While the SNS is currently in its early stages of testing and experimentation, there are several ways in which the SNS governance mechanism could help democratize access to the digital economy for developers who build fully on-chain.
As with any other article these days, I’d start by explaining what DAOs are, then go into the technical detail of how a DAO differs from a hierarchical organization, and lastly explain what the Service Nervous System is and why it has a superior architecture.
According to Investopedia, A decentralized autonomous organization (DAO) is a new type of legal structure with no central governing body and members who share the same purpose of acting in the best interests of the organization. DAOs, which have gained popularity due to cryptocurrency enthusiasts and blockchain technology, are used to make decisions in a bottom-up management method.
One of the most important aspects of digital currencies is their decentralized structure. This implies that they are not controlled by a single organization, such as a government or central bank, but are distributed throughout a network of computers, networks, and nodes. In many circumstances, virtual currencies leverage their decentralized structure to achieve degrees of anonymity and security that traditional currencies and their transactions do not have.
Inspired by the decentralization of cryptocurrencies, a group of developers came up with the idea for a decentralized autonomous organization, or DAO, in 2016. The concept of a DAO is to promote oversight and management of an entity similar to a corporation.
DAOs largely rely on smart contracts. These logically coded agreements govern decision-making based on underlying blockchain activity. For example, depending on the outcome of a decision, specific code may be written to raise the circulating supply, burn a specific number of reserve tokens, or distribute specific incentives to existing token holders.
The DAO voting process is stored on a blockchain. Users are then frequently required to choose between mutually incompatible choices. Users’ voting power is frequently allocated based on the quantity of tokens they own. For example, a person who owns 100 DAO tokens will have twice the voting power of a user who owns 50 tokens.
The assumption behind this method is that users who have a larger financial stake in the DAO are encouraged to operate in good faith. Consider a user who has 25% of the total voting power. This user may do criminal conduct; but, by doing so, the person jeopardizes the value of their 25% stake.
DAOs frequently contain treasuries that hold tokens that may be exchanged for cash. Members of the DAO can vote on how to utilize that money; for example, certain DAOs looking to acquire rare NFTs can vote on whether to trade treasury funds for assets.
However, like with every technological breakthrough, not everything about DAOs is perfect. Limitations like Speed, inefficiencies, and Security as even through the use of multi-sig or cold wallets, DAOs can be exploited, treasury reserves stolen, vaults emptied and Importantly shut down by centralized data centers/providers. Improperly establishing or managing a DAO might also have severe repercussions and some of these issues are what the Internet Computer Blockchain seeks to address with its unique technology known as the Network Nervous System, on which the Service Nervous System is built. I went into further detail about the Internet Computer and the Network Nervous System in a previous article here:
The Network Nervous System (NNS) is the autonomous tokenized governance system that controls the Internet Computer blockchain in an open, permissionless, and decentralized way. The NNS allows everyone around the world to submit and vote on network proposals, and if approved, the proposals are automatically implemented, enabling the network to evolve and adapt in real time.
You can read more about the Network Nervous System, its technical architecture, and major capabilities here:
In contrast to the NNS, an SNS would only control a single dapp, also called a “service.” Just as anyone in the world can participate in NNS governance by staking ICP utility tokens in voting neurons, anyone will be able to participate in SNS governance, which will autonomously control the operations and evolution of an associated dapp.
“Imagine, for example, building a social network like Twitter whose logic and data aren’t controlled by a company, but by a computer whose code runs autonomously and verifiably,” A16Z general partner Chris Dixon once wrote. “Its ownership and control may even be tokenized and distributed to its users and developers.”
Essentially, the Service Nervous System (SNS) works in the same way that the Network Nervous System (NNS) works on the existing Internet Computer network, which for one, is one of the most sophisticated blockchains capable of hosting dapps entirely on-chain. On neurons, voting, proposal submission, and token locking will be equivalent to what is accessible on SNS.
The difference between the SNS and NNS lies only in the tokens used in the governance system. In the NNS, users must use ICP tokens to participate, whereas, in the SNS model, each dApp can issue their governance tokens to run within their dApp governance system.
If you’re building or intend to build and launch your dapp on the Internet Computer Blockchain you may consider implementing an SNS to attract resources that would enable the dapp to have sufficient cycles to run, develop additional features, and scale with demand. The SNS facilitates token-based governance that can also be used to attract users to the dapp and drive network effects that extend its reach.
Adopting an SNS and switching control over a dapp to decentralized, tokenized governance would enable anybody, for example, to purchase the dapp’s specific “SNS governance token” in exchange for cycles. It would also allow the dapp’s SNS tokens to be distributed to early adopters and active users to help drive growth, giving them a stake in the dapp’s direction and success.
It is important to highlight, however, that in order to stabilize governance, people who want to participate in governance decisions must lock some of their tokens in voting neurons (as in the NNS), incentivizing them to participate in the long-term interest of the dapp.
Another important principle of this open governance model is that, apart from taking part in collective ownership, users can ensure that the dapp’s developers cannot, for example, simply stop a service, remove a feature, or update the code in an undesirable way. It establishes that no single entity or centralized party will control the dapp and determine its future. At the same time, it allows the dapp to evolve and upgrade through proposals that are directly responsive to the desires, feedback, and voting of its SNS community.
This is why using tokenization to provide a permissionless governance mechanism to regulate a dapp is such a significant feature. It enables the developers, users, and stakeholders of a certain dapp to make collective choices on which features are best and whether to approve or reject various recommendations. The SNS also allows for unique uses of dapp tokenization and lays the groundwork for various new types of governance that may be constructed utilizing parts of the SNS code, which will be fascinating to see emerge.
While the SNS is currently in its early stages of testing and experimentation, there are several ways in which the SNS governance mechanism could help democratize access to the digital economy for developers who build fully on-chain, as well as potentially fundamentally rethink the nature of how organizations are totally governed.