Governing in subgroups with tools

Governance structures help Web3 projects to adapt. As Web3 projects grow, they need to evolve those governance structures. One way that Web3 businesses scale governance is through breaking up governance responsibilities into subgroups, aided through DAO tooling. In this article we cover why and how Web3 businesses delegate governance powers and the frontiers of DAO tooling.

Why is governing a large Web3 business different?

Governing larger scale Web3 businesses has several distinct challenges.

There is a much larger group of stakeholders. Those community members might also have different incentives (such as different time horizons or priorities for the project).

Governance decisions in larger Web3 projects have a different risk profile. The financial and regulatory consequences of decisions, including with a larger market capitalisation and a sizable treasury, can be significantly greater.

As Nichanan Kesonpat outlines some of the distinct challenges that DAOs face as they grow include:

• Lowering barriers for meaningful contributions. It can be hard to attract and retain contributors in a useful and directed way.
• Maintaining operational efficiency. As all organisations grow they face challenges in maintaining effective processes.
• Coordinating decision-making at scale. The unique nature of ownership in Web3 means that it can be hard to coordinate decisions between often tens-of-thousands of governance token holders.

The governance structures of a Web3 business tend to become more complex as a project grows. Some of that evolution will be towards decentralisation — a community of token holders might be tasked with major decisions about the protocol (e.g. increasing token supply). Other governance structures will push towards centralisation — indeed, decisions can be delegated to smaller groups.

Delegating to subgroups

There is an idealised vision of Web3 and DAO governance where token holders vote on all issues all of the time. While this approach might fulfil the ethos of decentralisation, it is not necessarily or likely the most effective way to govern a Web3 business at scale. As Linda Xie notes in Key Learnings from DAOs:

It should not be the case that all DAO members vote on every decision needed in the DAO. It’s impossible to try to keep up with everything and it’s not the best use of everyone’s time, especially as the DAO scales.

… allow token holders to delegate their votes to a person or group that is able to dedicate the time needed to make informed decisions.

Another potential tactic that can help expand a DAO’s membership and scope is partitioning a DAO into subgroups that each operate independently and focus on specific tasks (development, marketing, etc.). One of the first DAOs to partition itself successfully was Yearn Finance. Yearn’s rapid growth and constant product evolution led to a need to split up the team into multiple teams that independently handled tasks like front-end UX, core protocol development and marketing.

There are further reasons why mature Web3 projects tend towards the emergence of subgroups. Some reasons are:

• To access specialist knowledge. Not every token holder will have knowledge about each decision. Some decisions, such as treasury risk management or protocol development, might require deeper specialist expertise.
• To conceal knowledge. A subgroup might be necessary to conceal some knowledge (e.g. strategic information for a business) that are best kept private (even if only temporarily).
• To enable experimentation. The use of subgroups to make decisions (e.g. to give grants from the treasury) could enable each subgroup to develop its own governance processes. This experimental approach has some innovation benefits over a one-size-fits-all governance approach.

Delegating to subgroups has a sound theoretical basis. In practice, developing these more complex governance structures requires governance tooling.

Governance tooling

There has been an explosion in Web3 tooling over the past few years, especially driven by the need for DAO tooling. The DAO tooling landscape is diverse and expanding. Some types of tools are:

• Voting tools. These tools help coordinate a community of governance token holders, including the ways that those votes are aggregated, displayed and executed. Examples include Snapshot, Tally and Boardroom.
• Communications tools. Organisation members need to communicate with each other, including places to debate and discuss governance issues. Examples include Discourse, Discord and Commonwealth.
• Contributor tracking tools. How do projects know who is contributing, and how much their contributions are worth? Tooling is needed to coordinate the process of measuring and compensating contributors. Examples include Source Cred and Coordinape.
• Treasury management tools. The treasuries of DAOs need to be managed, filled and kept secure. As projects grow, they tend to diversify their treasuries through governance proposals and tools. Examples include Llama, Parcel and Juicebox.
• Security tools. There are various tools for maintaining security, including multisignature contracts and oracle integration. Examples include Gnosis Safe and reality.eth.
• Governance delegation tools. As discussed above, protocols might develop subgroups for on-chain subgroups that require tooling. Examples include Metropolis and Zodiac.

We expect that the space of DAO tooling will grow significantly in the coming years. These tools are critical to enable DAOs and Web3 businesses to operate effectively at scale.

From the perspective of a Web3 business, DAO tools are an increasingly important organisational resource. Because many DAO tools are standardised and composable, Web3 businesses can implement a suite of different tools, in a unique combination, to suit their specific governance challenges.

Want to know more?:

If you’re interested, you can read more about Yearn’s governance shift towards teams here.