Research-Driven Insights About DAO Governance

Hi everyone,

My name is Andy Hall, I’m a political economy professor at Stanford where my lab studies how to build effective systems of democratic governance. I’m also an advisor in tech where I work on solutions to online governance problems. I’ve become interested in blockchain governance and “DeGov,” and have started to study these topics academically. Through this research I have been drawn to Maker as a particularly successful example of DAO governance.

Over the past several months, I have been lurking a bit on this forum, chatting with some of you on Discord, and working with @0xdeniz to study Maker governance.

Goal: Explore Research-Driven Insights for Maker Governance

Our goal is to see if insights from the long-running study of “physical-world” governance are relevant for DAO governance and can help Maker as it thinks about new governance solutions in the context of the clean money vision, the Sagittarius engine, and the natural evolution of the DAO.

Having done some early thinking, we thought it was a good time to bring the project to the community and get thoughts from people who might be interested before developing potential next steps.

Three Central DAO Governance Challenges

After looking at governance from many angles, we have homed in on three central challenges to effective decentralized governance:

  1. Aligning incentives. Aligning the incentives of the Maker workforce with MKR holders, as @rune discussed in depth here.
  2. Participation. Increasing MKR holder participation in governance, as @0xdeniz discussed here.
  3. Information and expertise. Making smart, informed decisions about complex, technical issues in a context where most MKR holders are unlikely to have the necessary time or expertise. (This issue is raised in many forum discussions including the discussion linked above in item 2.)

These three challenges are core to democratic governance, and there are insights from research about all three that may be helpful to Maker and to the general design of DAO governance.

Aligning incentives

The future success of Maker, as it grows and evolves, depends on continuing to align the incentives of the workforce with the preferences of the MKR holders, a challenge common to many types of organizations. Incentive alignment is not only important for getting workforces to focus their efforts on maximizing value for shareholders; it is also important for investment, as investors will presumably prefer to commit resources to projects they believe are sufficiently well governed to not waste or steal their resources. This is why good governance is important for growth in a broad variety of contexts and is a classic topic in political economy.

In democratic systems, this is all about getting politicians to do a good job, and in political economy we often boil this down into two parts:

  1. Choosing honest, competent delegates;
  2. Giving delegates incentives to work hard for their constituents.

This idea is well expressed in James Madison’s Federalist 57, where he writes: “The aim of every political constitution is, or ought to be, first to obtain for rulers men who possess most wisdom to discern, and most virtue to pursue, the common good of the society; and in the next place, to take the most effectual precautions for keeping them virtuous whilst they continue to hold their public trust.”

For Maker, there are at least two layers of principal-agent relationships to think about: the relationship between the workforce and MKR holders, and the relationship between MKR holders and their delegates, who can help them to monitor the workforce. This is analogous to standard legislative and bureaucratic politics in a democracy: voters elect representatives (like delegates), and those representatives are responsible for monitoring and overseeing the bureaucracy (like the workforce).

How do political systems select good delegates and give them incentives to properly oversee the workforce? Solutions from democratic governance that may be relevant to Maker (and other DAOs) include:

  • Compensation of delegates. As has been discussed recently on the forum, it is important to build good compensation structures for delegates that encourage good people to become delegates, and give them incentives to work hard while in office and to desire reelection. [For example, I wrote a book about why paying politicians too little, among other factors, can contribute to polarization by deterring moderate, sensible people from becoming politicians. For some further key tradeoffs involved, see this famous paper by Tim Besley. For arguments against paying politicians, take a look at this underappreciated essay by Benjamin Franklin.]
  • Periodic elections. If being a delegate is sufficiently valuable to people, then periodic elections can help make delegates think forward to future reelection bids, causing them to work hard now because they want to win reelection later. [For example, I recently published a paper about how having to face reelection makes US state legislators show up for more votes, serve on more committees, and write more bills.]
  • Legislative oversight. Designing a system for the delegates that allows them to divide labor among themselves, develop specialized expertise on particular issues facing the DAO, and monitor different parts of the workforce. This could include full-time staff for delegates, a committee system, etc. [For a good overview of academic thinking on legislative organization, see this review paper by Keith Krehbiel.]

