Futuristic city built on blockchain, symbolizing decentralized governance.

Decoding DAO Governance: How Liquid Democracy Can Revolutionize Blockchain

Soraya Malik in Tech & Innovation December 2025 • 5 min read.

"Explore how decentralized autonomous organizations (DAOs) are using liquid democracy and innovative reward systems to enhance cooperation and economic growth in the blockchain space."

Decentralized Autonomous Organizations (DAOs) are emerging as a groundbreaking approach to governance, leveraging blockchain technology to facilitate collaboration and enforce collective rules. Imagine a world where communities, businesses, and even governments operate with unprecedented transparency and efficiency, all thanks to the power of decentralized decision-making. This is the promise of DAOs, and it's rapidly becoming a reality.

DAOs address a critical question: How can we optimize human cooperation in a digital age? Traditional hierarchical structures often struggle to adapt to the fast-paced, interconnected nature of modern society. DAOs offer a compelling alternative, providing a framework for collective governance that is both transparent and adaptable. One notable example is the Network Nervous System (NNS), a comprehensive on-chain governance framework built on the Internet Computer Protocol (ICP). The NNS utilizes liquid democracy principles, allowing token holders to either vote directly on proposals or delegate their voting power to other trusted members.

This system's potential impact on cooperation and economic growth within DAOs is significant. DAOs are not just about technology; they're about people. By aligning individual incentives with the long-term prosperity of the organization, DAOs can foster a sense of shared ownership and responsibility. This is particularly evident in the NNS, where the staking mechanism, especially the reward multiplier, plays a crucial role.

Understanding the NNS Mechanism: A Deep Dive

Futuristic city built on blockchain, symbolizing decentralized governance.

At the heart of the NNS lies its sophisticated voting and reward design. The Internet Computer operates as a self-governing blockchain, where decisions are made collectively by all stakeholders. To participate, users stake ICP tokens in "neurons," which function as voting accounts. These neurons gain voting power and are rewarded for their participation, creating a powerful incentive system. The NNS incorporates two primary mechanisms to encourage and reward user engagement in blockchain governance: multipliers of neuron stake and staking rewards.

The voting power and rewards in the NNS are directly linked to the neuron stake, with multipliers based on the duration (dissolve delay) and age of the stake. The neuron stake represents the number of staked ICP tokens. The dissolve delay, ranging from 0 to 8 years, significantly impacts the multiplier. Neurons with a dissolve delay under six months have no voting power, discouraging short-term voting and promoting long-term cooperation. The longer the dissolve delay, the greater the voting power and potential rewards.

Duration (Dissolve Delay): Neurons must be staked for at least six months to gain voting power. The longer the stake duration, the higher the voting power multiplier, incentivizing long-term commitment.
Age: Neurons that remain in a non-dissolving state for extended periods also benefit from increased multipliers on their voting power and rewards. This encourages continuous engagement and loyalty.
Staking Rewards: Neurons receive rewards for participating in governance activities, including voting and delegation. The daily voting reward is calculated using a set inflation rate, ensuring a steady stream of incentives.

This design ensures that those who are committed to the long-term success of the DAO have a greater say in its direction and are appropriately rewarded for their commitment. In essence, the NNS aligns individual short-term interests with the collective long-term goals of the DAO, creating a virtuous cycle of participation and growth.

The Future of DAO Governance: Opportunities and Challenges

The exploration into the mechanics of the NNS highlights the immense potential for liquid democracy to revolutionize DAO governance. By carefully designing reward mechanisms and aligning incentives, DAOs can foster greater participation, more informed decision-making, and ultimately, more sustainable and thriving decentralized ecosystems. However, further research is crucial to address the complexities of DAO governance and ensure that these systems are truly decentralized, secure, and efficient. By continuing to explore and refine these innovative approaches, we can unlock the full potential of DAOs and create a more collaborative and equitable future.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2404.13768,

Title: The Economics Of Blockchain Governance: Evaluate Liquid Democracy On The Internet Computer

Subject: econ.gn q-fin.ec

Authors: Yulin Liu, Luyao Zhang

Published: 21-04-2024

Everything You Need To Know

What are Decentralized Autonomous Organizations (DAOs) and how are they transforming traditional organizational structures?

Decentralized Autonomous Organizations (DAOs) represent a groundbreaking shift in how communities, businesses, and even governments can operate. By leveraging blockchain technology, DAOs facilitate collaboration and enforce collective rules in a transparent and efficient manner. Unlike traditional hierarchical structures, DAOs offer a decentralized framework for decision-making, promoting adaptability and inclusivity. For example, the Network Nervous System (NNS) demonstrates how DAOs can optimize human cooperation in the digital age by aligning individual incentives with the long-term prosperity of the organization.

How does liquid democracy function within the context of DAOs, and can you give an example?

Liquid democracy in DAOs allows token holders to either directly vote on proposals or delegate their voting power to trusted members. This system enhances participation and informed decision-making. The Network Nervous System (NNS), built on the Internet Computer Protocol (ICP), exemplifies this. In the NNS, users stake ICP tokens in 'neurons,' which act as voting accounts. Token holders can either vote themselves or delegate their voting rights to other neurons. This flexible approach ensures broader participation and expertise in governance, aligning individual incentives with the DAO's long-term goals.

What are the key components of the Network Nervous System (NNS) mechanism, and how do they incentivize user engagement?

The Network Nervous System (NNS) mechanism is built around neurons, which are voting accounts created by staking ICP tokens. The system incorporates two primary mechanisms to encourage and reward user engagement in blockchain governance: multipliers of neuron stake and staking rewards. Key components include: neuron stake (the number of staked ICP tokens), dissolve delay (ranging from 0 to 8 years, impacting the multiplier), and neuron age (neurons that remain in a non-dissolving state for extended periods benefit from increased multipliers). Staking rewards are earned through participation in governance activities, like voting, which are calculated using an inflation rate, ensuring a steady stream of incentives. These elements align individual interests with the collective goals of the DAO, promoting participation and growth.

How do dissolve delay and neuron age affect voting power and rewards within the Network Nervous System (NNS)?

In the Network Nervous System (NNS), dissolve delay and neuron age are critical factors that influence voting power and rewards. Neurons must be staked for at least six months to gain voting power. The longer the stake duration (dissolve delay), up to eight years, the higher the voting power multiplier, incentivizing long-term commitment. Similarly, neurons that remain in a non-dissolving state for extended periods (neuron age) also benefit from increased multipliers on their voting power and rewards. This design ensures that those committed to the long-term success of the DAO have a greater influence in its direction and are appropriately rewarded, aligning short-term interests with the collective long-term goals.

What are the potential future implications of liquid democracy and reward systems in DAO governance, and what challenges need to be addressed?

The exploration of the Network Nervous System (NNS) highlights the immense potential for liquid democracy to revolutionize DAO governance. By carefully designing reward mechanisms and aligning incentives, DAOs can foster greater participation, more informed decision-making, and more sustainable decentralized ecosystems. However, further research is needed to address the complexities of DAO governance and ensure that these systems are truly decentralized, secure, and efficient. Addressing the challenges of DAO governance is crucial to unlock the full potential of DAOs and create a more collaborative and equitable future. Areas such as scalability, security vulnerabilities, and regulatory uncertainties need attention to fully realize the benefits of DAOs.