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Decoding DAOs activity - The importance of a multidimensional data analysis
This article is a contribution to Polygon #DaoDataWeek.
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Decentralized Autonomous Organizations (DAOs) are reshaping collaboration and decision-making in the digital age. Using blockchain technology as the backbone for all their activity, DAOs promise transparency, security, and efficiency in operations.
Today, the DAO landscape boasts thousands of organizations and is expanding at an unprecedented pace. According to a Polygon Analytics Dune Dashboard, there are currently more than 24K active DAOs.
DAOs serve as a flexible framework for organizing various groups, and they can be classified into different categories based on their specific use cases. While this list is not exhaustive, it provides an overview of the categories in which DAOs can be placed:
Art & Culture: DAOs focused on supporting artistic and cultural initiatives.
DeFi: DAOs involved in decentralized finance activities.
Infrastructure: DAOs contributing to the development of blockchain infrastructure and protocols.
DeSci: DAOs dedicated to decentralized scientific research and collaboration.
Gaming: DAOs operating within the gaming and virtual world ecosystems.
Investment: DAOs focused on investment and asset management strategies.
Media: DAOs involved in decentralized media creation and distribution.
NFTs: DAOs centered around non-fungible tokens and their various applications.
RWA: DAOs participating in the realm of real-world assets, bridging traditional and digital economies.
These categories offer a structure for comprehending the diverse applications and areas of focus within the DAO ecosystem. DAOs can belong to one or more of these categories, depending on their specific objectives and activities.
Nevertheless, within this new form of decentralised organization, a significant obstacle persists: the majority of metrics generated by DAOs are overlooked or not thoroughly analyzed, failing to comprehensively capture and interpret the abundance of onchain data they produce.
Multidimensional analysis of DAOs onchain data
When assessing and comparing DAOs, the prevailing metrics often revolve around treasury value and the number of holders. However, relying solely on these metrics can distort our understanding. To gain a comprehensive view of DAO activity, a more holistic approach is essential, considering various dimensions.
As previously mentioned, DAOs can encompass a wide range of categories and use cases. Consequently, the relevance of metrics may vary depending on the type of DAO under evaluation. The three dimensions of Treasury, Governance, and Holders we explore in this article, collectively capture a significant portion of typical DAO activities. By considering the insights each of these dimensions provides, we can better assess and understand the unique dynamics within each DAO.
In the upcoming section, we will delve into each of these dimensions and explore a selection of relevant metrics, examining the valuable insights they yield.
Treasury Metrics: Analysing the Financial health
While treasury assets value are typically one of the initial metrics examined in the context of DAOs, it is essential to consider that there are other relevant metrics that offer financial insights.
These additional financial metrics play a crucial role in evaluating financial risk and sustainability, providing a more comprehensive understanding of the DAO's financial health.
As mentioned earlier, treasury balance is a widely utilized metric in DAO analysis. This metric represents the total value of assets held within the DAO's treasury, typically expressed in ETH or USD. It serves as an indicator of the DAO's overall financial strength and stability.
Assets in Treasury
Examining the composition of assets in the treasury reveals the DAO's risk appetite and financial stability. A diversified portfolio mitigates risks and ensures liquidity. Also it is important to consider that some assets could be illiquid, meaning they may not be easily convertible to a liquid currency or have limited trading volume in the market.
Furthermore, it is essential to acknowledge that DAOs may issue their own assets as part of their operations and hold these tokens in their treasury. Consequently, when evaluating the diversification of assets within the treasury, it becomes crucial to consider the potential impact of these self-issued assets.
Treasury Inflow vs. Outflow
This metric compares the balance between the inflow and outflow of funds in the DAO's treasury trough time. A positive inflow versus outflow balance in a certain period of time indicates a financially sustainable DAO, while more outflows than inflows may raise concerns about its longevity.
This concept of evaluating inflow and outflow balances is akin to a metric commonly found in the financial accounting world known as cash flow analysis. In traditional financial accounting, the cash flow statement assesses the sources and uses of cash within an organization, providing insights into its ability to generate and manage cash. Similarly, the treasury inflow vs outflow metric in DAOs serves as a measure of the financial health and sustainability, aligning with the principles of sound financial management observed in traditional accounting practices.
