DAO Governance Concept

Can a New Auction System Fix DAO Governance?

Lena Voss in Tech & Innovation August 2025 • 3 min read.

"Exploring Contestable Control as a Solution to Entrenched Issues in Decentralized Autonomous Organizations"

Decentralized Autonomous Organizations (DAOs) have emerged as a novel form of organization. Operating largely through automated code execution, DAOs often rely on token-based voting for governance, mirroring shareholder voting in corporations. While promising decentralization, this approach faces challenges.

Governance issues in DAOs have garnered increasing attention. Current experimentation focuses on voting mechanisms, including quorum-based systems and delegation. However, token voting can clash with decentralization goals by allowing explicit control through token accumulation or implicit control due to voter apathy.

To address these issues, researchers propose a sequential auction mechanism that introduces temporary, contestable control within DAOs. This mechanism aims to avoid public choice problems inherent in voting systems while enhancing value and ensuring robustness against empty voting. It also facilitates regulatory compliance and promotes investment by deterring value destruction.

How Does the Sequential Auction Mechanism Work?

The proposed mechanism centers on a sequential auction, utilizing smart contracts to execute basic auctions. These auctions occur periodically, subject to early termination, and can be initiated by any party at any time, ensuring continuous contestability.

Bids consist of a token target price, a surplus claim, and disclosure of any existing token holdings. The winning bid is the one that maximizes the value distributed to other token holders, considering the bidder's surplus claim and potential gains from their token holdings.

Token Target Price: A bidder claims that with control, they can increase the token value to a specific target.
Surplus Claim: The bidder specifies the portion of the generated token value increase they will claim.
Toehold Disclosure: Bidders must reveal their current token holdings to ensure fair calculation of surplus distribution.

To ensure appropriate incentives, control parties that fail to reach the token target price forfeit a value deposit to other token holders. This guarantees that token holders benefit from the claimed future performance, even if unrealized. Moreover, value destruction is deterred through potential loss of the value deposit and an additional surety deposit.

Is This the Future of DAO Governance?

The proposed sequential auction mechanism offers a promising approach to DAO governance. By creating temporary, contestable control and aligning incentives, it addresses key challenges related to entrenchment, value destruction, and regulatory compliance. While further research and development are needed, this mechanism could pave the way for more effective and equitable DAO governance.

About this Article -

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This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2403.1698,

Title: Economic Dao Governance: A Contestable Control Approach

Subject: cs.gt econ.gn q-fin.ec

Authors: Jeff Strnad

Published: 25-03-2024

Everything You Need To Know

What is the main problem that Decentralized Autonomous Organizations (DAOs) are facing in terms of governance?

Decentralized Autonomous Organizations (DAOs) are struggling with governance issues, particularly with how decisions are made. The reliance on token-based voting, mirroring shareholder voting, can lead to problems. These problems include explicit control through token accumulation, where a few individuals or entities can gain a disproportionate amount of influence, and implicit control due to voter apathy, where a lack of participation allows certain stakeholders to dominate decisions. These issues undermine the decentralization that DAOs aim to achieve.

How does the sequential auction mechanism work in the context of DAO governance?

The sequential auction mechanism introduces a new approach to DAO governance. It involves a series of auctions executed through smart contracts. These auctions are designed to be periodic, but also subject to early termination and can be initiated by anyone. Bidders in these auctions propose a token target price, the portion of the generated value increase they will claim (surplus claim), and disclose their current token holdings. The winning bid is the one that maximizes the value distributed to the other token holders. Control is granted temporarily to the winning bidder. If the token target price is not met, the control party forfeits a value deposit.

What are the key components that bidders must specify when participating in the sequential auction mechanism?

Bidders in the sequential auction mechanism must specify three key components: Token Target Price, Surplus Claim, and Toehold Disclosure. The Token Target Price represents the bidder's claim on the future token value increase they expect to achieve if they gain control. The Surplus Claim is the portion of the generated token value increase the bidder will keep. Finally, the Toehold Disclosure requires bidders to reveal their current token holdings, which is important for a fair calculation of the surplus distribution.

How does the sequential auction mechanism ensure that token holders benefit from the process and deter value destruction?

The sequential auction mechanism is designed to protect token holders and discourage value destruction. Firstly, if the control party fails to reach the token target price, they forfeit a value deposit to the token holders. This guarantees that the token holders are compensated if the bidder does not deliver the promised value. Secondly, value destruction is deterred through the potential loss of the value deposit, and an additional surety deposit, disincentivizing actions that would diminish the token's value and further protect the interests of token holders.

How could the sequential auction mechanism improve the regulatory compliance of Decentralized Autonomous Organizations (DAOs)?

While the article mentions regulatory compliance, it does not provide specific details. However, by creating temporary, contestable control and aligning incentives, the sequential auction mechanism could help DAOs to demonstrate accountability and responsible governance. This, in turn, could make them more attractive to regulators. For example, the mechanism's transparency, and the incentives for bidders to increase token value and avoid value destruction, provide greater assurance of responsible behavior, potentially paving the way for greater regulatory acceptance. The mechanism also offers a clear framework for decision-making and accountability, which can be important for meeting regulatory requirements.