A better way to governance in the Stellar network

Governance and voting are more difficult than most people believe. With DAOs, we normally see the classic model “the more shares, the more vote“ which we truly believe is not the right way to do governance with DAOs… “Why not?” you might ask, so let’s go into more detail in this article and explain how FxDAO proposes its governance.

The issues with the current systems in the network

The classic model of the “more shares, the more vote” is really easy to understand and is basically the most common model used by DAOs not only in the Stellar Network but also in others. This model it’s the same in multiple non-blockchain voting solutions (like regular businesses) but just like it fails in multiple situations outside of the blockchain, it replicates that into our network too.

Let’s list the most common issues:

• It gives all the power to rich holders: This is easy to understand and is the most common one, whales are the ones who rule them all and if a whale doesn’t like what the community wants, they can just change the trajectory of the voting phase whenever they want.

• It benefits insiders: The majority of DAOs give a huge amount of their governance tokens to insiders for free when they are created (with insiders we also include the development team). This makes the protocol highly centralized even if the development team says the opposite.

• Those who are late, are at disadvantage: The more time passes before you go into the protocol, the less voice you will have. Insiders usually say this needs to be that way because they are the ones assuming all the risk at the beginning… The truth is that the only thing they are risking is their time since they got their power for free so that excuse is not fully valid here (a little different will be to initial investors because at least they put their money at risk).

There is no silver bullet

Should we just ditch everything and use a democratic system instead? Well… no, a democratic system also has its issues because there is no monetary risk nor barrier at the start and this can be manipulated too (just like it happens in our countries). The hard truth is that there is no perfect voting system and we need to make some tradeoffs between them.

Not being able to have the perfect solution doesn’t mean we can not try to improve the current system, so we decided to make a combination of the different existing methods plus doing some changes to them.

Our solution

The FxDAO governance model is a combination between a modified democratic system and a quadratic voting system. At the same time, it is divided into separate modules, we understand this will make governance a little difficult to understand at the beginning but we believe is worth it if, in the end, we protect the protocol from the most common issues other voting systems have.

Our governance solution is divided into three parts: Proposing, voting, and structural changes.

Proposing something is not free

Yes, we understand it sounds awful but keep reading and you will understand why we decided on this.

Making a proposal should not be free because is the definitive way to avoid spam. There are protocols out there that require a min amount of governance tokens to propose with the idea of preventing the spam but after the proposal, the proposer receives their tokens back so, in the end, it doesn’t matter and the protocol can be spammed anyway so that's why we do it differently.

Some others protocols also reward those who make proposals and are approved which we believe is a broken concept because whales can just propose something and then vote themselves… Whales getting bigger thanks to that.

But is not that you need to pay the DAO for proposing something (that will be even worst), instead, the tokens used for registering the proposal will go again to the distribution pool and will be distributed along with the rest of the participants.

So, how does it work then? Well, to make a simple proposal (there are multiple types of proposals) the proposer or group of proposers need to lock in 0.5% of the total governance token supply (this value can be changed during the development and/or by a proposal). During the voting phase, this amount won’t be usable and once the voting phase ends it will be distributed among the rest of the voters.

This process should keep the movement of the governance tokens between holders every time there is an activity with new proposals.

Possible issues

Like every other method out there, this one is not risk-free… The main risk is people only vote intending to get a chunk of the locked funds later during the distribution. This will be a problem only during the infancy of the protocol because once the protocol gets bigger and there are more participants, the distribution should be lower than the voting cost (yeah voting is not free either, we will get into details in the next section) and by consequence removing the incentive to act in this way.

If you want to vote, you should pay (kind of)

A fully democratic voting system doesn’t allow people to put their work/funds with the goal of making changes because everybody has equal voting power, this is not a perfect system when it comes to DAOs because of the idea of using governance tokens. Does that mean we should allow everybody to use all their funds so they can increase their voting power? Well, not really. Being able to freely increase it is the same issue almost every other DAO faces so it is not something we are going to do.

In FxDAO’s voting system, each extra vote gets more expensive (just like in a quadratic voting system). This allows the majority of the participants to vote and at the same time they will be able to increase their voting power without being able to freely abuse the voting system.

What do we mean with “pay for voting"? The amount used to vote, won’t be returned to the voter, instead, it is locked during the voting duration and once there is a result, the locked tokens will go again to the protocol’s distribution pool.

Proof of being a human

Unpopular opinion coming so get ready for it: Fully anonymous voting when there is no proof of being a human is garbage… Yes, we said it, now let’s get into details on why and what we will do instead.

When we say fully anonymous we talk about what everybody prays in the blockchain space: As long as you have your account and governance tokens you can vote. Why is this garbage? Well because is highly susceptible to manipulations and it doesn’t prevent situations where one bad actor uses multiple accounts in order to go against the voting rules in those cases where a different voting method is used instead of the classic “more shares == more voting power“.

So does it mean that we are going to fully KYC everybody and keep records of those who would like to participate in voting? Well, not like you might be thinking:

• First, we will require those who would like to hold our governance token to have proven they are humans by doing a verification process with a partner, this way we don’t know who is behind an address but at least we can be sure it was validated and we can trust is a human behind it.

• Second, since we are aiming to be a legally recognized DAO, we need to be able to request whales to identify themselves just like in any other market so all participants have access to the information and be sure one whale using multiple accounts is not manipulating everything. This means that by following regulations, any participant with at least 10% of the supply will need to be publicly disclosed.

• Lastly, the DAO needs to keep its voting system clean and comply with the jurisdiction’s laws… But we’ll still try our best to comply in the most decentralized and privacy-focused way, hence why the KYC selected is one that we don’t have access to. We believe decentralized identity is something that will improve safety and fairness in the blockchain space.

Structural changes

Earlier in the text we mentioned that there are different types of proposals, and this is because we want to allow the participants to request major changes in the DAO, for example, we would like to let participants decide if they want a different development team (yes, we think the community should be able to request this) or updating the DAO jurisdiction for example.

For those types of proposals, the voting system changes and it will be similar to a democratic voting system with a minimum percentage rule of ¾ of the voters with a required participation of ¾ of the validated holders. This means that at least 75% of the validated holders need to vote and 75% of them need to be in favor of the proposal.

Structural changes are unlocked once we have a minimum of 1000 participants and at least 20% of the governance supply has been distributed already.

If for example the development team is changed, the new development team will take the direction and will need to keep the DAO in order with the jurisdiction, keep the system healthy and take the responsibility of continuing the development and growth of the protocol… We mention in another article that full decentralization is a myth and that we need rules in order to keep those with more power accountable, and this is how you do it: setting a system so those with more power can be changed if they are not acting in good faith or the community things is time to change it.

Still a work in progress

The development of the protocol is still in progress, there is a long list of stuff we still need to do and improve on both the coding side and the DAO structure side… but we wanted to give a preview of how the voting of the DAO will work.

Changes could still be made and we will keep you posted 🙌 .