Original article by: Messari - Traver Normandi

Compiled by: BlockTurbo

On-chain governance uses blockchain to encode its governance rules through data storage and autonomously execute its operations. To date, on-chain governance contracts represent the closest implementation of the DAO name. However, the current state of on-chain governance is often a single contract with little room for adaptability, customization, or extensibility.

Most on-chain contracts require significant transaction and audit costs. Single on-chain contracts also create significant friction when conducting day-to-day operations. Every transaction, update, or change to the core protocol requires consensus from the entire DAO, leading to governance fatigue, slow operations, and overall inefficiency.

For these reasons, DAO governance leans heavily towards hybrid governance, which abandons on-chain execution in favor of off-chain signaling tools such as Snapshot. These DAOs validate the state of the chain to grant voting rights. Once consensus is reached, they often rely on trusted community members to manually execute these decisions using multi-signatures, introducing single points of operational failure and potential security risks.

On-chain contracts such as Governor Bravo and OpenZeppelin allow projects to customize specific parameters. These parameters include deciding how voting power is determined, setting quorums, the number of available voting options, how votes are counted, the type of tokens used for voting, and the inclusion and parameters of execution timelocks. Despite their customizability, these systems require every governance decision to be approved by the same contract with the same parameters, limiting the feasibility of on-chain governance for many DAOs to run.

Element Finance Council Governance Framework

While many projects have adapted to existing on-chain contracts or hybrid (off-chain) models, Element Finance has chosen a more innovative approach. With the launch of Council Protocol, the Element team hopes to build a general on-chain governance solution that meets the practical needs of daily and long-term governance.

The framework introduces a set of base contracts with modularity by design. To this end, the team aims to balance the accessibility and functionality of a well-designed smart contract system. The modular governance framework allows for customization, enabling Element Finance to add and remove modules as the protocol evolves.

Core voting contract

At the heart of the Council protocol is the Core Voting Contract. Like OpenZepplin and Compound Governor, the Core Voting Contract defines voting rights, tracks proposals, and measures voting rights before any proposal is executed. However, the Core Voting Contract extends these principles by allowing for detailed granularity and modularity of contract parameters:

Dynamic Voting Strategies: When a user votes, the core voting contract references a list of pre-approved voting strategies. These strategies define the calculation of voting power and validate the user's voting power for that specific strategy, enabling multiple approaches to coexist simultaneously. Dynamic Quorum: The core voting contract allows for dynamic quorum thresholds, which check the threshold required to execute a contract call. This means that governance can change the security thresholds for any on-chain operation with very high granularity, providing a wide range of possible access controls. Optional Timelocks: With the optional timelock feature, the core voting contract only uses timelocks for security-critical votes, improving efficiency for more minor proposals and providing measurable protection for sensitive proposals. Modules

While the core contract acts as the central node, modules surrounding the core voting contract enable the new governance framework to be adapted to different use cases. These modules are designed to address specific shortcomings of current DAO operations by leveraging smart contracts.

There are four specific modules, each with its associated use cases:

Voting Vaults Governance Steering Committee (GSC) Optimistic Grants Optimistic Rewards

Voting Bank

Unlike snapshots and off-chain strategies, most on-chain governance contracts are limited by the number of voting rights methods they can accept. Most DAOs default to token-weighted governance, which has many disadvantages, including centralization.

Voting vaults address this limitation by allowing protocols to define acceptable policies. Protocols can then integrate multiple voting vaults across multiple use cases, as these vaults can be upgraded and removed through the core voting contract. Voting vaults allow governance to scale across DAOs and their protocols; as new token primitives and voting policies are created, new vaults may emerge to satisfy those use cases. This customization unlocks the potential for entirely new approaches, strategies, and power structures for on-chain governance.

In its simplest form, voting vaults can be used as locked or vested vaults, giving governance rights to locked or vested tokens. There are more complex vaults. For example, DeFi vaults can allow tokens held in specific protocols or contracts (such as lending protocols or LPs) to vote, and L2-L1 synthetic vaults can verify L2 voting rights of L1 Merkle balance proofs.

DAOs could also use Vaults to enable identity-based tokenized membership for council-like positions. These positions could operate with special powers granted by the ultimate authority of the DAO’s core voting contract. This is an obvious fit for Optimism Citizens’ House or the Aave Grants DAO. Additionally, it opens the door to more experimental identity-based voting schemes, as proposed in the original Sushi Meiji proposal or discussed in Pocket DAO.

For Element Finance, the voting pool allows the protocol to add utility to existing projects and products that are previously on the Element committee. For example, Element can integrate its upgradeable Elfiverse NFT project, allowing NFT holders to increase their governance power by holding tokens in the official Element Finance PFP collection.

