Voting Mechanisms in Governance Token Systems: How DAOs Make Decisions

How Governance Tokens Turn Token Holders Into Decision-Makers

Imagine a company where no CEO makes the final call. No board votes behind closed doors. Instead, every person who holds a piece of the company’s digital token gets to vote on major decisions-like how money is spent, what features get built, or even who gets paid. This isn’t science fiction. It’s how DAOs (Decentralized Autonomous Organizations) operate today, and it all hinges on governance tokens and the voting systems that power them.

These tokens aren’t just for trading or speculation. They’re keys to influence. Holders use them to vote on proposals that change the rules of the protocol itself. But not all voting systems are built the same. Some favor the rich. Others try to give everyone a fair shot. And some are so slow they can’t respond to emergencies. Understanding how these systems work isn’t just for developers-it’s critical for anyone holding governance tokens, whether you’re a small investor or part of a large DAO.

Token-Based Voting: Simple, But Skewed

The most common system is straightforward: one token, one vote. If you hold 1,000 UNI tokens on Uniswap, you get 1,000 votes. If you hold 10 million, you get 10 million votes. It’s simple to code, easy to understand, and cheap to execute on-chain.

But here’s the problem: it creates plutocracy. According to TokenTerminal’s Q1 2024 report, the top 10 wallet addresses control 48.7% of Uniswap’s voting power. That means less than 0.1% of token holders can outvote the other 99.9%. In May 2023, a single proposal (#132) was passed by wallets representing just 0.02% of total token holders. That’s not democracy. It’s a silent auction where the biggest wallets bid on control.

Compound, Aave, and MakerDAO all use this model. It works fine when the community is large and distributed. But when whales show up with flash loans-borrowing millions of tokens for a few hours to swing a vote-it breaks down. The Beanstalk Farms attack in April 2022, where an attacker used a flash loan to seize 67% of voting power and steal $182 million, exposed how dangerous this simplicity can be.

Quadratic Voting: Giving Power Back to the Many

What if voting power didn’t scale linearly with token holdings? That’s the idea behind quadratic voting. Instead of one token = one vote, you pay a cost that increases with the square of your votes. To cast 2 votes, you need 4 tokens. For 3 votes, you need 9. For 10 votes, you need 100 tokens.

This system, pioneered by Gitcoin for funding public goods, makes it expensive for whales to dominate. A holder with 10,000 tokens can’t just buy 10,000 votes-they’d need 100 million tokens to do it. That’s often more than exists in circulation. It encourages smaller holders to pool their votes and vote on what matters to them, not just what the biggest wallets want.

But it’s not perfect. Gas costs spike. A standard vote on Ethereum costs around 21,000 gas units. A quadratic vote with 10 votes? Around 10,000 gas. Sounds better? Not when you’re voting on a $50 proposal and the gas fee is $3.50. And setting it up requires complex smart contracts. Only a handful of DAOs, like Colony and Gitcoin, use it seriously. Still, Vitalik Buterin calls it the most promising path to avoid plutocracy-especially if paired with proof-of-personhood systems to ensure real humans, not bots, are voting.

Conviction Voting: Patience Over Speed

Conviction voting flips the script. Instead of voting once and moving on, your vote gains weight over time. If you support a proposal for 1 day, your vote counts as 1. For 7 days, it counts as 7. For 30 days, it counts as 30. The longer you stick with a position, the more power you have.

This rewards commitment and discourages short-term speculation. DAOs using this model, like Aragon-based projects, see more thoughtful decisions. MIT’s 2023 study found that DAOs using conviction voting had 31% better long-term strategic alignment than those using token-based voting.

But here’s the catch: it’s too slow for emergencies. In March 2023, Curve Finance had to fix a critical vulnerability. The proposal took 72 hours to pass because conviction voting requires time to build momentum. In crypto, 72 hours can mean millions lost. When speed matters, conviction voting can be a liability.

Holographic Voting: Betting on Proposals Before You Vote

Holographic voting, used by DAOstack, adds a prediction market layer. Before you vote, you must stake tokens to signal whether you think a proposal is worth voting on. If enough people stake (say, $500 worth of ANT tokens), the proposal enters the voting phase. If not, it dies before it even gets a vote.

