DAO and Governance Contracts: A New Era of Decentralization

Decentralization Autonomous Organization ( DAO ) and the protocols it manages are disrupting the blockchain-based business decision-making model, especially in the field of Decentralized Finance ( DeFi ). These DAOs challenge the traditional financial system, offering transparent and decentralized products, allowing people to access financial services without intermediaries.

To achieve this goal, DeFi protocols typically use "governance contracts" to embed rules and decisions on-chain. These contracts establish a trustless, decentralized decision-making system that allows token holders and community members to voice opinions on the direction of the organization. Overall, this technology has fundamentally transformed countless DAOs, driving them towards full decentralization.

Although DeFi protocols can operate without relying on governance contracts, DAOs must have governance contracts to exist. The choice of protocols to use these contracts is to allow token holders, contributors, and community members to make decisions together in a trustless and verifiable environment. Governance contracts have become a key component for DAOs to maintain democratic principles.

This article will explore the working principles, types, limitations of governance contracts, and innovations in these fundamental modules.

How Governance Contracts Work

The core of each governance contract is the voting contract, where key parameters are set by the creator, usually involving voting weight, proposal tracking, and weight calculation. Over time, industry innovations have gradually expanded the functionality of governance contracts. This evolution enhances the adaptability and modularity of contract parameters, allowing them to meet the governance needs of specific DAOs more precisely. Some governance contracts are exemplars of being able to adjust and upgrade according to the specific needs of the DAO.

To better understand the operation of governance contracts, it is crucial to delve into their historical development.

A certain decentralized lending platform is widely praised for its pioneering contributions in creating and implementing Governor Alpha and Bravo. These two contracts are milestones in the field of Decentralization governance.

Due to its simplicity and forkability, Governor Bravo has become the preferred governance contract for multiple protocols.

The important functions of the Governor Bravo contract are as follows:

• propose() - Allows those with sufficient votes to propose changes to the protocol.
• castVote() - Token holders can vote on proposals based on their weight.
• deleGate() - Token holders can delegate governance rights to others.
• cancel() - A proposal can be revoked when the number of opposing votes exceeds the number of supporting votes.
• queue() - The queuing process can be initiated after the proposal is approved.
• execute() - Proposals in the executable queue can be executed after the time lock ends.

Improvements of Bravo on Alpha

In March 2021, Governor Bravo was launched as an advanced version of Alpha. Compared to its predecessor, it offers more flexibility and upgrade potential.

Built-in Upgradability: Regardless of any adjustments made to the governance contract or execution, Governor Bravo has a fixed contract address and proposal number system.

Parameter changes: Introducing the capability to conveniently adjust certain parameters, such as the required number of people, submission threshold, voting period, and time lock period. This adjustability helps improve governance risk management.

Other Types of Governance Contracts

Based on Governor Bravo, a new governance contract has been born, providing innovative solutions to governance issues. Below are two main governance contracts.

An open-source contract has many similarities with Governor Bravo, both aiming to achieve on-chain governance and providing customizable parameters. Unlike Governor Bravo, which requires forking to be applied, this contract is completely open-source.

It offers various governance customization options. For example, it supports NFT voting rights, allowing NFT holders to participate in governance. Voting rights can also be distributed to multiple tokens, creating possibilities for building a more open and inclusive governance system.

In summary, this open-source governance contract offers broader options, and its openness encourages deeper collaboration and innovation from the very beginning.

A certain governance framework adopts a modular approach, allowing for greater flexibility to meet the diversity of current and future governance needs.

Although Governor Bravo and a certain open-source contract are upgradeable, they do not provide the DAO with the option to switch voting strategies. This has led the DAO to adopt a hybrid governance system, where proposals that do not require on-chain implementation are conducted on a certain platform, while those that require on-chain implementation are executed using local on-chain governance.

