Democracy works, for now.

By a narrow margin, Venezuelan voters defeated President Hugo Chavez's referendum to make drastic changes to Venezuela's constitution. In addition to effectively making Chavez president for life, the referendum would have increased Chavez's control over the economy and local elections, according to Frank Bajak of the Associated Press:

The defeated reform package would have created new types of communal property, let Chavez handpick local leaders under a redrawn political map and suspended civil liberties during extended states of emergency.

The defeat of the referendum does mean that there are still people in Venezuela who believe in free market, property ownership, and freedom of the press, and who are not afraid to express their views at the ballot box.
It does not mean, however, that Chavez's agenda has been weakened. He is still El Jefe until 2012, during which time he will hold the power he needs to consolidate his authority as Dictator.
As Daniel Duquanel, of Pajamas Media writes:

The bad news is that Venezuela wakes up on Monday with its same problems and even less of an idea of what to do about them.

Now that the constitutional project of Chavez, which was the centerpiece of the “five motors of the revolution towards socialism,” he announced last December has tanked – nobody knows what he will do. In earlier statements he had implied that a NO victory might force him to start already looking for a successor. Indeed, the extreme personalization of the campaign in its last three weeks turned the vote into a plebiscite on Chavez and the loss considerably complicates considerably his stay in office.

Yet, Chavez still holds a few key cards in his hand.

He controls all the established powers of the country, including all but two statehouses, and even presides over a National Assembly which is 98% at his service, and still enjoys considerable personal support in the population.

Now Duquanel and other observers are being very careful about not being labled as "alarmist," while the mainstream media, and even members of the US State Department are optimistically acting as if democracy will hold its course in Venezuela.
But there are some causes for alarm about the future of democracy in that country. Chavez has made it clear that he would follow in the footsteps of Fidel Castro. If he is sincere about his ambitions, we should not be surprised to see some government sponsored violence in Venezuela before the next elections in October.
Shortly before Sunday's elections, this Associated Press article quoted Chavez as follows:

"He who says he supports Chavez but votes 'no' is a traitor, a true traitor," the president told an arena packed with red-clad representatives of pro-Chavez local community councils. "He's against me, against the revolution and against the people."

So, with these words alone, Chavez has incited his followers to violence against the opposition. He has already shut down what he considers "opposition" news services, and other pogroms can't be too far behind.
Dequanel writes:

The debt owed by the Venezuelan opposition to the dissident student movement is enormous. Perhaps it was crucial on Sunday night to avoid any large scale fraud as they went to vote late and stayed for the counting. The opposition has very little chance to control or even to use to some advantage this vibrant movement which is fast reshaping the political agenda of the country.

Now the opposition has been given a brief window of opportunity to come up with a real message. Let’s see what they will do with that.

This is the kind of stuff a dictator hates to see. If history were to repeat itself, if Chavez were to follow in the footsteps of Castro and other tyrants, these dissidents will be silenced in the following ways:
First, crimes of violence against these dissidents will be ignored by the government. Vigilante groups of Chavistas--Chavez supporters will be encouraged to commit violence against the dissidents.
Next, the government crackdowns against opposition demonstrations will increase in authority and violence, and there will be bloodshed acted upon the demonstraters by military crowd control squads.
And, as a result of that, opposition leaders will be arrested "for their own safety" and imprisoned indefinitely. Any backlash to such actions by the government will be met with even more political incarceration.
This is how tyrants of Chavez's ilk have reacted to opposition throughout history, and there is no reason to expect that Chavez wouldn't act in kind.
I am not hoping that this happens, I am pointing out that this should be expected. What I hope for is similar to the hope Dequanel expresses summing up his article:

This could go a long way to restore some degree of civility and political respect which is totally missing in Venezuela today. That is also where the dissenting student movement could come in: they have shown that the leaders of the future are already here and running. Unencumbered by past faults or current incompetence and cheap ideology, they might have a very bright future sooner than expected.

But I wouldn't count on that.