Dual governance is a decision-making mechanism in DAOs where two distinct parties are involved in running the organization rather than one larger body.
Together, they make up the dual governance system, ensuring the protocol is not solely responsible for decision-making that ultimately affects both groups of token holders.
Dual governance can ultimately ensure that the interests of all stakeholders are represented, and can promote a more decentralized and democratic decision-making process.
Although simple in design, dual governance is prone to suffering from issues such as conflicts of interest and governance risks. As such, two key requirements are crucial to supporting the dual governance model and preventing a governance gridlock.
Another requirement for the mechanism is that it shouldn’t enable cheap attacks on governance. Any attack should bear a considerable material cost. The mechanism should also consider the fact that cooperation between liquidity pool token holders is harder and slower than it is between governance members. This can be specified as three assumptions:
There is a small but active part of the liquidity token holder’s community that can react to a controversial governance decision and escalate promptly.
There is a larger but less-active part of the community that can still participate in escalation given significantly more time.
The rest of the liquidity pool token holders constitute an even larger group that is unable to participate promptly. The estimated sizes of these groups should define the basic parameters of the mechanism.
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Decentralized decision-making allows for larger community involvement while also ensuring the security and efficiency of the network. Dual governance is devoid of centralized power and, therefore, there are reduced chances that stakeholders can decide on something that only benefits the individual or a small group of the entire community.
Decentralization has some downsides too. Coordinating and aligning the interests of two distinct governing bodies can be difficult to navigate. Finding the right balance between efficient decision-making and remaining truly decentralized is not always possible. This leads to delays in decisions being made, which can have a snowball effect on the entire operation of a protocol.
Reaching a consensus through a dual governance system is not as easy in practice as it is in theory.
Dual governance has the potential to make the decision-making process balanced. Both sides can give their opinion on the matter at hand and reach a mutually beneficial vote. Overall, it ensures a fair representation of both groups of stakeholders. This can help prevent conflicts of interest and guarantees the protocol operates efficiently and effectively. With clear communication and collaboration between both parties, finding that balance will be much easier. Dual governance can help to increase trust in the protocol and promote its long-term sustainability.
For protocols operating with a DAO governance structure, dual governance aims to ensure the alignment of the strategic and economic interests of the protocol users with those of liquidity token holders.
Dual governance will potentially revolutionize the governance structure of DeFi protocols as a whole. It will provide another solution to move away from any centralization concerns or risks, create a dynamic and inclusive relationship between the deciding parties, and ultimately lead to better democratic decision-making that is beneficial to the entire ecosystem in which the protocol operates.
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