Financial Reserve Ratio
Calculating the ratio between the DAO's liquid assets and its operating expenses provides insight into its financial resilience. A higher reserve ratio indicates a more robust financial position, as it signifies that the DAO has a greater proportion of liquid assets available to cover its operating expenses.
Drawing a parallel to the financial world, this metric is reminiscent of the concept of the reserve ratio used in traditional banking. In traditional banking, the reserve ratio represents the proportion of a bank's total deposits that it must hold as reserves, typically in the form of cash or deposits with central banks. This reserve serves as a safeguard to ensure that banks have sufficient liquidity to meet withdrawal demands from depositors.
Similarly, the financial reserve ratio in the context of DAOs serves as a measure of their financial preparedness and ability to handle unexpected expenses or fluctuations in revenue. A higher financial reserve ratio indicates that the DAO has allocated a larger portion of its liquid assets to act as a buffer against potential financial challenges.
Revenue streams analysis
Analyzing the DAO's revenue streams and their growth rate provides an understanding of its ability to generate income and sustain operations. This metric assesses the DAO's financial viability and potential for long-term success.
A Revenue streams analysis provides an understanding of the income-generating capabilities of the organization. It showcases the DAO's capacity to attract users, clients, or customers, and monetize its products, services, or platform. By monitoring revenue streams and their growth rate, stakeholders can gain valuable insights into the financial health, sustainability, and growth potential of the DAO.
Governance Metrics: Assessing Decision-Making Processes
Effective decision-making processes and the distribution of power play pivotal roles in shaping DAO’s operations and outcomes. Understanding governance metrics is vital as they shed light on the level of community engagement, the responsiveness of the DAO to proposals, and the overall democratic nature of its decision-making.
By examining these metrics, we can gain a deeper understanding of the dynamics behind decision-making processes, the concentration of power, and the extent to which token holders are actively involved in shaping the DAO's future.
Number of Proposals Created
This metric measures the quantity of proposals generated within the DAO. A higher number may indicate a more active governance and showcases the DAO's adaptability and responsiveness to community needs. By analyzing the number of proposals created, stakeholders can gain insights into the level of community engagement, the efficiency of the DAO's governance processes, and the extent to which the DAO is actively addressing the concerns and aspirations of its members. This metric serves as a valuable measure of the DAO's democratic participation.
Number of Voters
The number of unique token holders participating in voting reflects the level of engagement in the decision-making process. A higher number indicates a more diverse and engaged community. A larger number of voters suggests a broader representation of stakeholders who are actively contributing their perspectives and opinions to the decision-making process.
Voters Turnout (%)
This metric calculates the percentage of token holders who actively participate in voting.
A high voter turnout percentage signifies a highly engaged community that actively takes part in the decision-making process. It demonstrates a strong interest and commitment from token holders to exercise their voting rights and contribute to shaping the direction of the DAO. A high voter turnout is indicative of a vibrant and participatory community that values democratic principles and actively seeks to have a say in the DAO's decisions.
Conversely, a low voter turnout percentage suggests a potential lack of engagement or interest from token holders in participating in the governance process. It may indicate the need for increased community outreach or improved mechanisms for encouraging participation.
It is important to note that the voter turnout percentage can also be influenced by the perceived importance or controversy of the proposals being voted on within the DAO. Proposals that are considered significant or contentious tend to generate higher levels of interest and engagement from token holders, resulting in a higher voter turnout percentage.
Voting Power Distribution
This metric assesses the concentration of voting power among the top holders within the DAO, taking into account both direct token holders and those who have received delegated voting power.
It quantifies the influence held by the top percentage of wallets in terms of voting power.
This metric quantifies the influence wielded by the top percentage of wallets in terms of their voting power. Analyzing this metric provides valuable insights into the distribution of governance influence within the DAO and helps identify potential issues related to centralization or inequality.
By assessing the voting power distribution, stakeholders can understand the extent to which governance authority is concentrated in the hands of a few dominant holders. A higher concentration of voting power among a limited number of wallets may indicate a governance structure that is less decentralized, potentially raising concerns about power imbalances.
