November 7, 2023

We were honored to speak at Solana Breakpoint this past Friday, where we shared our thoughts on effective DAO governance and announced a major new update to Armada. For those of you who weren’t able to attend in person, please read on for details of the talk and information about Armada Fleet 2.

Functions of an Effective DAO

The Sol community cannot thrive without flourishing DAOs. Unfortunately, many of those that have formed over the past several years have been hampered by a lack of efficiency, agility, and effective organization. Much of this is the result of incorrect assumptions about how these communities operate.

These are important issues to examine, because despite the early challenges, DAOs serve an essential role in token projects. 

An effective DAO lays out the parameters for token issuance, including founder rounds, and plays a key role in determining the legal structure of a project ahead of a token launch. DAOs determine pricing and the total number of tokens released. During and after launch, token flow – transfers, volume, number of holders – should also function according to an architecture set out by the DAO. 

Since a functioning DAO is such an important element of a successful project, we dug in to understand their challenges in order to offer potential solutions. 

Current Challenges

One of the major assumptions behind the early development of DAOs was that large institutions would participate in governance. But political uncertainty, among other headwinds, has prevented this. Given the continued doubts around the regulatory environment in the US and elsewhere, it's best to expect that big institutions will not participate in DAO governance in a meaningful way any time soon.

The other big assumption that has turned out to be overly optimistic was that individual stakeholders would drive much of the action. This is a key element of the democratizing promise of blockchains. However, in practice, most individuals do not participate in governance, either in DeFi or TradFi, where fewer than 30% of retail shares vote on average.

As a result of this lack of participation, votes often fail, resulting in paralysis. It has now become clear that a tokenomics model that relies on individual DAO members for key decision making is unlikely to be as effective as it needs to be.

A separate but equally important challenge is the rise of centralized market makers, which are designed to mitigate the unruliness of decentralized organizations and provide sufficient liquidity for token ecosystems to function. But these centralized services impede, rather than facilitate, progress toward truly decentralized finance and introduce important problems of their own. Most acute is the fact that they require large loans to institutions in order to create liquidity – at the expense of security. “Not your keys, not your coins” is especially apt in the case of these centralized platforms.

Potential Solutions

With enough on-chain liquidity, Solana itself should be the best place to execute trades. That’s a major reason we wanted to talk about solutions for DAO governance that can achieve just this. Promising developments include SPL (Solana Program Library) Governance and Realms UI, which are easy to set up and which support voting with SPL Tokens or NFTs. Key improvements include the ability to delegate and integrate with third-party programs.

In addition to these technical improvements, fair token launches should become standard practice in the industry. Particularly in light of the changed market environment, now is the time to emphasize a model that allows a broader pool of participants to participate from the start. One key reason for this is that fair launches lead to a more widely distributed token, and therefore one that’s more likely to be stable and liquid.

A final important solution is on-chain, non-custodial market making, which avoids the pitfalls of centralized market makers. Which is why we were so excited to explain how Armada’s concentrated liquidity market making (CLMM) vaults can serve precisely this function. While allowing users to maintain custody of their assets, CLMM vaults partner with institutional market makers and automate greater functionality than many other decentralized solutions, which means individuals only need to worry about depositing and withdrawing funds.

Announcing Armada Fleet 2

With a shift in approach and the right infrastructure, we can address the challenges that DAOs face. In fact, we are already doing so. The tools we will introduce in Armada Fleet 2 are designed to increase both community participation and protocol liquidity. 

With the SPL Governance Plugin, projects can set up dual-purpose staking that allows users to earn real yield in the form of a share of protocol revenue, while also retaining a say in how a project divides its income.

The sharing out of protocol revenue is handled by another tool Fleet 2 will introduce to the Solana community: the Armada DeMUX protocol. DeMUX is a dynamic rewards system that can be configured to automatically carve up and distribute protocol revenues as designated by the community. Some of this revenue will go toward protocol liquidity, some to the DAO treasury to fund growth and development, and some directly to users as a distribution. 

Coupled with effective delegation programs and the automation of non-urgent operational decisions, Armada’s governance building blocks could eliminate many of the issues resulting from low engagement in DAO decision-making.

One important final note: all Armada tools are provided as a public good and available for any Solana-based project to use. We believe that by allowing great projects to focus on building rather than cobbling together their own tokenization architecture, we can help make DeFi 2.0 a reality on Solana – to the benefit of everyone. 

After all, a rising tide can lift an Armada. Watch the full talk here.