Introduction: Governance Is the Heart of Web3

Decentralized Autonomous Organizations (DAOs) are one of the most powerful innovations in Web3. They allow communities—not corporations—to govern protocols, treasuries, and ecosystems.

But as DAOs have grown, simple “1 token = 1 vote” systems have shown major weaknesses:

• Wealthy whales can buy the outcome

• Low voter turnout leads to poor decisions

• Governance attacks become easier

• Incentives don’t always align with long-term success

  
  

This led to the rise of advanced governance models that aim to make decision-making fairer, smarter, and more aligned.

This article breaks down three of the most important models:

1. Futarchy

2. Liquid Democracy

3. Quadratic Voting

   
   

These are complex ideas, but we’ll explain them in the simplest way possible.

1. Futarchy: “Vote on Values, Bet on Outcomes”

Futarchy is one of the most interesting and futuristic governance models. It was proposed by economist Robin Hanson.

In Futarchy, the community decides what it wants… and prediction markets decide how to get there.

How Futarchy Works (Simple Version)

There are two layers:

1. The DAO votes on goals (“values”)

Examples:

• “We want to increase treasury revenue.”

• “We want to expand the user base.”

• “We want to reduce protocol risk.”

This is the values vote.

2. Prediction markets decide the best policy

A prediction market lets people bet on which proposal will lead to a better outcome.

The proposal that the market predicts will perform better becomes the decision.

Why Prediction Markets?

Prediction markets gather:

• Experts

• Analysts

• Traders

• Community members

  
  

People put money behind their beliefs. This makes decisions more accurate than simple voting.

In short:

People don’t vote for proposals — they bet on which policy produces better results.

This turns governance into:

• Data-driven

• Incentivized

• Forward-looking

• 
  

Example of Futarchy in a DAO

A DAO has two choices for treasury strategy:

Proposal A: Invest heavily in stablecoins

Proposal B: Invest heavily in DeFi yield farms

The DAO first agrees that the goal is:👉 “Increase treasury value over the next 12 months.”

Then the prediction market opens:

• If people think Proposal A will lead to higher treasury value, they bet on A.

• If they think Proposal B is better, they bet on B.

  
  

Whichever side the market favors becomes the chosen policy.

Benefits of Futarchy

✔ Decisions rely on real-world knowledge, not popularity

✔ Markets filter out low-quality proposals

✔ Incentivizes accuracy (people lose money if they bet incorrectly)

✔ Prevents emotional or politically-motivated votes

Challenges of Futarchy

❌ Hard for beginners to understand

❌ Requires strong prediction markets

❌ Can be manipulated if markets lack liquidity

❌ Needs safeguards to avoid insider trading

2. Liquid Democracy: The Best of Direct and Delegated Voting

Traditional governance offers only two choices:

1. Direct democracy — everyone votes

2. Representative democracy — elect leaders to vote for you

Liquid democracy combines both.

How Liquid Democracy Works

Every member has two choices:

1. Vote directly on a proposal

OR

2. Delegate your vote to someone you trust

What makes it powerful:

• You can change or remove your delegate anytime

• Delegation can be issue-specific

• Delegates don’t have fixed power positions

This creates a fluid form of democracy — hence “liquid.”

Example of Liquid Democracy in a DAO

Imagine you don’t understand tokenomics deeply.

You can delegate your voting power for token-related proposals to:

• A top tokenomics analyst

• A community economist

• Someone with experience

  
  

But for NFT-related proposals, you might delegate your votes to someone else.

You control who speaks for you at all times.

Benefits of Liquid Democracy

✔ Encourages informed decision-making

✔ Reduces whale dominance (delegations can counterbalance token-rich addresses)

✔ Increases voter participation

✔ Delegates gain influence based on merit, not money

✔ Flexible — users can reclaim or reassign votes instantly

Challenges of Liquid Democracy

❌ Delegate “superpowers” can form if too many votes concentrate

❌ People may follow popular influencers blindly

❌ Delegates must be transparent and accountable

❌ Requires good UI to manage delegations

3. Quadratic Voting: Fairer Voting With Reduced Whale Power

Quadratic voting (QV) is one of the most popular advanced models used today.

It aims to solve the biggest problem in DAO governance:

👉 Whales can buy the vote.

QV doesn’t eliminate voting tokens — it just makes them expensive to concentrate.

How Quadratic Voting Works (Easy Explanation)

Instead of 1 token = 1 vote:

Votes cost more the more you buy.

The formula:

• 1 vote = 1 credit

• 2 votes = 4 credits

• 3 votes = 9 credits

• 10 votes = 100 credits

  
  

This means:

• A whale must pay 100x more to get 10 votes

• A smaller voter can influence the outcome affordably

• Majority preference becomes stronger than minority money

  
  

Example of Quadratic Voting

Let’s say there are two groups:

Group A (100 small voters)

Each wants the proposal to pass and buys 3 votes.

Their total = 100 × 3 = 300 votes

Cost to them = 100 × 9 = 900 credits

Group B (one whale)

Wants the proposal to fail.

Buys 10 votes.

Total = 10 votes

Cost = 100 credits

Even though the whale is richer, the community dominates the vote.

Benefits of Quadratic Voting

✔ Dramatically reduces whale domination

✔ Encourages people to vote only on issues they truly care about

✔ Better represents community preference intensity

✔ Fairer than simple majority voting

Challenges of Quadratic Voting

❌ Sybil attacks (fake identities) can break the system

❌ Requires identity verification (zkID, POAPs, or reputation systems)

❌ More complex for new users

Comparing All Three Models

Which Model Is Best for DAOs?

There’s no “one-size fits all.”

Each DAO has different needs:

Futarchy

Best for: Economic decisions, treasury management, long-term strategy

Liquid Democracy

Best for: Large communities, education-focused DAOs, DAOs with many categories

Quadratic Voting

Best for: Grants, public goods funding, NFT communities, governance fairness

Many mature DAOs combine multiple models for maximum fairness.

Conclusion: Advanced Governance Is the Next Phase of Web3

Governance is evolving fast. As DAOs grow into billion-dollar ecosystems, communities need systems that are:

• Fair

• Smart

• Transparent

• Hard to manipulate

• Aligned with long-term success

  
  

Futarchy, Liquid Democracy, and Quadratic Voting are powerful tools that help DAOs move beyond simple token voting.

A Web3 analyst who understands these models can:

• Evaluate DAO proposals better

• Spot governance risks

• Understand protocol power structures

• Contribute to better community decisions