Conversely, a more equitable distribution of voting power signifies a more inclusive and decentralized DAO, where governance decisions are more representative of the broader community.
It is important to note that a high concentration of voting power in a few wallets within the DAO can potentially impact the voter turnout percentage. When token holders perceive that a small number of top holders have significant control over decision-making processes, it may lead to decreased motivation among other holders to participate in voting. The perception that their individual votes may have less influence compared to the decisions made by the dominant holders can result in reduced engagement and lower voter turnout.
Measuring the proportion of voting power delegated to representatives or delegates (if the DAO supports liquid democracy) provides insights into the trust placed in specific individuals.
By assessing the delegation power metric, stakeholders can gain an understanding of the influence and decision-making authority granted to selected representatives. Delegation power reflects the degree of responsibility and decision-making entrusted to these individuals, showcasing their ability to act on behalf of others within the DAO.
Proposal Success Rate
The proposal success rate represents the percentage of proposals that are accepted and implemented within the DAO. A high or low success rate may indicate issues with proposal quality or potential barriers to acceptance, providing insights into the DAO's decision-making dynamics and effectiveness.
A potential bias that can arise from a very high proposal success rate is the "unanimity bias." This bias occurs when participants within a DAO exhibit a strong inclination towards agreement and consensus, leading to a lack of critical evaluation or consideration of alternative viewpoints. The unanimity bias can stifle healthy debate, hinder the exploration of innovative ideas, and limit the diversity of perspectives within the decision-making process.
When a DAO consistently experiences a high success rate with minimal rejections, it may indicate that proposals are being evaluated without sufficient scrutiny or independent analysis. This bias towards unanimous agreement can result in a closed decision-making environment where dissenting opinions are suppressed, potentially hindering the DAO's ability to identify and address potential risks, weaknesses, or innovative opportunities.
Holders Metrics: Understanding the community
Understanding DAOs holders dynamics that forms around an organization is crucial for its success and sustainability. These metrics offer valuable information about the inclusivity, diversity, and overall dynamics of the community. By examining holders metrics, we can gain a deeper understanding of the size of the community, understand holders retention and growth. Assessing these metrics is essential to evaluate the DAO's community-driven nature, identify potential concentration of power, and gauge the level of support and involvement from its stakeholders.
Number of Unique Holders
The number of unique holders is a fundamental metric that provides insights into the size and diversity of the community within the DAO. A higher count of unique token holders suggests a larger and more diverse participant base, which can enrich the DAO's decision-making processes by bringing in a broader range of perspectives, experiences, and expertise.
A larger community with a diverse set of token holders contributes to a more robust and resilient DAO ecosystem. It fosters a dynamic environment where different stakeholders can contribute their unique insights and knowledge, leading to more innovative solutions.
However, it is important to consider that a higher number of token holders may also present challenges in terms of organizing and fostering active participation. With a larger community, coordinating decision-making processes and achieving high voter turnout can become more complex. Each individual's vote may have a relatively lower impact overall, potentially leading to lower voter turnout or reduced engagement from token holders.
This metric measures the distribution of tokens among holders. It provides insights into whether token ownership is decentralized or concentrated among a few individuals or entities.
A more equal distribution of tokens among holders indicates a decentralized structure, where power and influence are dispersed across a diverse range of participants. This can foster a more inclusive and democratic decision-making process, as a broader set of stakeholders have the ability to shape the direction and policies of the DAO. It promotes a sense of ownership and collective responsibility, encouraging active participation from a wider range of token holders.
Conversely, a high concentration of tokens in the hands of a few individuals or entities suggests centralization, where decision-making authority may be disproportionately influenced by a small number of powerful stakeholders. In such cases, the decision-making process may be more susceptible to the preferences and interests of the concentrated holders, potentially limiting the diversity of perspectives and the overall representativeness of governance decisions.
Average Token Holding Period
The average token holding period provides valuable insights into the behavior and sentiment of token holders within the DAO community. By calculating the average length of time that tokens are held before being transferred or sold, stakeholders can gauge the level of commitment, loyalty, and long-term belief in the DAO's mission.
