Ink Finance: How to Design Voting Mechanisms to Achieve the Most Effective Governance for DAOs
The Common Dilemma of DAO Governance
As a new organizational structure formation, DAOs need to prioritize decentralizing governance rights and the implementation of transparent, on-chain governance through smart contract coding. However, as the development of DAOs is still in its early stages, DAOs with diverse missions and structures will need to continuously experiment with different voting mechanisms and governance rights allocation solutions to find the most effective match for their specific goals. Any tool platform that rigidly defines governance rules may need help with applicability, a common challenge in developing DAO governance platforms.
Most DAO governance protocols today have created systems where tokens are held equal to the number of votes. However, according to Chainalysis’ DAO Ecology Report, the distribution of the top 10 DAO governance tokens has less than 1% of holders with 90% voting rights. This mechanism maximizes the rights of token holders, reflecting the governance logic of a traditional shareholding company. However, expanding user participation in DAO decision-making is crucial for its innovative governance. Without widespread adoption of the opinions of users and members and only recognizing giant whale contributors participating in governance defeats the purpose of forming the DAO in the first place. For example, in a content-driven ecosystem, this leads to an unfair lack of evenly distributed value contribution and governance rights and highlights the ecosystem’s centralization of governance as the actual way it operates and can be vulnerable to “attack by whales” through vote buying.
Allocation Improvement of Governance Powers
Optimism proposes a bicameral or two-chamber governance system to ensure representation from diverse ecosystem participants and avoid a wealthy-ruled plutocracy. The Token House would handle project incentives, protocol upgrades, and managing treasury funds, while the Citizens’ House would focus on allocating retroactive public goods funding. This way, governance is not solely driven by token holders.
Element takes a dynamic and flexible approach to committees, allowing users to select representatives who align with their views. However, to preserve balance, each member of the GSC has a single vote, and token holders can supersede a GSC member’s vote at any time to prevent the largest token holder from having excessive control.
Lido dual governance structure. It allows stETH holders who pledge through Lido to “veto” certain governance decisions. Essentially a “check” on the LDO holder’s governance powers and ensures that multiple protocol stakeholders have direct involvement in the governance process.
Improvements in Voting Mechanisms
Token-weighted Quorum Voting: A certain percentage of votes is required to pass a proposal. While simple and straightforward for participants, this mechanism requires a high level of participation and is susceptible to manipulation.
Vote Delegation: DAOs allow members to delegate their voting power to another party, typically industry experts, which increases participation and allows for more informed decision-making. However, this system also opens the door to bribery and potential collusion, creating an unfair advantage for certain parties.
Quadratic Voting: A quadratic voting system in which the cost of casting additional votes on a proposal increases exponentially. For example, the first vote is worth 1 USDC, the second vote is worth 2 USDC, and the Nth vote has a face value of N USDC, making the cost of casting N votes on a proposal (N²)/2 USDC. This system aims to alleviate the tragedy of the commons by allowing voting to reflect the community’s preference for a particular proposal more accurately. However, it has the disadvantage of not having proper identification mechanisms to protect against “witch attacks,” complicity, collusion, and fraud.
Ink Finance’s new governance platform enables users to configure the governance that works best for them.
Ink Finance offers a unique, customizable governance system that organically incorporates identity authentication and seamlessly combines conviction-based voting, token voting, quorum-weighted voting, and rights-tiered voting. This system gives users maximum flexibility and control over their governance decisions. It provides an execution platform that allows organizations to assemble these rich and diverse governance features, enabling them to adapt to a rapidly changing and highly competitive operating environment a the top level. This flexibility allows large organizations to implement different governance logic across their sub-organizations, tailoring the approach to suit the specific missions or regulated characteristics of each sub-organization.
Ink Finance’s flexibility in allocating voting rights at the top and sub-ecology levels allows for fully personalized and autonomous governance segmentation within different application scenarios. Its strength lies in its ability to adapt to each sub-ecology’s unique needs and characteristics.
