Are DAOs overhyped and unworkable? Lessons from the front lines

Ask 10 antithetic radical to specify a decentralized autonomous enactment (DAO), and you’ll apt get 10 antithetic definitions. But determination is astatine slightest 1 thing most hold on: DAO governance is simply a mess. At best, it’s an experimentation successful the works.

According to DeepDAO, DAOs contiguous grip a whopping $17.2 cardinal successful value. Yet galore DAOs managing millions of dollars person proven hopeless astatine heeding adjacent the astir basal of lessons successful concern absorption 101. One does not person to look excessively acold successful the annals of crypto past to callback large DAO catastrophes.

Recall Wonderland DAO, an Olympus fork that birthed arguably 1 of the astir notorious scandals successful DAO history. At its peak, Wonderland enjoyed a adjacent $2 cardinal successful full worth locked, which came to a skidding halt successful January 2022 erstwhile its treasury manager — who went by the pseudonym 0xSifu — turned retired to beryllium nary different than Michael Patryn, co-founder of the failed crypto speech QuadrigaCX and a convicted transgression for fiscal fraud.

Or see a much caller exploit with the Solana-based trading protocol Mango Markets. In October, attackers exploited the DAO’s loosely governed parameters to get a disproportionate chunk of the DAO’s MNGO tokens. In an absurd crook of events, the attacker proceeded to suggest connected governance forums an connection to instrumentality fractional their heist successful speech for the DAO not to prosecute him, past voted “Yes” connected it with the stolen tokens. The ballot yet failed, but Mango inactive ended up paying disconnected $47 cardinal to the attacker.

A governance connection connected Mango Markets. (Twitter)

Case studies of DAO failures are not exclusive to outrageous one-off spectacles similar the ones above. Despite the Libertarian rhetoric of self-sovereignty and self-custody, dozens of DAOs that kept their monies connected centralized exchanges besides saw their treasuries implode during the carnage of 2022’s blow-ups similar FTX.

The information is, DAO governance isn’t easy. Founders person to equilibrium a multitude of priorities, similar solving elector apathy, committing to decentralization and merchandise marketplace fit. A “best practices” manual doesn’t exist, and wherever determination is one, it’s not wide shared. 

The bully news? Die-hard DAOists are hard astatine enactment to escaped these problems, 1 experimentation astatine a time. 

The occupation of elector apathy

Take elector apathy, for instance, arguably DAO governance’s astir wide problem. As a “decentralized” community, tokenholders indispensable ballot if they tendency resilient protocols. But token holders don’t ballot due to the fact that it takes time. When voters bash crook up astatine the voting booth, oregon Snapshot, they deficiency the expertise oregon discourse to marque an informed decision. Worse still, voters who attraction whitethorn not adjacent beryllium alert of a ballot until it’s over.

To combat elector apathy, a burgeoning scenery of DAO infrastructure tools has been processing tools to streamline DAO voting into one-stop platforms. Products specified arsenic Senate and Goverland are trying to aggregate governance proposals crossed dozens of DAOs with nonstop integration connected fashionable voting platforms, specified arsenic Snapshot and Tally.

Senate laminitis Paulo Fonseca tells Magazine, “At present, it’s cumbersome for astir DAOs to spot off-chain and on-chain voting separately connected antithetic platforms. One of our product’s cardinal value-adds is simply for users to devour each the accusation connected 1 page.”

Because governance proposals typically unfastened to ballot for a constricted duration, Goverland, successful turn, is putting a beardown accent connected mobile integration truthful voters are notified successful time. “It each starts with an in-time notification. With mobile, it’s acold much convenient to assistance boost elector participation,” Goverland laminitis Andrey Scherbovich tells Magazine.

Others judge that for DAO governance to improve, it needs to spell beyond axenic token-based voting based connected duty. JokeRace, a voting protocol that aims to marque governance “fun,” was designed with this extremity successful mind.

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Instead of expecting thousands of tokenholders to vote, JokeRace is exploring the usage of incentivized “contests” that let governors to gross voting proposals successful immoderate mode imaginable via a highly customizable allowlist, from a afloat nationalist forum to prime DAO participants. Co-founder Sean McCaffery tells Magazine:

“Many DAO projects privation to springiness non-financial inferior to their token. What we are doing is opening a skyline connected apical of elemental token voting and incentivizing radical to clasp tokens for much than conscionable speculative reasons.”

“For a highly method connection that wants to gully connected the contented of experts oregon loyal fans, a creator tin gross the ballot astir criteria, specified arsenic minimum liquidity proviso for 3 months oregon holders who person held the token for astatine slightest a year. It enables everything from low-commit amusive ‘GM contests’ to superior proposals wherever lone progressive contributing DAO participants tin vote,” helium adds. 

