DAO: Decentralized. Autonomous. Organization.
The whole phrase is a misnomer. Theyre not decentralized, not autonomous and they are not organizations, Monsterplay blockchain consultancy founder David Freuden tells Magazine.
Freuden co-authored a 51-page report on DAOs in May 2020 in an attempt to help
Sometimes, I see the DAO de-fund projects I saw a lot of value in, Goldstein explains. As a full-time employee, I still have to put in a funding proposal. But, with monthly votes, it is still much faster than other companies Ive worked on.
The Dash DAO community sees itself as a headless beast. There is a CEO of the corporate entity overseeing the project DASH Core Group, Ryan Taylor. But, he himself is subject to the decisions of the DAO. He oversees the tech development, investment arm and incubator. Yet, the DAO community will lose it if any press ever says Dash CEO Ryan Taylor.
The problem is that we dont know who holds the most tokens [] because you dont know who your customers are or who your investors are. However, the loudest voices usually dont have the most MasterNodes and are not the most invested, so they yell and scream the loudest to offset that power imbalance.
On the other hand, Goldstein says she worked hard as the only female in the DAO. I was proud of the DAO when I turned the logo pink for a day and received a great outpouring of support from the men in the DAO. This has yet to entice a major influx of female DAO members.
Like the Kibbutz, communism or even the space race, utopian dreams face a great many hurdles.
How can DAOs deal with bad behavior by major token holders?
In early February, a heated debate in crypto Twitter touched on inclusion, diversity and cancel culture over a number of incidents related to decentralized projects. Again, this spotlight on founding teams raised the question of how a DAO addresses any alleged inappropriate behavior.
In a corporation, misconduct can result in termination. In a DAO, founders usually hold a large number of tokens and the keys to the blockchain (multisignature) or otherwise.
The conversation was sparked by derogatory comments made by Brantly Millegan, the director of operations of Ethereum Name Service (ENS), about the LGBTQ community and other controversial topics. The screenshotted comments were made in 2016 and were brought to the attention of the board of the not-for-profit behind ENS in early 2022.
His contract was terminated with the legal entity linked to ENS. But, what about his large holding of DAOs governance tokens?
Members of the DAO put forward a motion to its members, or those that hold tokens to vote on key decisions, to remove Millegan. Yet, he is a delegate that holds 370,000 votes that were delegated to him. He is the largest delegate in the DAO itself and remains so today.
So, what would have happened if he refused to accept the DAOs decision?
The answer is not that simple, according to Freuden.
Do the members of a DAO have a right to throw someone out that built the project?
Yet, if the original mission is no longer viable, they should be dissolved. When a DAO fails, do they give the money back and dissolve themselves? They should. Give back the money with interest like a prenuptial for a marriage that fails.
One relevant analogy is that VCs might seek to remove a problematic CEO before an IPO.
While treasury is one governance mechanism deployed by DAOs, they are usually (at least for an initial period) controlled by the people that built the original project. Or, in the case of Uniswap, venture capital firm a16z controls so much of the voting power thatit delegated various parcels to student-run blockchain organizations in order to gain a semblance of distribution.
This leads to the question of whether DAOs can truly work at scale. And, how to evolve these voting paradigms beyond token holdings?
There are some solutions for the whale token holder problem. Multiple tokens, for example, a utility token on top of a governance token and quadratic votingfor whales have become one such mechanism. There are also other protections such as multisignatures keys to a blockchain and time locks on decisions that leave time for any automated decision to eventuate. Each DAO will need to get the structure right depending on the assets at stake.
In truth, voter participation is often itself a bigger issue.
Participation is also very low in many DAOs. This is likely due to not understanding the tech, apathy or members busy lives. The bigger the DAO, the smaller the number of voters that vote, thats apathy but also culture, says Freuden.
Freudens report cites Dunbars Law, a British anthropologist, who argued that people can only maintain a total of about 150 relationships, noting that:
The larger the DAO gets, the less influence the individual exercises, as their perception of their voting power becomes diminished or inconsequential once the individual becomes a smaller part of a large group. This can be seen via Dunbars Rule and the Ringelmann Effect, which states that members of a group become lazier, disenfranchised and more detached as the size of their group increases.
Freuden says that we need to understand how humans relate to operate a DAO. For this reason, he believes DAOs may work best as an investment fund vehicle, rooted in Cryptoland and function better if small in scale. SyndicateDAO, for example, enabled the creationof 450 new investment group DAOs in just three weeks.
For example, FlamingoDAO, a celebrated NFT curation investment DAO, had a maximum of 100 investors due to U.S. Securities and Exchange Commissions regulations. The so-called LAO is a member-directed venture capital fund and a registered LLC in the United States. They have limited membership to only 100 members in compliance with U.S. Securities law with a 120ETH minimum staking contribution.
Still, how were investment decisions made by FlamingoDAO? Did all 70-odd members have a say regularly? Art and NFTs are highly speculative.
