what they are voting for.”
Another fallout of whale members in a DAO is that the swaying power of large coin holders could result in a conflict of interests in which wealthy actors in a constituency are also holders of tokens of another DeFi DAO platform.
How tracking tools can help mitigate the DAO-Whale dilemma
Since a DAO token empowers holders to participate in governance, a whale who realises that any particular space does not enforce token lockups could take advantage of this. Whales could simply buy up large amounts of the DAO’s token at a moment’s notice, vote in the worst interests of the application and general interest of the larger DAO members. Whales could also sell all their holdings immediately after the voting period without incurring any penalty.
A tracking feature or tool could prove helpful in this case. Native tracking of tokens from DAO members wallet addresses can help easily fish out irregular token movement from wallets during voting proposal seasons.
DAO participants pay pricey fees in order to go on-chain to vote, thus discouraging greater voter participation
Governance is an essential part of DAO functionality, and the right of participants to vote, accept or decline a proposal is of utmost importance. But what happens when that right can not be exercised fully? It places limitations on a DAOs engagement and eventually its growth. Of course, DAO voting already has a limiting factor of unequal voting power. This is because participants with greater holdings of coins have more votes than those with a relatively lesser number of coins. What this means is that just a fragment of participants will participate. If an excessive gas fee for on-chain voting is included, another limiting factor for participating in a DAO. Users with lower amounts of coins may likely not join as they can not afford the gas fees. High gas fees can also cause disenfranchisement within a DAO as participants cannot raise or vote on proposals.
A study on transaction fee price in the Ethereum related DAOs indicates its impact on user activities. A typical example would be the analyses of 5,580 transactions from 7,825 users grouped in 191 DAO communities. The study used a VAR model and calculated the daily time series of the average fee value and the DAO operations. The result of the analysis indicates that gas price affects the activity of DAO users.
The multifaceted impact of pricy gas fees
The impact of expensive gas fees on a DAO goes beyond its governance. Other on-chain activities are also affected. For instance, taking a DAO activity such as creating NFTs, while it is possible to develop them as part of DAO activities, Minting prices can be high sometimes. So who bears the cost? The DAO or the participants? While different platforms have different technical requirements for minting NFTs, new standards are needed to reduce the gas fees that participants have to pay to carry out activities on a larger scale.
Pricey Gas fees also affect the reconciliation of sales against proposals. One way to determine if the engagement in the DAO is performing is through interesting observations and analytics on interaction with proposals. This may even influence future proposals or share offerings. Participants can follow the proposals, vote, use standard patterns, and share profits on tasks. However, if gas fees can be tracked every time a proposal is dropped, participants would be able to get in to vote at the right time, cutting out high gas fees. In addition, DAO participants.
Also, DAOs are still somewhat in their early budding stages and can be a bit techy and complicated for people who are not tech-savvy. Adding expensive gas fees to this challenge may alienate them from engaging with DAOs. As of December 12, Gas fees were at a low of 65.95 Gwei, as compared to the price of February 21, which was at a high of 373.80 Gwei.
Most DAOs opt for Layer 2 solutions such as Polygon for fundraising or rival chains like Solana to offset gas fees. However, until layer 2 solutions become mass production effects of DAOs, we need a simple overview which presents a user friendly and simple to use DAO dashboard with basic functionality.
Gas fee tracking as a solution
DAO operators are constantly looking for a solution to Circumvent disenfranchisement resulting in high gas fees and reduced participation in DAO governance. Imagine a DAO stakeholder who wants to raise a proposal at the height of the Ethereum gas hike? This means that the stakeholder has to spend more on gas fees, participants in the voting process have to spend more equally, which may hamper participants.
With a solution that helps members calculate gas fees before setting up a proposal, DAO participants would know cost implications before setting up a proposal and participating in on-chain governance. By integrating a Fee Tracking feature to a super DAO such as Snapshot, DAO participants can track the actual cost of the gas fees before raising a proposal or participating in proposals. This feature can enable DAO participants to set triggers for gas fees tracking the Gwei price movement.
DAO members have a hard time tracking new proposals due to the poor push notification systems
An average person's attention span is currently below 8 seconds. In this fast-paced society, attention has become a scarce commodity. Why is this little fact important in a subject about decentralised autonomous organisations? DAOs, by their nature, are social environments that are community-driven, and one of the key elements of any successful community is engagement.
A glance on DeepDAO's dashboard, Voter Participation - a metric that tracks DAO members' ratio who participate in a particular proposal shows significant low voter turnouts. Very few DAOs like ENS, Aragon, Yearn, manage to secure 100% voter participation. This particular metric reveals a symptom of one of the major problems DAOs face - contributors engagement. DeepDAO, a data analytics platform that provides insights into decentralized autonomous organizations also reveals that metrics such as AUM - used to gauge the amount of assets under the management of a DAO, is not a good measure of how healthy a DAO is or how good it's governance system is. An instance of this is the DAO project mStable which ranks very high by assets under management. Still, a closer look at the voter participation ratio reveals that only nine members participated in 29 proposal votes, indicating a very poor membership engagement.
Voter Apathy
During the beginning stages of the first DAO project, weeks after the project started receiving its first proposals, none of the proposals met the required quorum. Proposals raised a measly 0.83% to 8.94% quorum out of the 20% needed, regardless of how critical these proposals might be. Varying explanations existed for the low voter turnouts with some saying it's because of a lack of serious proposals. Others attributed it to technological barriers, citing the difficulty in acquiring The DAO Tokens needed for voting.