This filters out low-quality or spammy proposals. It’s like a community jury deciding which ideas deserve attention. It prevents DAOs from being flooded with garbage proposals-something that plagues many token-based systems.

But it creates a new barrier: money. If you don’t have $500 to stake, you can’t even get your proposal seen. And if you’re a small holder, you’re locked out unless you trust others to stake on your behalf. It’s effective, but it’s not inclusive.

Liquid Voting: Delegation as a Workaround

Liquid voting-also called delegated voting-lets you assign your vote to someone else. If you don’t have time to research a proposal, you can delegate your tokens to a trusted expert. You can change your delegate anytime. If you change your mind, you vote directly.

This is the system Lido DAO uses. And it works. Krayon Digital found that liquid voting boosted participation by 37%. In Aave’s governance forum, users reported 22% participation on key proposals-far above the industry average of 3-8%.

But there’s a risk: centralization. In Q4 2023, just three delegates controlled 62% of Lido’s voting power. If one of them gets hacked, or decides to act selfishly, the whole system is compromised. Liquid voting turns a decentralized system into a representative one-and representatives can become power centers.

Multisig Voting: Security Over Speed

Smaller DAOs, like Friends With Benefits, often skip token-based voting entirely. Instead, they use multisig wallets. A proposal needs approval from 3 out of 5 trusted members. No tokens needed. Just signatures.

This is the most secure method. No flash loans. No whale manipulation. No automated exploits. It’s human-controlled, slow, and deliberate.

But it’s also the least decentralized. You’re trusting a small group of people-often founders or early contributors-to make decisions. Approval times average 72 hours. Compare that to token-based voting, which can execute in 15 minutes. Multisig works for small, tightly-knit groups. It fails for large, open communities.

Why Most People Don’t Vote (And Why It Matters)

Here’s the ugly truth: 73% of governance token holders never vote. DeepDAO’s 2024 study found the median participation rate across 127 DAOs was just 4.7%. Yet most DAOs require 20-40% quorum to pass a vote. That means a tiny fraction of the community controls the outcome.

Why? Three reasons:

• Gas fees-$1.50 to $5 per vote adds up fast.
• Whale dominance-why vote if your 100 tokens won’t matter against a whale’s 10 million?
• Complexity-most proposals are written in dense technical jargon. No explanations. No videos. No summaries.

DAOs that fix this see results. Aave and Uniswap now provide video explainers and live AMAs. Those with clear education saw 38% higher participation. Simple changes-like a 2-minute video-can turn apathy into engagement.

What’s Changing in 2025?

The worst systems are being phased out. Uniswap’s proposed Governance v3 (announced July 2024) combines token voting with a council of elected delegates. It’s a hybrid-giving weight to both token holders and trusted experts.

Off-chain voting is booming. Snapshot, a tool that lets you vote without paying gas, is now used by 80% of major DAOs. Votes are counted off-chain, then executed on-chain only if they pass. This cuts gas costs by 92%.

Privacy is arriving too. Aztec Network’s zero-knowledge voting system lets you vote without revealing your wallet or token balance. It’s still new, but it could stop whales from targeting small holders.

And AI is stepping in. GovAI, launched in early 2025, scans proposals and flags risks with 92% accuracy. It tells you if a proposal has a reentrancy bug, a bad incentive structure, or a hidden conflict of interest. No more guessing.

What You Should Do If You Hold Governance Tokens

If you hold governance tokens, you’re not just an investor-you’re a stakeholder. Here’s what to do:

1. Check how the DAO votes-Is it token-based? Liquid? Quadratic? Know the rules before you buy.
2. Don’t ignore proposals-Even if you think your vote doesn’t matter, others might. Low turnout means a few people decide for everyone.
3. Use off-chain tools-Vote on Snapshot. Read summaries. Watch videos. Skip the gas until you’re sure.
4. Delegate if you’re unsure-Find someone whose judgment you trust. But check who they delegate to.
5. Push for better education-If a DAO’s proposal page is unreadable, say so. Demand clear explanations.

Governance isn’t broken. It’s just early. The first wave of DAOs used simple models because they had to. Now, we’re seeing smarter systems emerge. The goal isn’t perfect democracy-it’s functional, secure, and fair decision-making. And that’s something every token holder should care about.