Governance Steering Committee (GSC)

As DAO governance has evolved, there has been a common trend towards returning to some form of representative authority to counter the inefficiencies of plutocratic governance. These representatives are often thought of as councils, which are usually elected by the DAO. They typically exercise privileges over a specific set of contracts, actions, or funds. The Synthetix Council and the Olympus Policy Team are two examples.

The GSC module introduces Element’s view of corporate governance committees. Through composability with the Voting Vault and Core Voting Contract, DAOs can choose the exact parameters to represent GSC member status and define the inherent permissions of the GSC. For Element, any delegator who meets the 110,000 ELFI delegation threshold can obtain GSC status through a custom GSC Voting Vault. Rather than tenure through election or appointment, the delegation threshold enables liquid delegation. If ELFI token holders are dissatisfied with the actions of a delegate, they can always re-delegate their tokens to another delegate, creating a continuous feedback loop of accountability.

Given the modularity of the Element Council, the permissions of the GSC are customizable. Some examples of future use cases include the ability to propose votes directly on-chain, specific permissions to perform fund management or fund disbursements, and the ability to run bug bounties, grant programs, or emergency powers to protect the protocol.

Optimistic Grants

From the Ethereum Foundation to Gitcoin, grants are an intrinsic feature of crypto culture. DAOs use grants to attract builders to their ecosystems, funding them with tokens held in their treasury to improve their products and communities.

Many grant programs suffer from poor design. Programs that lack accountability to grantees and diligent review of grants often result in overfunding, inefficiency, and even cronyism. Others simply suffer from the operational overhead of having to fund grant programs to manage accountability, track dates and funds, and coordinate multi-signature payments—all while checking grantee accountability and progress.

Optimistic Grants addresses these shortcomings by providing a more open grant process and less operational overhead. It works by codifying the escrow structure and aligning grantee incentives. Thus, grant committees can pre-approve funds, apply a “set-and-forget” approach, and still retain the power to recover funds in the event of grantee abuse.

Optimistic Grants operate on the assumption that the grantee will deliver the agreed upon outcomes. Once approved, the grant funds can be locked in the Optimistic Grants smart contract with an expiration date. This on-chain commitment will distribute the funds once the grant is complete, after which the grantee can withdraw the funds. However, these grants include clawbacks, and the DAO can take action at any point in the process if the grantee does not deliver the agreed upon deliverables.

Optimistic Rewards

In addition to grants, the same funding approach applies to rewards. By implementing an “approval by default” mentality, participants with permissioning power (councils, sub-DAOs, etc.) can promote greater operational efficiency while still being held accountable. This concept is not dissimilar to the Easy Track module adopted by Lido DAO using Aragon Governance.

The Optimistic Rewards contract focuses on the rewards use case, making the contract process more secure and upgradeable. Traditionally, most rewards systems are deployed via smart contracts. These systems require DAOs to update complex mathematical formulas and contract integrations when they wish to update their reward formulas. To limit inherent smart contract and security risks, Optimistic Rewards instead allows proposers to run a deterministic program that calculates off-chain rewards and then submits them on-chain for review. The result is a more accountable rewards program that is able to leverage smart contract governance to increase decentralization and efficiency.

Outside the contract

Finally, Element Finance has moved beyond smart contracts as the core focus of Council in order to position Council as an all-in-one governance framework. Council provides the community with smart contract deployment templates that simplify configuration and a full set of UI interfaces. Developers can therefore deploy Council contracts for their DAOs using reference UIs that use React, TypeScript, NextJS, and SDK.

Conclusion and Outlook

Element Council offers an optimistic outlook and important development for on-chain governance. Since the execution and launch of its smart contracts (developed and audited in 2021) and the first implementation of Council Protocol (launched with Element DAO in March 2022), Council has been improved and packaged as an all-encompassing DAO framework. The official Council V1 release plan will be released in batches:

Wave 0

As outlined in Element’s recent announcement, the governance UI for Element DAO governance has been completely revamped, modeled after the UI using the Council framework.

Wave 1

Wave 1 contains the first releases of early adopter projects that will announce their intention to integrate Council as they become more decentralized. In addition to considering the initial governance architecture (i.e. the modules and parameters to use at the outset), some are building custom voting libraries on top of Council Protocol.

Wave 2

The full public launch requires the open source Council Kit repository, a dedicated educational landing page with links to all documentation, tutorials, deployment templates, and contributor guides. The Element team will continue its product discovery by engaging users and contributors in the community to develop a product roadmap with new features and improvements to ensure that future Council versions more broadly meet the evolving needs of DAOs, their managers, and governance practitioners.