Governance: On Chain or Off Chain?

DAOs require governance to manage the time, energy, and resources of the group. Governance is largely carried out through voting. In DAOs, voting can happen onchain or offchain. Both are important for a DAO to function effectively and have unique benefits and drawbacks, here we’ll explain both.

What is Voting?

Voting is a regular occurrence in a DAO, much more than going to the ballot box once every four years to decide who you want to be president.

This is because voting is critical to support the ongoing functioning of the DAO. Without voting or governance, DAOs become either oligopolies or dictatorships run by a limited number of people, or they stagnate and don’t do anything at all.

The act of voting means that the group decides what to do with its resources. This distributed decision-making creates the “autonomous” aspect of DAOs, meaning they govern themselves. Members decide on the best way for the collective to pursue their goals with their resources, whether that is funding new projects, creating content, or making investments.

Voting creates buy-in. Votes show members support the actions of the collective. Voting, like in the real world, creates legitimacy. A DAO’s capacity to take action is linked to the legitimacy it has with its members. Strong participation in voting is a good sign for the DAO’s capacity to work towards goals, receive investment, maintain membership, and be successful.

Practically, DAOs use a platform (like Upstream) to create polls, questions, or proposals for members to vote on. Members can log into these platforms, often using their crypto wallet and ownership tokens, to learn about what is being voted on, gather information, and make their decision. DAOs can use ownership to gate access or weight representation on votes.

Voting can be as simple as clicking a poll option to as complicated as a multi-signature verified transaction that moves money in and out of the DAO. Alternatively, certain DAOs use protocols and signed transactions to record votes. Voting in DAOs works similarly to other platforms with the option for an extra layer of decentralization, pseudonymity, and decentralization.

What is Onchain vs. Offchain Voting?

DAOs can utilize two different types of voting: onchain and offchain. Offchain voting is the type you are familiar with. It includes polls, questions, ballots, submissions, and other types of votes. The main difference between onchain and offchain is that onchain means it is recorded permanently on a blockchain.

The permeance of onchain votes creates security and history. Members can see what and how the DAO voted in the past, and trust that this history is true. Using onchain voting doesn’t mean all votes must take place onchain. Many can still take place offchain and sync with the blockchain later (Upstream can do this).

Onchain voting means the blockchain records every vote by every member, regardless of if the proposal passes. Votes are added to the blockchain through transactions processed by “miners.” Miners are the computers that run, store, and add transactions to the blockchain. They use their time and computation power to process the votes and add them to the blockchain. This is why it costs money in the form of transaction fees (called gas fees) to vote onchain because there are energy and effort costs to making the transaction happen.

Offchain voting means not every vote is recorded on the blockchain. Most DAOs start with an offchain voting system in which members use a platform like Upstream to vote on proposals. Once the vote is complete, a group of trusted people (usually early members or large owners of the DAO) called signators are in charge of executing the transaction on the blockchain to reflect the vote.

As a result, offchain voting is not completely decentralized as there are people who have more power than others. The benefits of voting this way means each person in the community does not need to pay fees each time they submit or change a vote on a potential proposal. This is attractive because fees can be expensive, anywhere from $10 to $100 to execute a transaction. Offchain voting can also allow for non-actionable votes, for example running a poll to gauge interest or a forum to generate new ideas.

While most DAOs start with offchain voting, as DAOs grow in size and scale, the voting method often switches from offchain voting to onchain voting. Especially if the DAO grows to the point of managing hundreds of millions of dollars in capital, the cost of voting onchain is worth the cost for the benefit of keeping voting decentralized and secure.

What are the Benefits and Drawbacks Between Onchain and Offchain Voting?

Both onchain and offchain voting have their benefits and drawbacks. Either can be used in a variety of scenarios, and allow DAOs more options in their governance and decision-making process.

The benefit of onchain votes is their history and security. Situations that use onchain voting include large transfers of funds, interaction with blockchain protocols, significant changes to protocols or ownership, and ensuring owners are represented in votes. For example, a DAO would want a vote onchain to create a large development grant or invest in an expensive NFT and trigger the dispersal of funds immediately on success.

The drawbacks are their speed and cost. Onchain votes can take more time to set up and process. They must be designed to ensure the benefits of being onchain are utilized and security issues are minimized. Onchain voting is also costly, often requiring members to pay fees to have their vote processed or changed. This limits participation.

Offchain voting provides the benefits of voting without the drawbacks of the slowness and cost of onchain voting. Offchain votes can happen as quickly as a poll can be shared with the group. Once complete, the results can still be synced onchain, but it requires trust in the leaders doing the syncing. DAOs can gain a fast understanding of the thoughts of the members through offchain voting.

The downside is that offchain votes aren’t as permanent or secure as onchain ones. A vote is connected to the platform it happens on. If that data is deleted or lost, the information on the vote is lost. Similarly, offchain votes can be manipulated by non-members or bad actors if they can get access to the votes and the community doesn’t have full visibility into the outcome of the voting.

What Voting Makes Sense for Your DAO?

If financial accessibility is important to your community, offchain voting may make the most sense, especially if you expect that there are a high volume of proposals to be voted on. A good balance of accessibility and decentralization we’ve seen DAOs use is conducting the vote through offchain voting and then executing the outcome of the vote on chain by a small designated group of signators who are on the multi-sig wallet. The risk here is ensuring these signators will always act in good faith for the DAO and can be completely trusted with their great responsibility.

If decentralization is of utmost importance to your DAO, a decentralized DAO may want to rely on onchain voting. It ensures transparency, security, and history. The accounting of funds and actions is clearer when votes are made onchain, as it can all be traced on the blockchain. Onchain voting can help these DAOs remain vigilant.

For the members of a DAO, voting is not the only important part of the voting process. The pre-vote and post-vote actions are equally critical. Providing access to information that helps members make good decisions is important in the pre-vote phase. If the proposal is complicated or members can’t get the information they need, allowing them to delegate their vote to trusted members is another option.

Once a vote succeeds, DAOs must be able to take action. A vote is the start of the work. Failing to execute causes a loss of trust in members and lowers the legitimacy of the DAO. For example, members are less likely to create high-quality proposals or vote on proposals if the DAO has a history of failure to execute.

Voting and governance are generally key aspects of making DAOs unique and successful. Improving the voting experience and legitimacy provides long-term benefits to DAOs who do it often. Having knowledge of how voting works, and how it can be improved helps members and managers alike.

If you’re interested in learning about the options Upstream provides for voting (onchain and offchain), check out our demo of Upstream Collectives.