Josh Litchman

Posted on May 30, 2022Read on

Why I like Gitcoin: How DAO governance can be improved with good mechanism design

DAOs. For a brief moment DAOs were the new shiny object of Web3 - a flashy acronym that you could sling around that would elicit all sorts of questions and FOMO about the next wave of innovation in Web3.

To be completely frank, DAOs are probably the least sexy thing about crypto right now. They are generally fragmented, unorganized groups where decision-making is a difficult and lengthy process. As a member of multiple DAOs, I have witnessed firsthand some of the strengths, but many of the weaknesses of these organizations.

The good news is that because this space is fairly nascent, the future of what DAOs will be is not-so-clearly defined. There are some very interesting use cases and areas of opportunity that I’m watching carefully.

DAO Governance is Still an Afterthought

DAO governance is generally tricky to set up given the fact that there are many different ways to reach consensus in a system. Many DAOs opt for a simplified “majority rule” or even a weighted majority consensus structure for their voting. This type of voting structure poses a large issue however - namely, that voters can still vote purely for their own gain vs the public good of the DAO.

While this could be a byproduct of the infancy of proper DAO tools, my belief is that this is actually due to the infancy of proper DAO mechanism design. Many DAOs must make a simple yet important tradeoff upon formation: efficiency or incentive structure - which has ultimately led to most DAOs using simple majorities to govern and thus allowing for economic inefficiencies within their consensus structures. The reality is that most “DAOs” are set up with poor mechanism design and governance is generally an afterthought.

The reality is that most “DAOs” are set up with poor mechanism design and governance is generally an afterthought.

The issue here is that if you're in a DAO that buys JPEGs and someone with a larger amount of DAO interest decides to vote in one direction, there is virtually nothing you can do to stop them since their interest in the DAO dwarfs yours. This could be remedied by having a simple 1:1 participant/vote system, however this solves one issue and creates another – now smaller interest members have just as much governance power as large DAO contributors.

Case Study: Gitcoin

I really like how Gitcoin uses a quadratic funding (QF) mechanism to solve this issue within their grants program. This incentive model is viable, solves for many of the issues in traditional consensus structures,  and encourages participation from all types of stakeholders in the underlying success of proposals.

With QF, a matching pool is raised, and then a crowdfund campaign is matched according to the QF algorithm. This accomplishes 3 things:

  • Number of contributors matters more than the amount funded.
  • This pushes power to the edges, away from whales & other central power brokers
  • This creates more democracy in public goods funding decisions

You can learn more about QF and Gitcoin here.

So What’s the Big Deal?

The reason QF is so interesting is because it optimizes funding for the public good, so that self-interested parties (i.e. members with larger interests) are forced to improve project success. It’s also a great way for ecosystem funds and grant programs to grow via their own voting mechanisms since QV encourages participation over just equity.

Vitalik turns to Steven Lalley (U Chicago) and E. Glen Weyl (RadicalxChange Foundation) in their examination of QV:

“QV is an optimal intermediate point between the extremes of dictatorship and majority rule. It is the one vote pricing rule under which voters who intend only their own gain are led, as if by an invisible hand, to advance the interests of society.”

You can find that literature here.

Gitcoin recently launched the 13th round of grants with a total of $2.7MM in matching funds for their ecosystem.

Gitcoin is a case study of how improving underlying mechanics can catalyze all sorts of ecosystem growth - a small structural change that now acts as a flywheel and attracts stakeholders and projects.

The quadratic funding/voting model is one that I think will extend far beyond just DAOs, but will eventually impact venture investing, public companies, and even governments - due to the fact that quadratic voting takes into account participation and diversity over simply ownership.

QV allows individual stakeholders to express the degree of their preferences, rather than just the direction of their preferences which is important. The key is figuring out how to streamline the mechanics of this type of governance structure and optimizing for efficiency.