Navigating the path to decentralized governance

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Crypto projects are increasingly turning to DAOs to hand governance and treasury control to their communities.

Decentralization is one of the most appealing aspects of cryptocurrency. When it comes to enabling decentralized governance, the challenge is getting there. After all, every crypto project begins its life as a centralized entity that’s controlled directly by its founders, who write the code, design its features and decide on its objectives. It’s only when the project is up-and-running that control can be handed off to its users, so how do they go about that?

For inspiration, project founders can look to earlier projects that have successfully navigated the transition to decentralized autonomous organization or DAO-based governance, such as Decentraland and No NPC Society.

During these early days, quick-decision making is necessary for the project to start getting traction. That’s founders will act like benevolent dictators, deciding on everything from its technical architecture to its tokenomics. However, this centralization contradicts the long-term vision of decentralized finance and web3.

That’s why the transition to a Decentralized Autonomous Organization is a key objective, but one that must be made gradually to ensure its survival. The main risk is that the project’s community might be too immature and lack the necessary expertise or structure to manage a complex protocol, so most introduce decentralization and community participation in stages.

The first step is for the founders to design the main governance mechanism, which usually involves creating some kind of governance token that’s used to assign voting rights to the community. In the case of Decentraland, its first step was to create the Decentraland Foundation, which included a community forum for members to propose and debate new ideas. It then introduced the MANA governance token. By holding MANA or LAND tokens, Decentraland users can propose platform changes or ideas on how to spend its treasury and vote on them.

The next step for Decentraland was to implement non-binding “advisory” votes as a test of its voting process and governance mechanics without risking the protocol. It then enabled on-chain voting for minor protocol parameter updates, such as its fee structure and interest rates to minimize the risks associated with implementing community decisions. Finally, it progressed to full voting, where the community can propose changes to the entire protocol, and also vote on its treasury allocation.

Crypto projects can only achieve full DAO autonomy when the core team relinquishes every aspect of control they have, including administrative rights over protocol changes and treasury spending. The treasury can be seen as the “vault”, while governance rights provide the “keys” to the kingdom. When these are handed over, code finally becomes law, with changes executed based entirely on community consensus, rather than a founder’s decree.

To become truly decentralized, projects must ensure that their codebase becomes fully immutable, so that the founders can no longer make changes on a whim. This means that code updates, bug fixes and feature add-ons can only be made when the community agrees.

DAOs must also set up a self-sustaining treasury that generates revenue for the protocol to fund its operations and development. Revenue can be generated through transaction fees, interest on loans and via other mechanisms – these funds are then deposited directly into the DAO treasury. The community will then make proposals and vote on how these funds should be allocated.

When a project gives control of its code and treasury to its community, that signifies the final act of the transfer of power. That’s now the major goal of No NPC Society, a memecoin and decentralized identity project that embraces the “Simulation Hypothesis.” Its DAO roadmap calls for a rapid transition, where the vault and the keys will be handed to the community within six months of its private and public token sales. To do this, it’s using Solana’s Realms platform to streamline the creation of its DAO and evolve its native NONPC coin into a governance token that bestows voting rights on holders.

To underscore its decentralization, No NPC Society’s DAO ecosystem will be governed by transparent multisig vaults to ensure full visibility into its democratic process. In this way, the project is designed to outgrow its founding team, who will step back to become no more than community members themselves.

The shift to DAO governance is not without challenges, and many projects struggle with problems such as decision paralysis, low voter turnout and the risk of “whales” (large token holders) obtaining too much influence over the voting process.

Successful DAOs can mitigate these challenges in various ways. The first and most important step is to create a structure for community members to submit proposals and make sure their suggestions and the assumed impact is clearly spelled out, with simple “Yes” or “No” choices for voters.

To deal with voter apathy, many projects try to incentivize DAO participation in some way. To prevent whales from exercising too much control, projects can implement more complex voting models that distribute power more equitably. Possibilities include reputation-based governance, where voting weight is based on an individual’s contributions to the project instead of token ownership. Alternatively, quadratic voting can be used to create a system where the votes of large token holders carry less weight than those with only a small amount.

The path to DAO governance is a complex one that involves navigating many technical hurdles and it can only be navigated at the right time, once an established community takes shape. That’s why the handover of control to a DAO is often seen as a defining achievement that signifies a project’s maturity and its commitment to decentralization. When control and ownership is distributed across a large global community, projects can enhance their longevity and credibility.

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