This framework provides different governance strategies for various situations. For example, the basis for determining voting weight is an issue faced by most on-chain governance contracts. Although most DAOs govern using token-based weight, this method has its drawbacks. The emergence of voting libraries is to address this issue, allowing DAOs to easily switch between different voting strategies based on demand. Since these voting libraries can be upgraded or replaced via core voting contracts, they offer more flexible voting methods for a variety of scenarios.

The voting repository enables governance to scale in sync with DAOs and related protocols. As new token primitives and voting strategies emerge, new repositories can be created to meet new application scenarios. This flexibility brings new possibilities for on-chain governance processes, strategies, and power structures.

Limitations of Governance Contracts

Like other smart contracts, governance contracts also have limitations.

Sacrificing Returns for Voting Rights: When governance tokens are deposited into liquidity pools or staked for yield, holders often have to choose to forgo governance rights in exchange for returns. This forces holders to make a decision between returns and participation in governance, leading many to prefer obtaining yields rather than engaging in governance.

Lack of partial delegation: Currently, most contracts only allow governance rights to be fully delegated to one person. Ideally, holders should be able to decentralize power and choose to delegate to multiple representatives.

Using: A common issue with smart contracts is that they can be easily exploited. Because they run through code, they may be manipulated and altered by malicious actors. Here are some examples.

Low-price attack: When the price of governance tokens is low enough and the incentives for attacking the DAO governance are significant, attackers may accumulate enough tokens to execute malicious proposals. If the token price is very low and there is a lack of governance communication within the DAO, attackers can successfully launch an attack. A stablecoin project once suffered from such an attack, where the attacker voted to mint billions of dollars worth of stablecoins, transferred them to a personal wallet, and sold them on a DEX.

Flash Loan Attack: According to the definition from a certain data platform, a flash loan is "an uncollateralized loan that allows users to borrow assets without prepaying collateral, as long as the borrowed assets are returned within the same blockchain transaction." This type of attack aims to bypass time delays in order to approve requests at the last moment. Attackers take advantage of this point to obtain flash loans to gain enough voting power to bypass time locks, and then order the depletion of the protocol's treasury.

Innovation of Governance Contracts

The governance contract world is largely built on certain foundations. These contracts play a key role in the development of cryptocurrency governance. However, as the ecosystem continues to evolve, we can expect to see innovations and upgrades to existing contracts, as well as entirely new contract primitives.

Here are some developments worth paying attention to:

A certain governance framework: represents the latest progress in governance contract innovation, aimed at laying the foundation for future governance development.

A certain protocol: aims to solve specific governance issues through an on-chain delegation mechanism, allowing governance tokens to be reused and adding an extra layer of utility.

Gas rebate: Due to the increase in Gas prices, the cost of participating in on-chain governance has risen. The Gas rebate will provide participants with on-chain voting fees, refunding the "Gas" costs required for participation. This lowers the participation threshold and helps alleviate financial burdens.

Cross-chain governance: As DAOs expand across different chains, it is important to conduct and execute governance votes across different networks. For example, changes in the parameters of a certain protocol V3 on a certain network are voted on the Ethereum mainnet, rather than at the location of the protocol version deployment. A certain service provider has begun to focus on initiating cross-chain governance work.

Anonymous On-Chain Voting: DAOs should provide the option to enable anonymous voting on-chain proposals. This is crucial in addressing the bias that may arise from voters viewing the results of ongoing proposals. People often underestimate the psychological factors at play when viewing voting results in real-time. By adopting anonymous voting, individual voting behavior can be monitored without external interference, promoting independent thinking rather than conformity. Overall, implementing anonymous voting will help ensure fair and transparent decision-making within the DAO.

Conclusion

The on-chain governance field continues to evolve, with new innovations and improvements constantly emerging. However, there are still some challenges, such as reducing returns to obtain voting rights and the issue of not being able to delegate partially. In addition, smart contracts also carry risks of exploitation, such as low-price attacks and flash loan attacks. Nevertheless, regardless of these challenges, new developments combined with solutions like Gas rebates, cross-chain governance, and on-chain anonymous voting bring promising possibilities for future governance models.