The Three Governance Failure Modes
Voter apathy (gridlock):
Governance participation consistently below quorum. Proposals can never pass. Cause: governance too difficult (high gas cost for on-chain voting), governance parameters too demanding (unreachably high quorum), or token holders not sufficiently engaged.
Whale capture (cartel):
A small number of large token holders vote as a bloc and consistently pass proposals aligned with their interests. Cause: no delegation system, no quorum upper bound.
Governance attack (exploit):
An attacker acquires temporary governance power (flash loan of governance tokens, or acquiring tokens during a low-price period) and passes a malicious proposal that drains the treasury or modifies critical parameters. Cause: inadequate timelock, snapshot voting not used, no proposal deposit requirement.
Governance Parameter Design
- Voting period: Minimum 3 days; 7 days recommended.
- Quorum: 4–6% of total supply is functional for most protocols. Consider variable quorum: lower for routine changes, higher for treasury expenditures above threshold.
- Approval threshold: Simple majority (50%+1) for routine decisions. Supermajority (67%+) for structural changes. Unanimity for irreversible decisions.
- Timelock: Minimum 48 hours between vote passing and execution. 72–96 hours recommended.
- Proposal threshold: Minimum token balance required to submit a proposal. Typical range: 0.1%–0.5% of total supply.
Delegation System Design
Delegation allows token holders to assign their voting power to a representative they trust — without transferring the tokens themselves. This is critical for large protocols: most token holders are not active enough to research and vote on every governance proposal. Without delegation, quorum depends on active voting from potentially millions of passive holders. How delegation works (ERC20Votes): Token holders call the `delegate(address delegatee)` function to assign their voting weight to the delegatee. The delegatee's voting power is the sum of their own tokens plus all delegated tokens. Delegation is revocable at any time.
Treasury Management
- Multi-sig control: The DAO treasury (typically a Gnosis Safe) requires M-of-N signatures for any outbound transaction.
- Spending limits by category: Routine operational spending (up to $50K) executable without a governance vote. Larger expenditures require a formal governance proposal.
- Diversification: Maintain a reserve in stablecoins (USDC) sufficient to fund 18–24 months of operations at current burn rate.