Properly empowered delegates can in turn align the incentives of the workforce with the preferences of MKR holders by developing policies related to how the workforce is compensated and monitored. But this only works well with a sufficiently well designed delegate system.

Participation

Increasing MKR-holder participation—in terms of discussing, voting, delegating, and serving as a delegate or other contributor—seems important for a number of reasons. Insufficient participation could lead to poor monitoring of the workforce and misaligned incentives. Just the possibility of concerns like these, whether true in practice or not, could scare away potential investors or users who worry about their money being misused. It may also leave the system more vulnerable to governance attacks, among other issues, as research about Maker by some of my Stanford colleagues explores.

Getting people to participate is always difficult, because of the fundamental free-rider problem: as a token holder, I enjoy the benefits of the Maker system whether or not I participate. Since participating takes time and effort, and since my participation generally has little or no impact on the outcome, I have incentives not to participate. This is particularly true for small token holders, given the nature of token voting. Perhaps for this reason, we see low rates of participation in Maker governance, as we do in many physical-world settings (examples include low rates of voter participation in many political elections; the difficulty of getting people to run for office in many democracies; and the low rates of participation in shareholder governance for publicly traded corporations.)

On the other hand, many democratic systems overcome this challenge, and surprisingly large numbers of people participate in many voting systems even though it is difficult, if not impossible, to articulate rational self-interested reasons for them to do so. This is often referred to as the “paradox of voting.” We see similar patterns in other forms of online participation, like Wikipedia or Reddit, where skeptics used to think—clearly incorrectly—that it would be impossible to get communities to participate in maintaining the community.

Experiences in democratic elections suggest three important insights for Maker as it considers ways to expand participation:

  • Reducing costs of voting is important, but not enough. Very high costs of voting clearly dissuade participation (see for example this research on how the southern US raised voting costs to suppress black turnout), but lowering costs without making other changes often fails to increase participation meaningfully. For example, my lab recently published a study of the 2020 US election and the largescale shift to mail voting, which many people thought would increase turnout dramatically by making it easier to vote from home. It had almost no effect on turnout, because another fundamental barrier to voting in US elections has to do with feelings of disempowerment and disinterest with the system, which is not affected by lowering the costs of voting.
  • People tend to participate more when they care, intrinsically or socially. Caring about the issues at hand, being part of a network of people who are paying attention to the issues, and social pressures are important drivers of participation, beyond the costs. [One good example of this is a famous experiment showing that threatening to reveal your non-voting to your neighbors increased turnout dramatically in a US primary election.]
  • People tend to vote more when they understand the decision they’re facing. Lowering the cognitive costs of voting is also important. We think, for example, that increasing education leads people to vote more. Simpler voting systems that reduce the complexity of the number and difficulty of voting decisions are likely to increase participation, too.

Information and expertise

Decentralized governance works best when the governing community understands the issues it is debating and voting on. This is perhaps the oldest concern about democracy, stemming back to Plato, Aristotle, and many other critics of democracy in Ancient Greece.

Experience in a wide variety of democratic systems suggests that there are at least four core elements that help imperfectly mitigate this problem while preserving some of the benefits of elections and voting:

  • Simplify the voting problem. If you look at how most polities run their elections, or how shareholder voting works for publicly traded companies, votes typically occur at a set, relatively infrequent interval, and concern a relatively small number of voting decisions. While limiting the number of things that are voted on may seem like it reduces how “democratic” a system is, it can actually increase it if it empowers voters by giving them a clearer and simpler set of decisions to make. A great book to read along these lines is Riker’s Liberalism Against Populism, which argues that the point of elections is simply to let voters control the hiring and firing of key political officials—not to understand and weigh in on each specific decision that government makes.
  • Vote on delegates more than on decisions. Most democratic systems rely on asking voters to choose a relatively small number of key representatives. Those delegates take charge of identifying and appointing experts. This creates one layer of insulation between experts and elections. We tend to think this is helpful for at least two reasons: first, it helps us find and retain experts who may not be interested in, or have the particular skills for, winning elections; and second, it shelters the experts at least partially from direct electoral pressures that might lead them to pander and take bad but popular decisions. [For some key tradeoffs, see this essay on elected vs. appointed judges].
  • Rely on media to help inform voters. An ecosystem of experts who monitor the system and can alert voters when something concerns them (or when something is going particularly well) can help create accountability. The news media is thought to be especially important in performing this duty in physical-world governance [see for example this great paper showing how congressional districts in the US that for somewhat random reasons get more news coverage about politics end up knowing more about politics, paying more attention to their politicians, and ultimately have members of Congress who work harder for them]; it is not clear yet how this void will be filled in DeGov, but it seems like an important opportunity.
  • Structure political conflict with parties and interest groups. Parties and interest groups distill complex issues into simple decisions for voters and create a potential layer of accountability. Similar to how the media can inform voters, when parties or interest groups support a particular delegate or a vote on a particular issue, it can signal to voters who share their preferences that this is something they should support. In this way, it can simplify the problem for voters, who can pay the relatively low cost of figuring out which parties or interest groups are aligned with them, and then try to trust their endorsements concerning some set of future decisions. [The classic case for parties and ideology as informational short-cuts for voters comes from Anthony Downs’s An Economic Theory of Democracy.] This is obviously an imperfect system and is difficult to create from scratch, but we know that most election-based societies evolve over time to have quite well developed party and interest group systems.

Potential Next Steps

The ideas above hopefully give some sense of how insights from political economy might apply to DAO governance and to Maker, specifically. We are curious for people’s thoughts on these ideas, whether they are valuable, and where we might take this project next. One potential next step could be to develop specific design recommendations for Maker based on these ideas and share them in a next memo.

For my own part, I plan to pursue academic research around DAO governance in general, but am also excited to talk with people about Maker specifically and to explore if there are constructive ways for me to help build new forms of governance. Please do not hesitate to reach out to me if you’d like to chat.

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Thanks @Andrew_Hall for the elaborate write-up! It’s been a pleasure collaborating so far and I’m eager to read input from others in the DAO.

Andy reached out based on my prior write-up on increasing voting participation rate, upon which I helped him navigate the DeFi space and Maker. We ended up with this initiative, which I’m super happy with.

I regard it as a unique opportunity to involve a passionate academic heavyweight in the continuous process of designing a long-term to-be state of Maker’s governance system. There are a lot of lessons to be learnt from political science outside of crypto—I’d hate to see a governance system be designed by engineers, entrepreneurs and crypto anarchists only. Let’s not reinvent the wheel. :brain::sparkles:

Edit: Paging @GovAlpha-Core-Unit @SES-Core-Unit @Recognized-Delegates @rune for visibility

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Thank you for the mention! As a Political Science undergraduate major plus Law School - very much in agreement with engaging other disciplines as intellectual contributors. Super important.

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Really appreciate the thoughts you’ve laid out here. I definitely wouldn’t mind getting in touch to discuss how some of this relates to Maker.

I’d love to see / get involved in this.

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“Sir, there are two passions which have a powerful influence in the affairs of men. These are ambition and avarice—the love of power and the love of money. Separately, each of these has great force in prompting men to action; but, when united in view of the same object, they have, in many minds, the most violent effects.“ —Benjamin Franklin

Thank you for this great write-up! You provided many useful links, including this portion here :point_up:by Ben Franklin–very interesting to read through Ben’s thinking on compensation–some might say he had a boomer mentality :slight_smile:

As we All know, the right to vote is a powerful thing. I believe governance tokens will likely become more important as crypto investing becomes more sophisticated. How can a DAO communicate this belief to the masses in order to attract more participation? And do you think that currently there’s a barrier-to-entry for folks to recognize that the systems of on-chain governance and the use of governance tokens look quite promising? And how do we improve communication so that everyday folks know that DAOs + Governance Tokens have potential?

