Governance and DAOs

I haven’t written a blog post about DAOs since 2016 or 2017. Unlike my rants about blockchain scalability, this is a discipline I do have expertise and professional experience in, so I won’t play the “just an armchair hobbyist” card. DAOs aren’t useful in most scenarios - traditional models like cooperatives or public companies serve the goal of public ownership or “decentralized organizations” far better. However, there are some niches where DAOs do innovate - particularly when the organization is a) digital and b) global, or certain niche things like a necessity for transparency. To be clear, traditional organizations like cooperatives can leverage blockchain and smart contract tech to improve their processes, without becoming a DAO.

The critical error made by many DAOs is ignoring the learnings of millennia and going back to bizarrely primitive methods of organization. Fortunately, some DAOs seem to be heading in the right direction, and starting to build on the shoulders of giants instead of being the dunce ignoring them.

Broadly, DAOs are best off following three or four models - public companies, local governments and cooperatives, with service organizations for the non-profit DAOs. Depending on the type of protocol, different models may be suitable. For example, on one end, an L1 is best served by minimal or ideally no governance. On the other, a profit-oriented DEX is best served by following public companies. Certain protocols can have a hybrid.

Most DAOs today follow some elements of public companies model, but unfortunately do not follow through to the good parts. This may be due to a misperception of public companies being “centralized”, whereas this is not true at all. Public companies are the very embodiment of decentralization, and many have been around for centuries to prove it. So, if you’re going to organize your ownership and voting by tokens, might as well leverage the best parts, with some inspiration from service organizations.

Now, it’s worth noting that how companies are run is totally tangential from whether they are DAOs or companies or whatever. For example, you can have a company with a flat meritocratic structure, while a DAO can be extremely top-down hierarchical. As with most things, it’s about finding a balance. Flat structures are highly ineffective in many scenarios - consider the brilliant essay “The Tyranny of Structureless” or investigations into Valve. However, DAOs are well suited to take the benefits of flat structures, but layering them with management where it makes sense.

There are many ways to go about this. One potential model could be:

- There’s a quorum of the top X delegates voted by tokenholders, which will basically act as a Board of directors, or as an accountability committee (more below).

There are certain types of proposals that can be passed by this Board, while others need broader involvement of the full delegate/tokenholder base.

- There’ll be multiple committees or councils, which are appointed by the Board. They are relatively independent with a specific mandate. A good example of this is the Grants Council in Optimism - they have a narrow mandate of allocating X amount of tokens to projects. Another example can be a team developing a protocol upgrade. The Board is responsible for keeping these councils in check. Of course, tokenholders are responsible for keeping the Board in check.

- For DAOs which require more involved operations, the Board can appoint a Governance Head/Secretary/President/CEO, whatever you call it. This entity will be responsible for the day-to-day running of the DAO. Most DAOs already have this position defacto, even if they don’t admit it - might as well make it actually decentralized.

A more exciting prospect for DAOs, though, is cooperatives. The key difference will be instead of plutocratic vote by tokenholders, there’ll be a democratic one-user-one-vote by users/builders. One-user-one-vote remains a formidable challenge for blockchains, and that’s an entire post of itself… It doesn’t have to be completely democratic, of course, we can dip into this world progressively, like Optimism’s Citizens’ House is attempting. As such, we can have a hybrid of the two - both tokenholders and users.

It’s important to note that while experimenting with cooperatives-like models can drastically improve democratization of ownership, a DAO still needs to have a functioning, efficient organizational structure. Different DAOs will need different structures, but one thing’s for sure - pure plutocratic operations will be disastrous for most DAOs in the long term. Conflating this as “decentralized” is a grave mistake.

There’s many more sub-topics I wanted to tackle, such as non-profit DAOs which can follow service organization models, or certain protocols may integrate a public administration model, or how treasuries can be managed effectively and attain economic sustainability, or a deep dive into where DAOs make sense or don’t - but I’ll close this post out here. If there’s interest, by any chance, I’ll consider writing a series about Governance and DAOs.

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