September 14, 2023

Drafting Governance Proposals – Part II


In the first part of this two-part article, we examined the drafting of governance proposals as informational documents tailored towards assisting an audience of token holders in making a decision relating to community assets.

This second part considers the role of governance proposals as authorising documents to the responsible persons to enact the will of the collective if the governance proposal is passed and best practices a draftsman should abide by.

Governance proposals as instructional documents

As we considered in part one of this article, governance proposals actually serve a dual purpose.

The first is to educate the voter base so that they can make effective decisions relating to community assets. The second – which is often overlooked – is that a governance proposal once passed is actually a delegation of authority to the persons identified as being responsible for the implementation of the proposal.

To draft an effective proposal for voting token holders, it is essential that the draftsman covers the macro elements in some detail– the bigger picture needs to be explained. But when we consider what effective drafting is for the executor of a DAO proposal, it is the more boring operational details which are paramount.

It is to these nitty gritty details to which we now turn our attention.

Why the boring stuff is important

Take for example the following preposterous governance proposal for a fictional GVRN DAO (note: we can neither confirm nor deny any plans to create a GVRN DAO nor to launch GVRN token)

Assume that this proposal has somehow passed a token holder vote. Now that the fun of voting is over, someone has to ensure that this proposal is implemented.

But who will do it – and how?

The proposal – though it provides presumably sufficient high-level detail to pass a token holder vote – is incredibly light on the details around implementation. Once the governance proposal is passed – what then?

Who is responsible for purchasing the supercar in this scenario? Is it the beneficiary or is it some member of the DAO executive team?Who will transfer and/or receive the USD stable coins from the DAO treasury and handle off-ramping of fund – if any? Is there a specific process for the purchase of the supercar and the return of any excess funds?

The reason these details are important is because the omission of such details means that the executor of the proposal – whoever it may be – is forced to use his or her discretion to fill in the blanks.

The problem with discretion

To preface this – discretion is necessary for any organisation to operate effectively. People charged with day-to-day operations must be empowered to make discretionary decisions because the alternative is that operations would simply grind to a halt.

The issue is with unchecked discretion.

When governance proposals do not specify in sufficient detail how a proposal is to be carried out as a matter of fact, this by default bestows upon the executor significant discretion to accomplish the objective.

This uncertainty and the consequential wide discretion accorded to the executor of such a governance proposal necessarily sets the stage for future conflict between the token holders and the executive team.Going back to the illustrative proposal for instance, if the DAO’s treasury is kept in ETH and BTC with no USD stables and the proposal fails to stipulate how those stable coins should be acquired – is the executor not being asked to take a discretionary trade in order to achieve the objective of the proposal?

Worse still, if the token holders have voted on a budget of 500,000 USD without specifying the process by which the supercar should be purchased – what if the executor of the proposal purchases the supercar for USD 480,000 through a friendly broker when an equivalent model could have been acquired for less?

The best way of dealing with potential disputes is to avoid them altogether. And in order to do so – clear instructions should be drafted into the governance proposal which considers from an operational perspective how that proposal should be implemented. There will necessarily be some element of discretion – but the key is to ensure that discretion granted is sufficiently limited in scope so that the executive team has enough flexibility to adapt to operational needs without inviting apparent or actual abuses of authority when acting in the name of the DAO.

Concluding remarks

The operational elements of governance proposals are often overlooked which invites disputes and distrust between the token holder base and the executors of the proposals.

The solution to this is to ensure that governance proposals are drafted such that clear instructions are provided relating to the implementation of proposal (if passed), limiting the discretion of the executive team to only the minimum necessary.

To receive these articles in your email, please sign up for our mailing list below.


Weekly Article

Drafting Governance Proposals – Part II

This second part considers the role of governance proposals as authorising documents to the responsible persons to enact the will of the collective if the governance proposal is passed and best practices a draftsman should abide by.

September 14, 2023


Drafting Governance Proposals – Part I

Previously, we considered the important role that aconstitution has in setting the groundwork for an effective DAO. Havingconcluded that good governance is anchored on the bedrock of a well-drafted constitution, how do we then ensure that ongoing governance decisions can be made byparticipating tokenholders and efficiently, effectively and accountably executed by the DAO’s executive team?

September 7, 2023


The Constitution – The Cornerstone of Governance

The cornerstone of a DAO is its constitution from which governance flows. A thoughtfully drafted constitution sets a DAO up for long-term success whilst a poorly drafted one sets it on the road to governance hell. Founders interested in the longevity of the DAOs they create should accord the constitution the same level of care and thought as they would in designing a DAOs tokenomics.

August 31, 2023

All Articles