A longer average holding period indicates that token holders are more inclined to retain their tokens over an extended period. This suggests a stronger conviction in the DAO's vision, goals, and overall value proposition. It reflects a sense of trust and confidence in the DAO's ability to deliver on its promises and generate sustainable value over time. A higher average holding period also signifies a more stable and dedicated community, as token holders demonstrate their commitment by keeping their tokens invested in the DAO's ecosystem.
A shorter average holding period may indicate a higher level of token turnover and potential volatility within the community. It suggests that token holders are more inclined to engage in frequent buying and selling of tokens, potentially driven by short-term speculative motives or a lack of long-term confidence in the DAO's prospects.
Unique holders growth Rate
The unique holders growth rate is a metric that provides insights into the expansion and adoption of the DAO's community. By measuring the rate at which new members join the DAO, stakeholders can assess its increasing popularity, acceptance, and the potential for network effects to take hold.
A higher growth rate signifies a growing interest and attraction towards the DAO. It suggests that more individuals are recognizing the value, benefits, and opportunities offered by the DAO's ecosystem. As the community expands, it brings with it a diverse range of skills, perspectives, and resources that contribute to the DAO's overall strength and resilience. A larger and more engaged community fosters collaboration, knowledge-sharing, and the potential for network effects, where the value of the DAO increases as more participants join and contribute.
It is important to note that while a higher growth rate is generally positive, the quality of growth should also be considered. It is crucial to ensure that the new members are onboarded and that they align with the DAO's values, goals, and contribute positively to its community. Maintaining a balance between quantity and quality of growth is key to fostering a sustainable organization.
Using multidimensional composite metrics to understand DAOs
As we've discussed, within the categories of Treasury, Governance, and Holders, exists an extensive range of metrics that can be utilized to evaluate DAOs. However, it is common for these metrics to be examined in isolation, rather than taking a multidimensional approach.
By taking a multidimensional approach, we can gain a more comprehensive and holistic understanding of a DAO's activities, strengths, areas for improvement and for a more nuanced and complete assessment.
Additionally, by adopting multidimensional composite metrics, we can gain deeper insights into DAOs and establish benchmarks that facilitate comparisons across different organizations. These composite metrics are constructed by combining and integrating the various dimensions we have discussed earlier.
Rather than analyzing metrics in isolation, using composite metrics allows to capture the interrelationships and interactions between different aspects of a DAO's operations. Consider the parallel to traditional macroeconomic indicators such as Gross Domestic Product (GDP). DAOs currently lack an equivalent composite metric that synthesizes multiple dimensions into a unified framework. While assessing the treasury value is important, relying solely on this metric provides a limited understanding of a DAO's multifaceted nature.
By synthesizing multiple metrics into a single composite indicator, stakeholders can assess not only the financial health of a DAO but also its governance efficacy, community engagement, and potential for sustainability. Such a holistic appraisal is vital for making informed decisions, strategizing for growth, and fully realizing the immense potential of DAOs.
Introducing DAO Governance Asset Value (DGAV)
In order to transcend the constraints of isolated metrics, this article proposes a composite multidimensional metric that takes into account several DAO dimensions:
DAO Governance Asset Value (DGAV)
DGAV = Treasury Assets x VPR x (1 - VPCI)
Treasury Assets = Liquid assets in treasury.
Voter Participation Ratio (VPR) = Unique Voters / Total Unique Holders.
Voting Power Concentration Index (VPCI) = (Total Voting Power of Top 10% Wallets) / (Total Voting Power of All Wallets)
DGAV integrates various factors including liquid assets in the treasury, active voter participation, and the distribution of voting power. By combining these dimensions, DGAV offers a comprehensive evaluation of a DAO's overall activity and enables benchmarking between different DAOs. This composite metric provides stakeholders with a more holistic understanding of a DAO's activity, fostering better-informed decision-making and facilitating meaningful comparisons within the ecosystem.
How to Interpret Results:
A higher DGAV suggests a healthier DAO, with substantial financial resources, an actively participating community, and a distributed voting power that avoids excessive centralization.
A lower DGAV could indicate issues such as limited financial resources, low community participation, or a high concentration of voting power among a few participants.
