DAO stands for Decentralized Autonomous Organization.
A bottom-up organizational entity, rather than the traditional top-down hierarchy. There is no centralized authority, and decisions are made as a collective. Token holders participate in governance by voting on proposals that can change certain parameters in the DAO-related protocol. Originally written smart contracts lay the groundwork for what can and cannot be changed.
Inspired by the original ethos of decentralized encryption, The DAO aims to create a crypto-native structure that aligns with this ideology. It also reduces regulatory risk, as a functioning DAO means it is self-sustaining without the need for a penultimate owner or decision maker. There is no CEO to dictate the DAO’s trajectory, and no board to oversee governance.
At first glance, this organizational structure sounds like a good idea. It is in the spirit of the original encryption and includes additional benefits. Imagine if Uber (Uber) shareholders could change ride-hailing fees and surge pricing algorithms by voting on governance proposals. Imagine if there was no CEO, then Uber could continue to subsidize cheap rides by handing out more UBER shares as a liquidity-driven reward. Imagine if Uber CEO Dara Khosrowshahi never made the decision to launch UberEats and make the company profitable. Imagine how long it would take to achieve this with a bottom-up approach. … doesn’t sound so good now.
I know the DAO is still experimenting with various governance structures; but for now, it appears to be mimicking the benefits of shareholder voting rights, but without the same level of efficiency or oversight.
Achieving decentralization and autonomy with accountability is hard.
So, how can DAOs improve? In this post, we present a framework for thinking about decentralized governance and how to work with it to optimize good business decisions.
Get a quick look at what’s in this article:
Decentralizing too quickly or too early is the number one mistake.
DAO inspiration often creates a “false narrative” that every decision is “the will of the community”.
Having a hierarchical structure in a DAO is not a bad thing.
A full-fledged DAO might look a lot like a public company.
Accountability needs to be enforced on-chain.
wrong narrative
The reality is that most DAOs are not decentralized or even autonomous. The initial founders, core team members and early investors, as the majority of token holders, can make decisions according to their own preferences. The execution efficiency of a DAO is not measured by the participation of its community members, but mainly by the competence of the core team members. Check out the Tribe DAO event below.
In May, the compensation proposal for the $80 million Fuse hack was approved (Fuse is a money market launched by Rari Capital, which merged with Fei Protocol to form Tribe DAO). Then, when the refund is about to be approved, someone submits a veto proposal to reverse that decision. Fei Labs, the main entity associated with the Tribe DAO, decided to abstain in the vote, signaling its opposition to the refund. All of this comes just days after Rari’s original founder, Jai Bhavnani, decided to step down. Fast forward a few months later, Fei Labs original founder Joey Santoro decided to quit Tribe DAO.
If the last paragraph doesn’t make sense to you, you should be thankful.
Again, instilling accountability into DAOs and their key operators is extremely difficult, especially when voting power is concentrated in a few, creating a “false narrative” that every decision is “the will of the community” “—if it fails, put the blame on the token holder, but if it succeeds, get a lot of reputation.
You want DAOs to mature and operate like Apple, where Tim Cook has real responsibility and reports to the board – not like Facebook where you can’t fire Mark Zuckerberg’s kids.
DAOs in their current form are also extremely inefficient. Apart from mitigating regulatory risk, there is absolutely no reason for a crypto startup to become a DAO in its early days. The fact that it is often combined with anonymous founders is another hidden danger.
If a FAANG engineer could juggle 10 remote jobs, do you think the following would not happen?
Large DAOs are also quite generous with their budgets. Maker has generated $75 million in cumulative protocol revenue over the past 6 months, but its annual budget is around $54 million.
This means that the average annual salary is about $400,000 per person, which is higher than NASA.
The point is that DAOs need more accountability. In a future article, I’ll explore how to do this further, but we should learn from what public companies are already doing, rather than doing it behind closed doors.
However, accountability should be enforced on-chain.
For example, milestone-based, non-game specific KPI compensation mechanisms are a good example. Imagine a scenario where the initial token authorization period for founders is 8 years (about the average time for a startup to go public), and a certain percentage of tokens will be unlocked when clear milestones (such as net profit, daily active users, etc.) are reached. currency. There are many other possibilities we can explore here, but the design needs to be tight, enforceable on-chain, and immune to gamification patterns.
The SUSHI “Chef” compensation below is a good starting point, but I’m not in favor of price-based token compensation, especially when most protocols are relatively young. Price-based compensation may apply to CEOs of public companies because of regulations and strict wash trading regulations. In the crypto space, this requires more careful thinking, as market manipulation occurs more frequently.
It also reminds us how generous DAOs are.
P.S.D.
Over the past few years, a Bear Stern memo from 1981 has gone viral. It talks about creating a company culture that employs a PSD degree. Born poor, smart, and deep desire. The cryptocurrency space is full of people who want to “make it”, but not many have the proper business acumen. Gamblers lose money on JPEG trades, while scammer founders make money with short lock-up periods. Before turning to angel investing, the average tenure of a crypto founder was 18 months.
While advances in developers and blockchain technology are important, the crypto space needs more business builders. Those who want to prove that web 3.0 can produce useful products, disrupt existing business models, and get rich in the process — rather than opting for nasty tokenomics strategies for short-term wealth.