Thus, there is a belief that investment DAOs work well in the small petri-dish environment. This is due to pooled capital (a max of 7% contributions per member) and crowd-sourced knowledge in a crypto-native club.
While scalability may be an issue, every DAO will operate differently depending on the aim, the stage of tech development and the personalities within. Tech people are accustomed to meet ups and hackathons for collaborating around a cause or exploratory idea. But, someone or something still organizes the hack.
However, there are lots of clever people working on creative solutions to every problem.
DAOplatform.ios Miller cites DXdao, as an example of a successful DAO. DXdao is a collective that builds and governs decentralized products and services and runs the DAO completely on-chain. You earn governance rights by contributing to the community and must keep contributing to keep voting.
DXdao, a fork of DAOstack, also deploys a system of economic curation of proposals known asholographic consensus, a voting algorithm invented by DAOstack founder Matan Field. The system allows a random or semi-random subset to make decisions for the group as a whole.
DXdaos Luke Keenan explains to Magazine that a small predictions market economy emerges around the likely outcome of a proposal as tokens are staked on it, which increases the potential influence of the issue by acting as a gatekeeper for voters. Additionally, proposals that have been given a financial incentive (boosted) have fewer prerequisites to be considered successful, resulting in increased system efficiency. DXdao makes decisions by removing voting power as an economic incentive.
Field, noting that scalable DAOs are indeed my focus, explains that the main point is that holographic consensus does not require a quorum to render a vote valid.
Rather, it provides a different parallel process to do so. This other parallel process is a prediction game played (for profit) by the predictors who can be anyone and not particularly voters they can even be A.I. bots who make predictions about whether a certain vote will be eventually approved or not by the voters. If, for a long enough period of time, enough stake is being placed over the prediction that the vote will be approved, then the voting process is considered valid, even when the voting quorum is low.
In other words, a quorum is not a resilient strategy for DAO governance at scale, says Field.
So, you dont need large votes on every issue. If only 5% votes, thats fine. But, if the proposal moves a significant amount of value or makes a significant change, you require a longer, say a 30 day, voting period and a higher quorum,says Miller.
Clearly, the DAO space is maturing. Theres less of a focus on voter turnout and more of a focus on tools like Orca and processes that mean power is delegated to smaller sub-DAOs, committees and working groups.
Miller also argues that studies in psychology show that if you reward people too much for participating in a volunteer activity, then you disincentivize them. So, depending on what your DAO does and what type of contributions you are looking for, you may want to offer symbolic rewards such as POAPs or contributor levels, rather than focusing on giving out tokens for every activity.
Free lunches offer less intrinsic rewards. Random rewards can provide more incentive.
One thing that DAOs can do (and Web3 generally), is to reward early-stage users a product with effective ownership. They encourage early participation and bootstrapping before there are network effects, at least in theory.
For Goldstein, DAOs are a double-edged sword. They ferment evangelical communities in the developing world and may not be fully-scalable, period.
There always has to be a leader somehow, she says. If people dont want to volunteer for any given task, they wont.
Sometimes, DAO members have a feeling of ownership or entitlement. They are not the boss, but they feel that they should be able to see my calendar or that I should provide a daily report on my workday, complains Goldstein. I own three MasterNodes and I demand to know X, Y and Z, they may say.
As with most decentralized projects, having strong community leaders to influence the culture is paramount.
Freuden notes that the the DAOs community builder is the influencer of cryptoland. They disseminate the DAOs culture, the cause and rally the troops and also need to speak in English, not tech.
They need to keep member spirits high.
So, the community builders role is crucial. Building a community around a coin that promises riches might be easy, but keeping the DAO members motivated as tech development stalls is essential.
This is a human task. But, there is a lot of focus on tools that measure contributions and then allocate tokens such as SourceCred or coordinate. Many DAOs also have large growth funds/community funds/grant programs that seek to incentivize development and get things done.
Maybe all DAOs need is a critical mass of onboarding, committed volunteers to emerge and a legendary community builder to herd the flock.
DAOs are unique for their ability to bring together a passionate (sometimes obsessive community) in a day. But, for organizations built around a shared goal, managing expectations for all stakeholders is key.
The key element of a DAO is community and cause, not scalable governance mechanisms. Gaming communities work at scale, thats how DAOs will work, but we will have sub-DAOs everywhere like sub-committees, opines Freuden.
And, as Field notes, new crypto-native voting mechanisms such as holographic consensuses can handle, in principle, a higher and higher rate of proposals by turning this tension between scale and resiliency into an economical cost. Scalability is possible but not ensured.
The fragmented workplace also remains the key innovation of the DAO. So, for Freuden, voting is a subset of engagement. The purpose of DAO should allow permissionless engagement and permissionless contributions. DAOs mean people can work remotely.
In 20 years, DAOs may be the AI-powered self-organizing concept that has long been imagined. For now, that seems a long way off. But, we are witnessing the maturing of a new breed of productivity coordination organisms.