Now, to better understand the metrics used to calculate the DGAV, here’s an overview of each of them:
Voter Participation Ratio (VPR)
VPR = Unique Voters / Total Unique Holders
The VPR is a key metric that helps us understand how engaged the members of a DAO are in its governance. It specifically quantifies the proportion of unique token holders who actively participate in voting on various proposals and decisions within the DAO.
How to Interpret Results:
A higher VPR indicates greater participation from token holders, which typically signifies a more active and engaged community. A lower VPR may suggest less engagement, which could indicate challenges in mobilizing the community or a lack of interest in governance matters.
Voting Power Concentration Index (VPCI)
VPCI = (Total Voting Power of Top 10% Wallets) / (Total Voting Power of All Wallets)
VPCI represents the percentage of total voting power held by the top 10% of wallets. It's essentially the weight the top 10% of wallets have in terms of voting power, and is expressed as a number between 0 and 1.
How to Interpret Results:
0: Indicates that the top wallets have no voting power, which is very unlikely but represents a theoretical extreme.
1: Indicates that the top wallets hold all the voting power, representing full centralization.
Numbers closer to 0: Indicate a more distributed voting power among all participants.
Numbers closer to 1: Indicate a higher concentration of voting power among the top wallets.
For example, if the VPCI is 0.9 for the top 10% of the wallets, it indicates that these wallets hold 90% of the voting power, which suggests a high degree of centralization. On the other hand, a VPCI of 0.2 would indicate that the top 10% of the wallets only hold 20% of the voting power, suggesting a more decentralized distribution.
Limitations to DGAV
The DAO Governance Asset Value (DGAV) serves as a valuable metric, but it is essential to acknowledge its limitations. Some of these limitations include the oversimplification of complex dynamics within a DAO, the potential susceptibility to manipulation by participants, and the challenge of assigning equal weight to factors that may have varying importance in different contexts. Furthermore, DGAV does not consider the composition of assets in the treasury, lacks a dynamic perspective, and overlooks qualitative aspects such as the quality of proposals and community sentiment.
Additionally, while DGAV focuses on governance participation, it may not fully capture the success factors of certain DAOs that rely on a core group of highly skilled contributors rather than broad voter participation. To obtain a more comprehensive understanding of a DAO's health and potential for success, it is crucial to complement DGAV with qualitative assessments, including the strategic vision of the DAO, community sentiment, and a holistic evaluation of both quantitative and qualitative aspects.
Moreover, it is important to recognize that the calculation of DGAV should be tailored on a case-by-case basis, considering the specifics of each DAO. For example, some DAOs might hold a high number of tokens (whether vested or non-vested), which makes the DAO itself the top holder. This has an influence on the calculation of the Voting Power Concentration Index (VPCI). In such cases, it might be prudent to exclude self-owned tokens from the calculation, but this exclusion should be clearly disclosed. Also, assumptions made during the calculation, such as what percentage of wallets to consider for voting power concentration, should be transparently communicated to provide context to the results.
In conclusion, DGAV should be considered as part of a broader analysis that incorporates other metrics and qualitative information. By utilizing a multidimensional approach, stakeholders can gain a more nuanced understanding of a DAO's overall health and make informed decisions based on a comprehensive evaluation of its strengths, weaknesses, and potential for long-term success. Transparency in the assumptions and considerations made during the calculation of DGAV is key to ensuring that this metric accurately reflects the governance health of a DAO.
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DAOs are revolutionizing collaboration and decision-making, powered by blockchain technology. They offer transparency, security, and efficiency in operations.
Despite the flourishing DAO ecosystem, a significant challenge remains: the majority of metrics generated by DAOs are overlooked or not thoroughly analyzed, failing to comprehensively capture and interpret the abundance of onchain data they produce.
The DAO dimensions of Treasury, Governance, and Holders, explored in this article, provide valuable insights into the distinct dynamics within each DAO and capture a significant portion of their activities and should be analysed in a multidimensional approach.
Adopting a multidimensional approach and using composite metrics is crucial for a comprehensive understanding of DAOs.
The DAO Governance Asset Value (DGAV) is as a composite metric that considers financial resources, participation levels, and voting power distribution.
By embracing a holistic multidimensional approach to analyse DAOs activity, stakeholders can make better informed decisions and steer the DAOs according to its needs or problems.