Voter apathy costs DAOs millions. Can tokens save them?

Voter apathy costs DAOs millions. Can tokens save them?
DeFi
DAOs need to hurry up and professionalise before its too late. Credit: Shutterstock.
  • Compound DAO was made $25 million lighter after a governance attack.
  • Digital collectives need to professionalise to grow, says expert.
  • Projects are already hashing out ways to share revenues.

With more than 50,000 decentralised autonomous organisations in the crypto industry controlling $20 billion, DAOs are now bigger and richer than ever.

There’s just one major problem — voting members of these amorphous, ever-online digital collectives are contributing less and less.

And it’s costing DAOs millions.

In July, an investor group bought enough voting tokens for Compound DAO, the organisation managing the $1.8 billion Ethereum-based lending protocol, to vote and give themselves almost $25 million.

Compound leadership eventually convinced the group to return the funds, but it was a wake-up call.

The near-disaster was made possible because so few DAO members were paying close attention. In other words, voter apathy.

Solving that means DAOs need to grow up.

“We don’t understand how to make that transition to a nine-to-five organisation, which is scary, weird and difficult, but very important,” Dennison Bertram, co-founder of onchain governance platform Tally, told DL News.

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DAOs’ transitions to more traditional business models — in which contributors are paid real salaries instead of riding a token’s highs and lows — come as the broader crypto industry is experiencing similar growing pains.

The $2.1 trillion crypto industry now counts Wall Street heavyweights, including BlackRock and Fidelity, as constituents. Digital assets have become a key issue in the upcoming US presidential election. Public pension funds are investing millions into cryptocurrencies.

At the same time, hacks, exploits, phony hiring schemes, sanctions violations, and crypto-funded disinformation campaigns run rampant.

Solving DAO disorder is simpler, says Bertram. Start with the token.

Two sides of the voting token

At the heart of every crypto collective is its native token. It doubles not just as a volatile cryptocurrency — dipping and diving alongside Bitcoin and joke tokens — but also as a vote.

With this voting token, holders can propose project changes and then vote on whether to follow through.

Launch a project on a new layer 2 network? Put it to a vote. Hire an artist to design and release a non-fungible token collection for your community? Vote on it.

The thinking was that as the project improved, the token’s price would rise, which would be incentive enough to stay active in a DAO.

“They returned this experimental value to you in the form of their own tokens that represented some speculative excitement over the opportunity,” Bertram told DL News. “That kind of worked.”

However, because these tokens double as votes, contributors sometimes needed to sell their stakes in the organisation’s future to pay their bills.

“How do you, who’s worked so hard, who’s a part of this, capture that value? You capture by exiting the organisation, by selling,” said Bertram.

By bundling active participation in an organisation with its financial incentive, DAOs are bound to fail. If the token goes to zero, no one will want to contribute to a failing project, and everyone will exit. If the token soars in value, rational investors will sell it to realise their profits.

In either case, the DAO dissolves.

Instead, tokens should be understood as work visas for the crypto collective. Contributors should be paid salaries for everything else, such as contributing to forum posts and measuring risks for specific proposals.

“The revenue that’s returned to the token holders is not a dividend. It’s a salary,” said Bertram. “That salary should be uncapped.”

“If you work super hard to drive this protocol to billions of dollars, yeah, you should be earning millions of dollars for that, right?”

The future of work

Some DAOs are already moving in this direction.

After Compound’s governance attack, the collective voted to begin sharing protocol fees with token holders. Arbitrum, one of the largest layer 2 networks on Ethereum, is also voting on a similar variation. That vote will conclude in October.

Paying salaries means improving the quality of a DAO, especially as they begin managing more money.

“Only the people who feel qualified to do this work and are addressing this work will participate. Actually, those are the people that you want to participate.”

Liam Kelly is a DeFi Correspondent for DL News. Got a tip? Email at liam@dlnews.com.