Fast forward to the present day, tokens are easily accessible, and platforms like Snapshot.org have lowered the technological barriers and difficulty encountered in DAO voting participation. With their IPFS-based storage system, they have effectively eliminated fees incurred in the process of moving tokens from one wallet to another, as is the case in traditional cryptocurrency voting. Yet this problem of low voter turnout in DAO systems is still prevalent today. The issue of voter apathy is not exclusive to decentralised autonomous organisations. It is a common phenomenon prevalent in human society, plaguing even the traditional corporate governance systems. It stems largely from a lack of interest and a sense that one's votes won't make a difference. For a system heavily dependent on community contributions and community governance, voter apathy presents a significant point of failure that needs to be addressed.
Implications of low voter turnout on DAOs
Decision-making processes on decentralised autonomous organisations are transparent and enforced by codes on a blockchain without any central intermediary. Since these decision-making processes are community-centric and plutocratic, voting is not one person, one vote, but is determined by the number of tokens a member holds. The level of participation in collective decision-making significantly affects the security of such governance systems. Low voting turnouts allow members with large token holdings relative to the total supply to swing the numbers substantially and manipulate governance.
A case study is the distribution of ownership shares among MolochDAO members, where Vitalik Buterin and Joseph Lubin each have 1000 shares which translates to 10 times the voting power of most members (full distribution details here ). This distribution means that voting activity in MolochDAO is concentrated around very few accounts that are the most active participants in proposal voting. This dynamic poses a significant security risk to the system. A theoretical example illustrates that a combined "No" vote by Buterin and Lubin on a proposal would require a minimum of 20 accounts, each with 100 shares voting "YES" to counter it. But with the 30% maximum current turnout rate on MolochDAO, there's little chance that the remaining members will be able to rally enough support to counter a combined Buterin and Lubin voting block.
Low voter turnout can drastically impede the pace of decision-making in a DAO system, subsequently stalling progress, and in the worst case, leading to the death of a DAO. A good example of the indecision that low voter turnouts can cause is in the case of MakerDAO, whose proposed vote to decrease stablecoin stability fee by 2% failed due to members inability to stake the minimum amount of MKR tokens needed to vote on the proposal.
Various theoretical solutions have been proposed to help curb this significant point of failure in the DAO systems. Polkadot, which also uses a token-weighted voting system, proposes what they call Adaptive Quorum Biasing Scheme. A scheme that allows for the supermajority of votes required to pass a referendum will change depending on voter turnout. This is best explained below;
"A positive turnout bias requires a heavy supermajority of aye votes to carry at low turnouts, but as turnout increases towards 100%, it becomes a simple majority-carries as above. We call this a “positive” turnout bias because the required margin of ayes increases as turnout increases."
"A negative turnout bias requires a heavy supermajority of nay votes to reject at low turnouts, but as turnout increases towards 100%, it becomes a simple majority-carries as above. We call this a “negative” turnout bias because the required margin of nays increases as turnout increases."
Another proposed solution is the Time-Lock Voting which subjects token holders to increase the weight of their vote by locking their shares for a given amount of time after voting, the trading opportunity cost for increased voting power. In MolochDAO's case above, opposing the Vitalik-Lubin voting block would only require the remaining members to lock their tokens for the maximum amount of time. While these solutions provide good ways to tackle the low voter turnout issue, without proper community engagement to facilitate voter participation, there's no guarantee these solutions will be applied effectively. In a society where attention is scarce, information asymmetry can be a major fact in increasing voter apathy. A major tool that can be critical in facilitating DAO member engagement and increasing voter participation is the Push Notification feature.
Web 3 Push Notification - A critical tool for improved proposed tracking and member engagement
Push Notification mechanisms have been native to various Web 2 platforms since the beginning of the 21st century. This technology has been effective in helping capture user attention, improve platform traffic, facilitate the conversion of users into customers and drive user engagement. Statistics have shown that users subscribe to push notifications three times more often than email newsletters. More so, the click-through rate of push messages is seven times higher than that of email newsletters. There's also a 45% increase in transitions to a website or an application. These numbers underline the importance of push technology on driving user engagement, and this very crucial tool is lacking in Web 3 applications.
A push notification tool can enable DAO platforms to significantly improve member engagement, voter participation and community growth by keeping members in the loop with recent activity updates on the platform. For instance, EPNS.io enables its users to opt-in for alerts to get needed notifications and engage with their respective DAOs. Also, Hal.xyz equips DAO users with tools to get web 3 notifications. Users simply have to create triggers for each web3 task and get notifications on slack, telegram, or mail.
A DAO without engagement is an exercise in futility
With the increase in DAOs and their importance to the blockchain and crypto ecosystem, there's a burning need to proffer solutions to issues affecting engagements within DAOs. Just as no one engages in constructing a tower without first setting a blueprint, setting up a DAO without a plan to foster engagement and creating solutions is an exercise in futility. Simply put, a DAO without an engagement strategy is a DAO derailed from its objective.
We have seen factors that affect DAO engagement ranging from pricey gas fees, lack of tracking tools, lack of features such as push notifications to make web 3 interactions easier and seamless for DAO members. However, for every problem, there is an equal and opposite solution. Platforms such as Hal.xyz enable users to get web 3 notifications simply by creating triggers for each web3 task and get notifications on slack, telegram, or mail. These tools will allow DAO members to engage more without feeling left out.
Crypto.com also has a feature that allows users to track gas fees. However, the downside is that users may not get a notification when gas fees skyrocket or subside. Etherscan also provides a similar feature to Crypto.com but tracking via notification is a feature that is yet to become popular in the web 3/DAO ecosystem. However, products such as EPNS.io and HAL.xyz create solutions that will ease DAO interaction. Hopefully, more solutions tailored to DAO engagement will surface in the future.