Check out last week’s edition of The DAO Mind
Here is a brief overview of the concepts in that edition that will make this edition of The DAO Mind much clearer.
DAO’s can be grouped into major categories mainly:
Management DAOs
Fundraising DAOs
Treasury DAOs
Community DAOs
These groups are not mutually exclusive and many orgs have characteristics of multiple org types.
So let’s take a deep dive into the first of these groups. Management DAO’s.
I find a few issues/solutions (issues and solutions are synonyms) in running a management DAOs. Most of these solutions are common sense. Maker DAO has solidified many DAO solutions at a macro level. I am not a governor of their DAO so I wouldn’t know what is going on behind the scenes, but from my perspective they have solved the management issue. The management issue is what is to be done with funds after proposals have been submitted and approved. It also ties hand in hand with the issue of standardized procedures.
So what is to be done when proposals have been finalized. Currently most DAO’s use this process flow.
Proposal is created
Outcome Finalized
Governors send assets where they need to go
Th issue is that governors still have the say in what happens to the assets. Thus all ownership of assets is removed from the members of the group and then given to a smaller group that actually holds the keys. This process is anti-decentralization. What is the point of making a proposal when you need the ownership of someone else to enable the outcome. This is why the standardization of DAO’s must be discussed. The best system to remove keys from a small group is to manage all assets through a smart contract that interacts directly with proposals. You can think of this system as a multi-sig on a much grander scale. Instead of a small group owning and managing assets according to an organizations decisions. The organization as a whole owns and manages the assets. The holding of keys by a small group is completely antithetical to a democracy and whether you like it or not on-chain democracies are the golden fleece of management on chain. In order to achieve this the smallest individual inside of an organization must have access to their portion of the treasury’s keys. The standardization of DAO’s can facilitate this decentralization. When creating an erc-20 token developers rely on token standards that are developed and accepted by ETH. Since the standards created to mint these ERC-20 tokens have been rigorously tested the network as a whole is much more secure. Investors often analyze audit reports in order to verify that the tokens do not have any exploits. However, DAOs, the organizations minting these tokens, do not have to undergo similar audits. This is largely due to the fact that the concept of DAO’s is open to interpretation. If we continue to let any organization call themselves a DAO then the definition will stay in relative obscurity and never progress to societal changing technology that maxis plead for.
Each DAO has their own way of proposing and voting on issues. Some orgs use Snapshot, others use Aragorn, and some even have their own platform they have built themselves. There are a million different ways to vote and interact with proposals. Regardless of the application used to vote or propose, the procedure needs to be the same. Also a true decentralized org should be making each of these proposals and results public. This leads to the next issue of governance, weight of members. In a traditional weighted democracy a member or group of members that hold a majority of GTs (governance tokens) would be able to sway the vote how they like on every proposal. This is especially true for smaller orgs who’s GTs are not too expensive. Some GTs have market caps in the sub 1m range (like my own). This means that anyone can purchase the entire company for under 500k. Many DAOs work to combat this by holding a large majority of GTs, but this isn’t decentralized either. If the board of a board is making the decisions we can hardly call that democratic. Instead of weighted democracies, DAOs should be managed by pure democracies. Now a pure on-chain democracy in theory sounds dangerous because creating wallets to vote is significantly less expensive than buying governance tokens, but there are a few solutions to anonymous identity wallets. These wallets or wallet add-ons use hashes in order to verify that one person is in control of the account. I am not going to pretend that I know how this tech works, but I do know from my contacts at Polygon Studios and Governor DAO that when this tech launches orgs will be able to determine that one identity is behind a singular wallet without use of government ID or passport (current KYC documents). This solution opens up a world of possibilities, mainly pure democratic possibilities. Orgs will be able to ensure that one user is making one vote. As opposed to the weighted democratic where one user can make thousands of votes.