For example, at the top level of a protocol, coin holders may have a favored position in terms of rights. However, as sub-communities of developers, promoters, and users form, it becomes apparent that each communities governance can be adaptive to their specific needs. For instance, a developer subcommunity’s governance should emphasize code contributions, while a user sub-community should prioritize self-generated content. A tailored and autonomous configuration of sub-community governance contrasts with the top layer of the protocol and allows for unique governance logic within each sub-community. The top layer of the protocol only needs to intervene in effectiveness-based resource allocation and anti-corruption management without interfering in the autonomy process that is most applicable to each sub-community, allowing them to govern themselves effectively.
In the existing Web3 space, no governance tool platform can accomplish such flexible and integrated functional delivery.
Badge settings are integrated into the voting mechanism, extending voting rights to participants who contribute to the development of the program.
A Badge is issued and named by the DAO organization based on demand. It is distributed to community contributors based on their contributions and individual contribution credit value and does not support transfers or transactions. In the subsequent development of Ink Finance, all Badges will be convertible to the standard SBT (Soulbound Token) form on the local network.
For voting proposals initiated by the DAO, participants need to have a Badge to vote. Badge holders are users who contribute to the project’s development and deeply understand the project. This mechanism avoids the interference of a single coin-holding vote that would affect the fairness of governance while incorporating a broader range of suggestions to create more efficient feedback on decisions.
In the future development of Ink Finance, we will enable the DAO issuing Badges to customize their quantitative voting power while maintaining the overall significance of the total eco-token.
The number of votes and wallets is set in the voting mechanism system through the ratio to increase voting participation.
When initiating a proposal, the creator can set a minimum number of votes and a minimum number of voting wallets for public polls to increase voting participation. The proposal will only succeed when the number of votes meets both conditions. Setting these minimum numbers will improve the rigor of resolution adoption. The larger the participation covered, the more representative the statistical accuracy of the vote and thus avoid survivorship bias. At the time of DAO creation, there are default minimums for participation, but proposers can adjust these based on the nature of the proposal when generating new ones.
Voting level distribution & setting functions to meet the organic combination of democracy and centralization needs.
When creating a proposal, the initiator can set the Voting Power to determine the distribution of voting rights. The two main categories of Board of Directors and DAO members represent different decision-making roles, creating maximum flexibility for democratic and centralized governance processes. At the moment of creation of the DAO, there is a default validity of the voting hierarchy. Still, when creating a proposal, the proposer can adjust the distribution of voting rights based on the nature of the proposal. However, these adjustments can only make the voting process more democratic, never more centralized than the default.
When you set a proposal’s Voting Power to “Public and Board.” The voting process divides into two rounds. After the Public voting time expires, the Board will begin counting the votes. If the proposal passes, it will proceed to the Board round. However, if the Public round does not meet the minimum number of votes or the number of voting wallets, the Public round will fail, and the entire proposal will not proceed to the Board round. When the proposal passes in both Public and Board rounds, its status updates to “resolution” via the smart contract. It is then executed and completed on the blockchain.
When you set Proposal Voting Power to Public Only, the most democratic way, there will be only one round of public voting. At the expiration of the voting period, the Board of Directors will complete the vote count. The proposal fails when the number of votes and the number of voting wallets do not meet the required minimum conditions. Once the proposal passes, the smart contract will update its status to “resolution” and immediately execute on-chain.
When you set the proposal Voting Power to Board Only, which is the most centralized way (i.e., the way the board resolves under the traditional corporate structure), there will be only one round of voting. Voting validity is not dependent on the number of votes but solely on the number of seats on the board. The existing beta version uses a simple majority, and the updated version will allow the DAO to set an absolute majority threshold or unanimous approval system that applies to it. After the voting period expires, the Board of Directors will complete the vote count. The smart contract will update the status of proposals that pass into a resolution and execute it on-chain.
About Ink Finance
Build On-chain Competence & Financial Credit with Ink Finance, an on-demand Web3 financial management SaaS, enabling on-chain organizations to build effective operation structures and perform best-practice financial management.
Learn more about Ink Finance and what we’re building:
Telegram | Announcement | Discord | Twitter Website | Medium | Youtube | Linkedin | Mirror | CMC