In the rapidly evolving world of decentralized autonomous organizations (DAOs), the recent governance attack on lending protocol Compound has exposed a critical vulnerability in the one-token-one-vote model. To build resilient, sustainable DAOs, it’s time to take a page from the playbook of tech giants like Meta and adopt multi-class governance structures that prioritize informed decision-making over token quantity.
The Pitfalls of One-Token-One-Vote
The allure of DAOs lies in their promise of decentralization and democratic governance. However, as the Compound incident demonstrates, the one-token-one-vote model leaves DAOs vulnerable to attacks by whales – large token holders who can wield disproportionate influence. In this case, a whale known as “Humpy” and their affiliated group, the “GoldenBoys,” used their collective voting power to allocate $24 million worth of COMP tokens to a yield protocol they controlled, essentially siphoning off funds for passive income.
While some have dismissed this as a consequence of voter apathy, security audit firm OpenZeppelin argues that it’s an exploit of the model itself. As Michael Lewellen, a key figure at OpenZeppelin, explains:
“Governance models that are dominated by token holders, where there are no significant checks on token holders, are all eventually going to end up in this situation. It’s just a matter of time.”
– Michael Lewellen, OpenZeppelin
The Case for Multi-Class Governance
To safeguard against such attacks and ensure long-term stability, DAOs should consider adopting a multi-class governance structure akin to that of Meta (formerly Facebook). Under this model, different classes of shares or tokens carry varying levels of voting power, with insiders and key stakeholders holding shares with greater influence.
In Meta’s case, CEO Mark Zuckerberg’s Class B shares give him roughly 58% of the company’s voting control, making shareholder activism effectively impossible. While such concentration of power may seem antithetical to the ethos of decentralization, it provides a crucial layer of protection against short-term thinking and misaligned incentives.
Balancing Decentralization and Accountability
Of course, implementing a multi-class governance structure in DAOs is not without its challenges. Decentralization remains a core tenet of the blockchain space, and any move towards centralization must be carefully considered. However, as Lewellen points out, decentralization in governance is not an unalloyed good in the same way it is for blockchains themselves:
“Decentralization is an objective good, but it’s not a governance good in the same way that it’s a blockchain good. It’s not necessarily better to have more voices in this debate if a lot of those voices are not aligned with the DAO and not informed.”
– Michael Lewellen, OpenZeppelin
To strike the right balance, DAOs must introduce elements of accountability and identity verification without compromising anonymity. Lewellen suggests that tools like zero-knowledge cryptography could help verify identities without exposing personal information, preventing bad actors from creating multiple delegate profiles to manipulate governance.
Incentivizing Participation and Expertise
Voter apathy remains a significant hurdle in DAO governance, with participation rates often low. To combat this, DAOs must design incentive structures that encourage not just participation, but informed participation. As Lewellen argues:
“We need to give token holders reasons to be responsible stewards of the protocol. By rewarding participation, we can ensure that governance decisions are being made by informed, engaged stakeholders.”
– Michael Lewellen, OpenZeppelin
This could take the form of reputational rewards, voting power boosts for active participants, or even financial incentives tied to the long-term health of the protocol. The key is to align individual incentives with the collective good, ensuring that critical decisions are made with care and expertise.
Preparing for the Worst
Even with a multi-class governance structure and participation incentives in place, DAOs must remain vigilant against potential attacks. Regular threat modeling and “wargaming” exercises can help teams prepare for worst-case scenarios and develop on-chain responses to malicious actors.
As the DAO ecosystem matures, it’s becoming increasingly clear that the ideals of pure decentralization must be tempered with pragmatism. By adopting governance models that prioritize informed decision-making and long-term sustainability, DAOs can chart a path towards becoming the resilient, transformative organizations they aspire to be.
The lessons from Meta’s multi-class share structure and the Compound governance attack are clear: to thrive in an often hostile environment, DAOs must evolve. It’s time to embrace a new era of decentralized governance – one that balances the power of the crowd with the wisdom of the informed.