Most corporations are split up into departments. A company may have departments in finance, marketing, sales, and engineering. The engineers do not interfere with the decisions of marketing and vice-versa. A DAO should be able to split the org into sub-orgs and then only allow certain users to vote on proposals specific to that sub-org. I have yet to see a project initiate a sub-dao that enables specialized decision making. This is the first step to efficient orgs on chain. Specialization almost always increases efficiency and no, not every DAO needs to have sub-orgs, but those who want to manage their resources like a corporation do. The sub-orgs also lead to corporate privacy and may be able to send proposals up to the large, public, DAO if necessary. In essence, the organization as a whole might not need to vote on small proposals like payroll, strategy, or hiring at a micro-level. Just imagine needing to vote every single time JP Morgan hired a summer intern. It just isn’t efficient. However, these decisions should still be made on chain within the private sub-daos created.
Despite my extreme public optimism, I actually despise the crypto space. The reason is because of fundraising in general. I used to work in venture capital. I got my first job in crypto as the manager of a marketing company that was directly linked to a large crypto venture fund. I worked directly with the principal to make sure his investments got the publicity they needed. Long story short the job didn’t last long. I hated it. The goal of the entire thing was just to amass more wealth and while some people’s life goal is to become incredibly wealthy, it wasn’t mine. Now with my personal distaste for fundraising aside, fundraising DAOs are by far the most well known. Let’s take Constitution DAO as an example. They amassed 73k followers on Twitter. They define themselves as a single use DAO. An org that only wants to accomplish one purpose. That purpose was to buy a historical artifact. They raised 47m in Ethereum in order to bid on an asset that ended up selling for 43m USD. Ultimately, they didn’t win the auction. With that small summary aside. The issue with fundraising DAOs is the management of assets. When it comes down to it, one person or a small group of people are the ones who can send and control the treasury of these orgs, subsequently making the org centralized (refer to my earlier argument for smart contracts as governors). Since Constitution DAO wasn’t trying to purchase an asset on chain their solution is a republic based DAO. A republic is made up of delegates who make decisions for the DAO. Brittanica defines a Republic as a “form of government in which a state is ruled by representatives of the citizen body. Modern republics are founded on the idea that sovereignty rests with the people… Because citizens do not govern the state themselves but through representatives, republics may be distinguished from direct (pure) democracy, though modern representative democracies are by and large republics.” Republics make up for lack of representation with efficiency. Elected representatives can speak for the people much faster than all of the citizen body can respond, this is why the US elects a president every four years and also why presidential elections require so much publicity. It is extremely hard if not impossible to find a pure democratic consensus from a large population. This is not to say that a pure democracy is ideal. Faction mischief occurs when a large portion of the citizen body can be persuaded to make decisions that may harm organization. James Madison defends republics by saying a “pure democracy can admit of no cure for the mischiefs of faction.” But a republic, he continued, “by which I mean a government in which the scheme of representation takes place, . . . promises the cure for which we are seeking.” Generally, members who are elected into power are better qualified for the position. In a DAO an elected member could be someone who is a pillar in the community, or someone who is notably educated on a subject matter. All in all, running elections and creating a republic can be the most qualified way for a DAO to become decentralized.
This election requires a pure democracy to vote in the powers of the organization. Not the powers being elected.
I used to believe that direct democracy was the answer to many of the problems associated with DAOs. The clear differences between pure democracy and weighted democracy support the former. However, DAOs generally have issues getting members to vote on proposals. Meaning pure democracy likely isn’t a viable option. It leads organizations to ask questions like “What do we do if we don’t get enough votes for an important decision”. Basically, many argue against the decentralization of a republic. However, as long as voting these members into power is done in a registered and secured way. The republic ends up being the most efficient and decentralized governance model by far.
So that concludes this week’s edition of The DAO Mind. I hope my rambling was somewhat cohesive since I am writing and editing these editions myself. If you want to support me and my project that is working to standardize DAOs follow us on twitter here. Thanks so much for reading and feel free to toss your questions at me!