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Most Common Governance Token Models for 2023

Jon Ganor
Jon Ganor
Most Common Governance Token Models for 2023
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Decentralized Autonomous Organizations (DAOs) have emerged as a groundbreaking concept in blockchain and decentralized governance. These innovative entities aim to create autonomous and self-governing communities where the collective will of token holders drives decision-making. DAOs represent a significant step towards democratizing organizational structures and fostering transparent, inclusive, and community-driven governance.

One of the most notable milestones in the history of DAOs is the creation of "The DAO" in 2016. It was a pioneering project that sought to leverage blockchain technology to build a decentralized investment fund. The DAO, short for "Decentralized Autonomous Organization," was powered by smart contracts on the Ethereum blockchain and intended to operate autonomously without traditional hierarchical structures.

Despite its ambitious vision, The DAO encountered a significant setback. In an unfortunate turn of events, a vulnerability in the smart contract code was exploited, leading to a substantial hack. The attacker siphoned off a significant portion of the funds held by The DAO, creating a massive controversy within the blockchain community.

The DAO hack served as a pivotal moment for the blockchain ecosystem. It raised important questions about security, code audits, and the need for robust governance mechanisms within DAOs. While The DAO faced significant challenges and eventually dissolved, the lessons learned from this experience paved the way for subsequent iterations of DAO models.

What is Governance Token?

A governance token is a digital asset that grants its holders the right to participate in the decision-making processes of a DAO or a blockchain protocol. These tokens serve as a means for stakeholders to collectively influence the governance and direction of the network or organization.

Since the advent of DAOs, particularly after the significant development in 2016 with The DAO, the concept of governance tokens has gained prominence. Many DAOs have emerged, each with its unique governance token, allowing token holders to have a say in key decisions affecting the platform's operations, protocol upgrades, resource allocation, and more.

In addition to DAOs, several blockchain protocols and platforms have integrated governance functions into their frameworks. For example, Uniswap, one of the leading decentralized exchanges, introduced its governance token, UNI, which empowers token holders to propose and vote on protocol upgrades, fee adjustments, and other governance proposals.

Governance tokens are typically distributed to participants through token sales, airdrops, or rewards for providing liquidity or staking assets within the network. Holding these tokens not only represents a financial stake in the platform but also grants voting rights and decision-making power.

The governance process facilitated by these tokens often involves mechanisms such as token-weighted voting, quadratic voting, or reputation-weighted voting. The aim is to ensure that decisions are made in a fair, inclusive, and decentralized manner, where token holders can express their preferences and contribute to shaping the future of the network.

Most Common Governance Token Models

Token Weighted Voting “Vanilla DAO” 

This is the most common tokenomics model used in DAOs. It involves token holders voting on proposals based on the number of tokens they hold. The more tokens a holder has, the more voting power they possess.

How Token Weighted Voting Works:

Voting Power = Total Tokens Held / Total Token Supply

This formula assigns voting power proportionally to the number of tokens held by each participant. For example, if a token holder holds 100 tokens and the total token supply is 1,000, then their voting power would be 10%.

The Pros and Cons of Token Weighted Voting:

Pros:

  • Simple and easy to understand.
  • Encourages holders with a larger stake to participate in governance.
  • Rewards token holders who have invested more in the DAO.

Cons:

  • Can lead to a concentration of power among a small group of large token holders.
  • Smaller token holders may feel disenfranchised and not participate in governance.
  • Can incentivize short-term thinking.
  • Can be manipulated via flash loan attacks (See Mango Markets)

Conviction “Staked Token” Voting

This model aims to create more nuanced voting by allowing token holders to "stake" their tokens to show support for a proposal. Tokens are locked for a set period, and if the proposal passes, the holder's tokens are released. The longer the tokens are locked, the more conviction the holder is assumed to have in the proposal.

How Conviction “Staked Token” Voting Works:

Voting Power = Tokens Staked * Time Staked  / Total Token Supply

This formula considers the number of tokens staked and the length of time they have been staked. The longer the tokens are staked, the greater the voting power they accumulate over time. It incentivizes long-term commitment and participation in the DAO, rewarding token holders who demonstrate conviction in their stake.

The Pros and Cons of Conviction “Staked Token” Voting:

Pros:

  • Encourages holders to make more informed and thoughtful decisions.
  • Rewards holders who are most committed to the DAO and its goals.
  • Helps to avoid "tyranny of the majority" decision-making.

