Almost all DAOs that exist today operate like public companies: there’s a token, ownership and decision-making is derived by tokenholdings. Now, if the DAOs only purpose is to turn a profit for their tokenholders in addition to some CSR initiatives, this is perfectly fine. However, some DAOs may prefer to be more akin to a community, in which case a pure tokenholder DAO makes it a plutocracy where a few wealthy whales effectively control the DAO, which is the shittiest possible outcome for a community short of a non-benevolent dictatorship.

The ideal way to launch a democratic DAO is to follow the cooperative model instead. There are tons of massively successful cooperatives with different models around the world to take inspiration from - right from boutique worker DAOs with a handful of people to multi-hundred billion dollar mega cooperative financial institutions. Of course, speculating on tokens is a big market in crypto, and coops don’t have tokens - possibly why they haven’t caught on. But I’ve already written an entire post about this topic, so let’s get back to tokenholder DAOs.

The most obvious way to add a democratic layer on top of or besides the tokenholders. Optimism Collective (aka OP Collective) is leading the charge on this front, and is the main reason it’s the only DAO I participate in, despite its many flaws otherwise. Optimism starts at the same base as most DAOs, with a tokenholder DAO. This becomes the Token House, and a democratic layer is added beside - the Citizens’ House.

How it’ll work, in theory: there’ll be an overlap between Token House and Citizens’ House, with different types of proposals calling for different voting standards. Here are some possibilities:

1. Token House only proposals: only the Token House votes on these.

2. Token House proposals but with Citizens’ House veto rights: Proposals Token House votes on, but under certain conditions Citizens’ House can veto these proposals, effectively acting as a check and balance.

3. Joint proposals Citizens’ House can vote on.

4. and 5) will then be the reverse of 2) and 1) leaning towards Citizens’ House.

In theory. The titanosaur in the room is - how exactly are citizens onboarded? As seen by the last 18 months in OP Collective’s efforts, this is extremely difficult with no clear solutions. The current method used is citizens nominating other citizens, and over time building a network. This is slow, unscalable, and introduces a different form of social centralization. Other methods like attestations, community participation metrics, usage metrics etc. are easily gamed. The problem is, citizens and their reputation are subjective and as I’ve mentioned for most of this year, this is the Achilles heel of public blockchains - we can only do objective outputs. There’s nothing more subjective than reputation and identity, and forcing these highly complex subjective variables into binary values is foolhardy at best, dangerous at worst. (The Black Mirror episode “Nosedive” is fun!)

Still, it’s a significant step forward over a pure plutocratic community. The best way is going to remain Citizens’ House onboarding citizens, but we have to find a more scalable way of doing it. One way could be using the very flawed methods listed above to create longlists of candidates, which Citizens (aka badgeholders) can then vote for, or perhaps a Council, with Token House holding veto rights. Perhaps the “Citizen” or “democracy” nomenclature is a misnomer and can never be achieved without an actual “bureau of naturalization”, so to speak - however, if we can get a representative base of maybe a few hundred to a few thousand enthusiasts onboard keeping checks and balances on tokenholders, it’s a massive step forward for governance & DAOs.

All that said, the best way to build a democratic DAO still remains following the cooperative model, and just eliminating the “Token House” altogether. But we know that’s never going to happen in crypto.

Can L1s use this mechanism? Definitely not, as they need to be neutral, and this is anything but. Indeed, many L2s also may eschew democratisation in favour of neutrality.

Lastly, I’ll also mention User rights, a third group that’s definitely worth empowering.