DAOs are a prominent feature of web3, leveraging the internet and blockchain technology to offer a novel, decentralized management structure for enterprises, initiatives, and communities.
Members of a DAO can participate in organizational decision-making by purchasing a governance token, which corresponds to a specific amount of voting power within the organization and can be traded on the secondary market. Although DAOs aim to democratize power, these organizations' ownership distribution is typically highly concentrated, as indicated by governance token data.
A Breakdown of the Concentration of Governance Token Holdings
An analysis of token governance distribution across ten major DAOs reveals that less than 1% of all token holders control 90% of the voting power in several major DAOs. This concentration of voting power has significant implications for DAO governance.
If they coordinated, the top 1% of holders could theoretically outvote the remaining 99% on any decision, which may discourage smallholders from participating in the proposal process.
To create a proposal, a user must hold between 0.1% and 1% of the outstanding token supply, and to pass it, they must hold between 1% and 4%.
This means that between 1 in 1,000 and 1 in 10,000 holders within these ten DAOs have enough tokens to create a proposal. Overly concentrated voting power can result in decision-making that contradicts the principles of decentralization on which web3 is built, as seen in the case of Solend DAO's decision to take control of a user's funds against their will.
The proposal passed with over 1.1 million "yes" votes, but more than 1 million came from a single user with enormous governance token holdings. With their vote, the motion would have passed the necessary quorum.
This incident triggered a backlash from the cryptocurrency community, raising questions about the ability of a DAO to act in the best interest of all participants when some voters control such an outsized share of governance tokens. There are trade-offs in the number of holders who can create a proposal, as too many may result in low-quality proposals, while too few may undermine the decentralized governance claims.
The Governing Process of Most DAOs
The governance process for DAOs varies from one to another but generally involves the participation of token holders who can vote on proposals or delegate their voting rights to others. The exact process differs from DAO to DAO, but let's take the example of Uniswap, the largest DAO.
Uniswap is a decentralized exchange governed by a DAO where anyone holding UNI tokens is a member. They can participate in governance by delegating their voting rights, expressing their opinions, or submitting proposals. Proposals can range from financing a grant program, integrating a new blockchain, or reducing the governance proposal submission threshold.
Before a proposal can be submitted, it must pass temperature checks and consensus checks. The temperature check determines if there is sufficient community support for a proposal. A majority vote with a 25,000 UNI yes-vote threshold wins. The consensus check establishes a formal discussion around a potential proposal. A majority vote with a 50,000 UNI yes-vote threshold wins.
If both checks pass, an official governance proposal can be put to the vote, and there is a seven-day deliberation period to discuss the proposal’s merits on governance forums. If there are at least 40 million yes-votes with no-votes as a minority at the end of the period, the proposal passes and will be enacted after a two-day timelock.
While not all DAOs function like Uniswap, most operate on similar infrastructure, using voting systems like Snapshot and chat servers like Discord. For example, Dream DAO is an impact-oriented DAO created by the charity Civics Unplugged and designed to provide Gen Zers with training, funding, and community support to use web3 to improve humanity. Their governance process is run by holders of SkywalkerZ NFTs, which function as both governance tokens and fundraising incentives.
DAOs exist in various categories, including DeFi protocols, social clubs, grant-makers, gaming guilds, NFT generators, venture funds, charities, and virtual worlds. While DeFi-related DAOs account for most of the treasury value and count, many DAOs focus on venture capital, infrastructure, and NFTs, suggesting that DAOs appeal to investors, developers, and artists alike. However, the lines between these categories are often blurry, as gaming DAOs often engage with NFTs, venture DAOs fund DeFi, and infrastructure DAOs support multiple categories.
Treasury Holdings of Most DAOs
Most DAOs' on-chain treasuries hold similar cryptocurrencies, with the stablecoin USD Coin (USDC) being the most commonly held asset, according to an analysis of 197 DAOs. However, stablecoins typically account for less than half of an on-chain treasury's value, with an average of 85% of DAOs' on-chain treasuries stored in a single asset, which is a stablecoin in only 23% of the DAOs studied.
These on-chain treasuries are as volatile as Bitcoin, with an average DAO with assets over $1 million having an annualized volatility of 82% versus 69% for Bitcoin. DAO treasury values are also fairly correlated with Bitcoin price movements, with 38% of on-chain DAO treasuries having correlations with Bitcoin between 0.5 and 1.00.
Regarding DAO treasury management, mergers and acquisitions (M&A) has yet to take off but are expected to become more common as the DAO model matures. DAOs have also been limited in terms of the types of instruments they use and hold, with few using loans or credit, likely due to their uncertain legal status. However, as DAOs mature, more standardized regulations, management strategies, and reporting practices will emerge.
Blockchain data suggests that DAO participants are advanced users of cryptocurrency services, with only 17.9% of DAO treasury funds coming from centralized services, while the remaining 82.1% originated at decentralized services. This indicates that most DAO contributors also engage with DeFi platforms and likely self-host their cryptocurrency, although demographic data about DAO participants still need to be collected.
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