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You are probably already aware, but I wanted to call out this piece of your essay as a poor approximation of the Maker delegate system. In Maker, representatives are elected in a continuous process that is not constrained by an arbitrary period or duration. At any moment, MKR holders can decide to delegate or undelegate their MKR weight to a representative. Hence, representatives that are elected (>10k MKR delegated) can be unelected or recalled at any time and replaced by someone else.

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Those are really interesting questions. I have the same sense that there is a barrier where people don’t necessarily realize how interesting and exciting this new form of ownership and self government can be.

Interestingly, we have a lot of evidence in political science that voting is habit forming—that is, you don’t vote and you don’t realize you actually like voting, but then you vote once for whatever reason, you actually enjoy it, and from then on you tend to vote in many future elections. I suspect there is something similar for DAO participation, where people who start to participate will form participatory habits. (That is actually an empirical question we could conceivably evaluate with existing Maker voting data, actually.)

In physical-world elections we see a suite of “supply side” interventions to help with this habit formation, including vigorous campaign advertising, media coverage, and “get out the vote” efforts, as well as broader societal expectations about voting, public events, etc. Finding ways to create logical and tractable equivalents for some of these efforts, to communicate to potential DAO participants, might make a lot of sense.

And more generally, though I’m not sure how much evidence there is for this, people tend to think that governance is more legitimate when there is clear two-way communication, with representatives hearing from voters, and voters also hearing from representatives.

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Yep, this was meant to be a potential tool from physical-world governance that Maker might want to consider, rather than a description of current Maker governance.

The current continuous-process token voting system is very interesting and has some appealing properties. I would guess its biggest downside is that it asks a lot of voters, who have to be monitoring their delegates somewhat continuously. That in turn creates unevenness in which blocs of voters who pay attention and actively delegate may become much more influential than voters who don’t pay attention and don’t delegate (and whose votes effectively don’t count, as a result, if they bother to cast them at all). One advantage to periodic elections like in physical-world elections is that it is a much lower cognitive bar for voters, who only have to pay attention at set intervals rather than all the time. If it’s an easier task for voters, they may be better at it, and it may in turn create especially strong accountability for delegates.

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As far as I see it, you’ve nailed three of the central challenges.

There’s a dearth of this type of research, but it’s hugely impactful to ensure that DAOs exercise best practices and encourage growth and quality output.

In the class I teach, we’re spend a great deal of time focusing on individual motivations, which, in turn, drive their actions. Projects try to align interests to make actions beneficial to the community but also worthwhile to the individual. Sharpening an understanding of how this tension can be best managed is imperative to organizational harmony and I’m excited to read more of your research!

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Fantastic writeup! Glad to see MakerDAO paving the way for the future of governance.

An area worth further exploration in incentive alignment and participation is voter apathy. I can foresee this snowballing into a larger issue. As Maker grows and new participants join, they may feel left behind due to their smaller holdings and become disinterested, resulting in voter apathy continuing in a downward spiral.

I agree with your insight that education will lead to more participation, but as you had also pointed out, that reducing costs (or otherwise friction):

We hear this all the time - that voters don’t turn out because they believe that “their vote doesn’t count” even with (or due to) elected representatives. It’s a tricky question, but how do we empower users to motivate them against real or perceived futility?

You linked Vitalk’s excellent article that proposes some hybrid solutions to combat this, so I’m curious to hear your thoughts on how some of these ideas can shape Maker’s governance to be more inclusive and empowering towards smaller or newer community members?

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Appreciate the effort here.

However, the scope appears to be very narrow. I’d really like to see a broader discussion that encompasses what “governance” means today in the context of a DAO and how that contrasts to what the word means in the traditional business (and particularly regulatory) sense of the word.

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The scope is narrow in order to get a meaningful initiative off the ground which seeks to make a tangible impact to a real DAO :slight_smile: Later it’s always possible to zoom out and try to get abstracted learnings out there into the world.

.@ACREinvest thanks for initiating the discussion on the G&R call today :slight_smile: Highly recommend anyone who’s interested in this thread to watch the Governance & Risk call of January 13th.

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