Cons:

  • Can be complex to understand and implement.
  • May require a longer voting period to allow holders to stake their tokens and build conviction.
  • Can lead to a lack of participation from holders who are not as committed to the DAO. 
  • Staking can incur high gas fees.

Timed Weighted Voting

This model assigns voting power based on how long a token holder has held their tokens. The longer a holder has held their tokens, the more voting power they possess. Timed Weighted Voting can be implemented in different ways. One common approach is to assign a linear or exponential increase in voting power over time, where tokens held for longer periods receive more weight in decision-making.

How Timed Weighted Voting Works:

Voting Power = (Tokens Held * Time Held) / Total Token Supply

In this formula, the voting power is calculated by multiplying the number of tokens held by the duration for which they have been held. The idea is to reward token holders who have demonstrated a long-term commitment to the DAO with a stronger voting influence.

The Pros and Cons of Timed Weighted Voting:

Pros:

  • Encourages long-term thinking and investment in the DAO.
  • Rewards holders who have a vested interest in the long-term success of the DAO.
  • Can help to reduce the influence of short-term speculators.

Cons:

  • Can lead to a lack of participation from newer token holders who have not yet accrued significant voting power.
  • May incentivize token holders to hold onto their tokens rather than actively participate in governance.
  • May be difficult to implement fairly and transparently.

Reputation Weighted Voting  

In this model, voting power is based on a user's reputation within the DAO ecosystem. Reputation can be earned through various contributions to the DAO, such as submitting proposals, participating in discussions, or performing work for the DAO.

How Reputation Weighted Voting Works:

Voting Power = Reputation Score / Total Reputation

In this formula:

  • Voting Power refers to the weight or influence of a participant's vote.
  • The reputation Score represents the reputation or credibility of the participant within the DAO community. This score is usually based on factors such as past contributions, expertise, activity level, or community feedback.
  • Total Reputation denotes the sum of the reputation scores of all participants in the DAO.

The reputation score measures a participant's involvement, trustworthiness, and expertise within the DAO. By assigning voting power based on reputation, DAOs aim to give more influence to participants who have demonstrated a higher level of commitment and expertise.

The Pros and Cons of Reputation Weighted Voting:

Pros:

  • Encourages active participation and contributions to the DAO.
  • Reduces the influence of holders who do not actively participate in governance.
  • Rewards holders who are actively contributing to the success of the DAO.


Cons:

  • Can be difficult to measure reputation accurately.
  • Can lead to a lack of participation from smaller token holders who may not have the same opportunities to contribute to the DAO.
  • Reputation can be easily manipulated or faked.

Quadratic Voting 

This model uses a formula that considers the number of tokens a holder has and the number of proposals they support. It ensures that smaller token holders can still significantly impact decisions by allowing them to have a greater voting weight when they support a proposal.

How Quadric Voting Works:

The voting power formula for Quadratic Voting in DAOs involves a quadratic relationship between the number of tokens a participant holds and their voting power. The formula can be expressed as:

Voting Power = sqrt(Token Balance)

In this formula:

  • Voting Power represents the weight or influence of a participant's vote.
  • Token Balance refers to the number of tokens held by the participant in the DAO.


Quadratic Voting aims to create a more balanced and equitable voting system by mitigating the potential for vote manipulation and ensuring that individuals with larger token holdings do not have disproportionately higher voting power. By taking the square root of the token balance, the formula reduces the voting power of participants with larger token holdings while still giving them an advantage over those with fewer tokens.

For example, if a participant holds 100 tokens, their voting power would be the square root of 100, which is 10. In contrast, if another participant holds 1,000 tokens, their voting power would be the square root of 1,000, which is 31.62.

Quadratic Voting encourages participants to allocate their tokens strategically, considering the importance of the proposal or decision being voted on. It aims to provide a more nuanced and proportional representation of the community's preferences.

The Pros and Cons of Quadratic Voting:

Pros:

  • Helps to prevent large token holders from dominating decision-making.
  • Encourages holders to support proposals they care about instead of just voting with their stake.
  • Allows for a more nuanced and representative decision-making process.

Cons:

  • Can be complex to understand and implement.
  • May require additional resources to manage the voting process.
  • Smaller token holders may still feel disenfranchised if they don't support the most popular proposals.

Continuous Token Issuance

This model incentivizes token holders to participate in DAO governance by continually issuing new tokens based on the holder's participation. This allows for a more fluid distribution of tokens and promotes ongoing involvement in the DAO.