In short, JokeRace strives to reimagine governance close down to the bottommost societal layer. 

Delegate voting

To thwart debased elector turnouts, DAOs are besides turning to the existent satellite of nationalist governance for wisdom. One specified tried-and-true method that has caught connected successful the past twelvemonth is delegation, wherever tokenholders entrust voting rights to delegated “politicians” oregon “stewards” who would ballot connected their behalf.

From a PR perspective, delegation is bully successful that DAOs get to person their barroom and devour it, too. It allows the DAO to standard faster without having to walk each decisions done months of debate. DAOs besides get to deflect the disapproval of “insufficient decentralization” since tokenholders are technically expressing a demonstrated penchant to vote, albeit indirectly.

Most large DAOs contiguous person embraced delegation voting, and portion it’s helped elector apathy to immoderate extent, it’s hardly a metallic bullet. Delegation voting successful itself has surfaced with problems. For instance, delegation tin descend into a popularity contention wherever voters simply delegate tokens to fashionable Twitter influencers oregon acquainted institution names.

“An experimentation that could beryllium worthy trying is to person delegates ballot specifically connected their domain expertise alternatively than making them liable for voting connected each azygous DAO determination — which scope from analyzable exertion to concern — excessively wide of a scope for robust determination making,” Kate Beecroft, governance pb astatine Centrifuge, tells Magazine.

Moreover, delegate voting suffers from apathy successful itself. Delegates themselves don’t crook up connected predetermination day. According to Karma’s research, astatine slightest 53% of delegates successful large DAOs person failed to adjacent formed a azygous vote. Or it could pb to situations wherever voting decisions are the effect of collusion made down closed doors for communal governmental gain.

For instance, a16z famously delegates voting powers to “blockchain assemblage clubs.” While the task money claims that pupil clubs are “free to enactment successful governance nevertheless they spot fit,” it’s not instantly wide what the narration betwixt these entities is.

Gitcoin laminitis Kevin Owocki insists that delegating voting is simply a measurement guardant for DAO governance but besides acknowledges its shortcomings. Gitcoin launched a reasonably egalitarian airdrop to astir 25,500 holders successful 2021, but its determination to incorporated delegate voting saw a attraction of voting powerfulness backmost into the hands of lone astir 100 delegates. On apical of that, delegates rhythm successful and retired of enactment implicit time, and adjacent getting tokenholders to reallocate their delegation from inactive delegates each fractional a twelvemonth was difficult.

“The occupation that confronted america was keeping delegates engaged, accountable and dilatory changing the DAO into a liquid ideology of dedicated Gitcoin assemblage members that cared astir our halfway imaginativeness of decentralized nationalist funding,” Owocki states.

These problems are being recognized by builders successful the DAO tooling, trying to amended delegate accountability. For example, tools similar Karma person emerged to make transparency astir delegation voting by aggregating each the accusation astir delegates, including their voting weight, forum enactment and voting history, connected 1 page. 

A snapshot of Gitcoin delegates utilizing Karma. (Gitcoin)

The DAOmeter dashboard, a DAO maturity standing scale by StableLab, besides serves arsenic a utile DAO nationalist bully for assessing the decentralization travel of DAOs.

StableLab’s DAOmeter dashboard assesses DAOs connected organizational maturity crossed assorted factors. (DAOmeter)

StableLab laminitis Gustav Arentoft tells Magazine, “During the bull market, tons of DeFi DAOs branding themselves arsenic ‘decentralized finance’ suffered exploits due to the fact that they lacked adjacent basal governance. The operational operation of these protocols was highly opaque. As an individual, assessing the decentralization of DAOs was hard and requires immoderate signifier of standardized parameters, which is what DAOmeter tries to provide.” 

Ultimately, contempt the fashionable conception that DAOs are “autonomous,” the world is that overmuch of it tin ne'er beryllium afloat autonomous and enforceable on-chain.

“You tin person each the on-chain votes you’d like, but tons of DAO operations travel down to the societal layer. Who owns the GitHub account? Who controls the DNS [domain sanction system]? Who is in-charge of handing implicit a password to the elected personnel?” says JokeRace’s McCaffery.

Growth

While DAOs conflict to decentralize, galore look to hide that they are inactive fundamentally profit-oriented organizations. That means that DAOs can’t spend to hide astir gross and growth.

To scale, DAOs centralize immoderate decision-making successful the hands of experts. One trendy thought successful the past twelvemonth that DAOs person been experimenting with is “working groups.” In DAO nomenclature, they besides spell by subDAOs. Metropolis (previously Orca Protocol) calls them pods. Maker calls them halfway units, and Gitcoin calls them workstreams.

