If you've recently become interested in the web3 space, you may have encountered the idea of decentralized governance.
You probably have some intuitions about what it can mean, but if you want to explore what's behind the name, we have you covered with this short article.
What is decentralized governance?
Let's break it down: what does decentralization actually mean when it comes to governance in web3?
It's quite possible the first thing you think of when it comes to decentralization is a way of organizing government. This kind of decentralization occurs when decisional power is handed down to various levels of government, instead of having the power concentrated in a single central authority. This helps with preventing the overuse of power by a single entity, fighting corruption, increasing representation, and can improve efficiency.
This is not far off the ideas you may come across in the web3 space. One of the reasons web3 brings decentralized governance to the table is part of a wider push to change the paradigm on which Web 2.0 was built. Cognitive capitalism and the network effect promote the formation of monopolies and shape the Internet in a top-down fashion: tech is built to increase the possibility of commodifying information.
You can now see that decentralization seems to be a natural response to the accumulation of decision-making power in individual entities and an approach that gives Internet users a chance to regain digital sovereignty. Though blockchain technology is used for many things, perhaps the most popular manifestation of it being cryptocurrency, there is an increasing focus on how the tech can be used to manage and organize. People can participate in funding projects, running communities, and shaping ideas through new mechanisms that champion the ideas of decentralization.
Where and how decentralized governance happens
Decentralized governance gets put into practice in Decentralized Autonomous Organizations (or DAOs for short). As the name suggests, these communities gather together based on the idea of distributed decision-making power.
When it comes to DAOs oftentimes they carry some kind of economic incentive: creating digital decentralized venture capital funds, raising money for specific purposes, or creating new tokens. But DAOs can also be to set the development path of a given protocol or platform. As Bud Hennekes from Alchemy explains, we can think of DAOs in many different categories, depending on their core purpose:
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Protocol DAOs for governing protocols
- MakerDAO
- Uniswap
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Grant DAOs work to fund projects through grants
- Aave Grants
- MetaCartel
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Philanthropy DAOs help with social causes
- UkraineDAO
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Social DAOs that build communities, ex. around the arts
- FwB
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Collector DAOs that serve to invest in collectibles
- FlamingoDAO
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Venture DAOs work to invest in start-ups, projects etc.
- MetaCartel Ventures
DAOs are usually built on the Ethereum blockchain, which enables the creation of smart contracts. There are several frameworks that allow for DAO management, including DAOStack, Colony, Aragon, DAOHaus, and Boardroom.
Importantly, decentralized governance operates on two levels: off-chain and on-chain. As the name suggests, off-chain governance takes place "off the chain," meaning that decisions are made informally outside the code base of the blockchain (e.g., on forums, social media, etc.). In the DAO space, there are platforms that allow for off-chain voting, such as Snapshot, a decentralized voting system based on the IPFS (InterPlanetary File System) protocol, or Gnosis Safe. Similarly, on-chain governance takes place within the blockchain. Compound Governor or Tally can be used to conduct on-chain voting, to just name a few.
When it comes to voting, the most popular set-up with decision-making in decentralized communities is tied to owning a token. This is called coin voting and though obviously it has perks, it also comes with an array of challenges. Token-based governance is vulnerable to vote-buying and bribery, is susceptible to a certain types of attacks on the organization, and is often linked to low participation and short-termism. This can all lead to "whales," wealthy governance token holders, having the ability to promote their preferred proposals, even if it goes against the preferences of the community (you can read more about these challenges in this post).
There are alternatives out there. Among these, you can find new (or old, but updated) voting mechanisms, like quadratic voting (QV). In QV voters are allowed to allocate a certain number of tokens to express their preferences on a given proposal. The caveat here is that the cost of allocating additional tokens to a given proposal increases quadratically with the number of tokens already allocated.
You can opt for a model based on voting tokens with a quorum, in which a certain number of DAO members must participate in the vote for it to be considered valid. There is also the concept of liquid democracy - a form of delegated democracy in which a DAO member can delegate their vote to a representative (this model has been implemented in the Gitcoin DAO), as well as holographic consensus.
Broadening the horizons of decentralized governance
With new ideas in decentralized governance growing day-by-day, we need a space for experimenting with them and seeing how they work put to the test. For this reason, at Golem Foundation we have been working on Octant - a platform for testing various hypotheses around user control, voter engagement, and community funding.
Octant allows for running various governance experiments in a real-life environment and rewards user participation with ETH, one of the most popular cryptocurrencies. One of the most important aspects is that we focus on public goods: projects that further a common goal for the benefit of the community. Public goods projects often have some things in common: they're often free to use, open-source, and non-competitive (you can read more about public goods in web3 here).
Octant is still in its early stages of development but we already have a working Testnet version which you can play around with without the requirement of owning any crypto. Octant is a great gateway to decentralized governance - it has a low barrier to entry and the onboarding process is very straightforward (read this introduction which explains how to get everything set up and ready to play with). You just need a Metamask wallet (we have an article on this that you can read here) and some TestGLM which you can claim for free. We also have a community on Discord and we're always happy to answer questions on there and help you with setting everything up and explaining how to interact with Octant.
Now you have a fair idea of what decentralized governance is you can go out there and experiment.
Smooth sailing!