How Continuous Token Issuance Works:

The voting power formula for Continuous Token Issuance in DAOs involves considering the continuous issuance of tokens over time. The formula considers both the initial token balance and the rate of token issuance. It can be expressed as:

Voting Power = Token Balance + Issuance Rate * Time

In this formula:

  • Voting Power represents the weight or influence of a participant's vote.
  • Token Balance refers to the number of tokens held by the participant in the DAO.
  • The issuance Rate represents the rate at which new tokens are continuously issued.
  • Time represents the duration for which the tokens have been held.


By incorporating the continuous issuance of tokens, this voting power formula acknowledges that token holders can acquire additional voting power over time. The longer a participant holds tokens, the more voting power they accumulate due to the continuous issuance.

For example, if a participant initially holds 100 tokens and the issuance rate is 10 tokens per month, after 6 months, their voting power would be:

Voting Power = 100 + (10 * 6) = 160

Continuous Token Issuance incentivizes long-term participation in the DAO and rewards ongoing engagement. It allows participants who hold tokens for extended periods to have increasing influence over time.

The Pros and Cons of Continuous Token Issuance:

Pros:

  • Encourages ongoing participation and contribution to the DAO.
  • Helps to incentivize holders to remain invested in the DAO.
  • Can lead to a more fluid distribution of tokens.

Cons:

  • Can lead to dilution of token value if too many new tokens are issued.
  • May be difficult to implement fairly and transparently.
  • May incentivize token holders to participate for the sake of receiving new tokens rather than for the benefit of the DAO.

What is Hord’s Governance Model?

Hord's governance model is designed to provide an effective and fair decision-making process for its decentralized autonomous organization (DAO). To achieve this, Hord has adopted a Timed Weighted Voting model, which offers a balanced approach to rewarding token holders based on their long-term commitment to the Hord. It ensures that the voting influence remains balanced and inclusive.

The Timed Weighted Voting model implemented by Hord incorporates an exponential increase in voting power based on the duration of token ownership. This means that the longer a token holder has held their tokens, the greater their voting influence becomes. However, to prevent any potential imbalance, the increase in voting power is carefully calibrated to incentivize long-term commitment without discouraging new token holders from participating.

Under the Hord governance model, the increase in voting power follows a progressive scale. Token holders who have held their tokens for 3 months receive a 10% increase in voting power. For those who have held their tokens for 6 months, the increase is 20%. Similarly, token holders with a 9-month holding period experience a 30% increase, while those who have held their tokens for a full year enjoy a 40% increase in voting power

It's important to note that the voting power increase is capped at 12 months, ensuring that token holders who have demonstrated a long-term commitment have a stronger influence in the governance process. This cap also maintains a level playing field and encourages participation from new holders.

Final Thoughts

The future for DAOs holds immense potential as they continue to shape the landscape of the Web3 world. Governance, a key pillar of DAOs, is expected to expand and become even more prevalent across various projects and protocols.

As the benefits of decentralized decision-making become increasingly apparent, community governance will likely become the norm rather than the exception. DAOs provide a framework for token holders and community members to participate in the decision-making process actively, ensuring transparency, inclusivity, and accountability.

The emergence of successful DAOs, such as The DAO, Constitution DAO, and others, has demonstrated the power of collective intelligence and distributed decision-making. The ability for stakeholders to have a direct say in the direction, operations, and governance of a project brings about a sense of ownership and aligns incentives among community members.

In the future, we expect to see an expansion of governance mechanisms and tools that empower token holders to shape the trajectory of projects. This includes voting protocols, reputation-weighted voting, quadratic voting, and other innovative approaches that aim to capture diverse perspectives and prevent undue concentration of power.

Projects without community governance may become rare as the benefits of decentralized decision-making become increasingly recognized. The decentralized nature of DAOs allows for more resilient, adaptable, and responsive ecosystems where the interests and aspirations of the community are at the forefront.

As the Web3 world evolves, integrating community governance within projects will become fundamental to building decentralized and sustainable ecosystems. DAOs will play a crucial role in fostering collaboration, innovation, and collective decision-making, shaping the future of decentralized governance in the digital age.

Website: Hord.fi/

Twitter: twitter.com/HordApp

Telegram: t.me/hord_app

Announcements: t.me/hordnews

Youtube: youtube.com/channel/UCOhzE0AKC1ZFElFqIxbFAmw

GitHub: github.com/hord