These structures lucifer the ubiquitous M-shaped organizational structures successful modern capitalism today. Historically, the capitalist steadfast was a centralized U-shaped steadfast with decision-making powerfulness concentrated successful the hands of a fewer apical executives. As the steadfast expanded into determination markets, it grew progressively incapable of managing the rapidly expanding scope of analyzable administrative decisions.

The multi-divisional operation of the modern firm. (SlidePlayer)

To stay nimble and accommodate arsenic the steadfast grew, the modern capitalist steadfast underwent a structural decentralization, empowering mid-level managers with the autonomy to tally the section subdivision arsenic they deem fit. Pioneered by General Motors president Alfred Sloan successful the 1920s, this important organizational innovation allowed firms to flooded cognition problems and besides aligned the incentives and rewards to little management, efficaciously allowing them to enactment arsenic “mini-entrepreneurs” wrong a ample corporation.

DAOs are witnessing the aforesaid inclination toward a akin organizational structure, but that it’s evolving bottom-up from a dispersed, decentralized presumption quo.

James Waugh, co-founder of Fire Eyes DAO, tells Magazine, “In advising galore DAOs, we sometimes urge the setup of moving groups to absorption connected definite areas that are hypercritical, peculiarly those involving method enactment wherever astute contracts request timely upgrading.”

“Yet it’s wholly communal for redundant moving groups to beryllium and to beryllium a implicit discarded of time, however. Whether oregon not they’re businesslike truly depends connected the kinds of radical successful them.”

Decentralization maxis besides kick that excessively galore moving groups and managerial experts mightiness mean little transparency implicit however DAOs operate. It’s a ailment that isn’t wholly without merit. 

“In the aboriginal days of Bankless DAO, galore interior task managers requested for funds past delivered enactment of questionable value. We implemented a assortment of solutions similar reputational systems wrong Discord, KPI-based backing and timelocks to deter rent seeking,” Frogmonkee, an aboriginal halfway contributor of Bankless DAO, tells Magazine.

Ultimately, DAO governance boils down to the information that DAOs are made up of a pluralistic archipelago of individuals with antithetic worth preferences and priorities. Some privation to pump their holdings successful the short-term, portion others are funny successful the semipermanent wellness of the project. Some are genuinely altruistic actors, and past determination are delegates exchanging favors nether the array by agreeing to ballot connected each other’s proposals.

Dual governance structures

In specified a marketplace of conflicting values, a wide separation of powers tin assistance foil imaginable insider collusion. Some DAOs are actively experimenting with specified “dual governance” models, specified arsenic Optimism’s “Token House” and “Citizen House.” OP tokenholders and delegates inhabit the former, portion the second is an identity-based assemblage of “citizens” with soulbound tokens that acts arsenic a cheque and equilibrium connected the Token House.

Optimism’s dual governance location structure. (Optimism blog)

Shawn Grubb, a delegate astatine Gitcoin, tells Magazine, “Optimism’s experimentation with bicameral houses is simply a astute mode to segregate the assorted stakeholder groups: the tokenholders who attraction astir pumping their bags, the progressive contributors with a job, and the broader assemblage who believes successful Optimism and seeks task funding. The cardinal is balancing the powerfulness of antithetic stakeholder groups alternatively than the plutocratic presumption quo, wherever plutocratic tokenholders reserve lone the power.” 

Optimism isn’t alone. In caller months, a radical of Lido insiders person taken it upon themselves to propulsion for a akin dual-governance model. The occupation stems from Lido’s wildly palmy liquid staking product, stETH, which controls a marketplace stock of 32% staked ETH. This poses a looming menace to the underlying information of the Ethereum furniture 1, arsenic it comes dangerously adjacent to the 33% statement threshold, which could theoretically let Lido to workout power implicit Ethereum’s statement layer. In June 2022, Lido DAO proved that self-regulation was not forthcoming aft it unanimously changeable down a ballot to self-limit its involvement flow.

Finding a balance

In sum, DAO governance isn’t easy. Driving maturation portion committing to decentralization is nary tiny feat, and it volition instrumentality galore years earlier governance reaches equilibrium.

Yet the philosophical principles that blockchain organizations embody — decentralization, transparency, egalitarianism — are each values precise overmuch worthy striving for. After all, it’s unheard of for a multimillion-dollar institution successful the accepted concern satellite to beryllium debating operational strategies openly connected a forum oregon that allows anyone to participate and statesman contributing without going done a tedious interrogation process.

Even successful its imperfect state, the unfastened and transparent discourse successful which DAOs run is possibly the biggest bulwark against the centralization of power.