The Off-chain vs On-Chain Governance Debate

A lot of criticism has been levied at off-chain governance for blockchain backed cryptocurrencies. Even Vitalik Buterin himself has openly stated that his central decision making authority might be more of a hindrance than a benefit in the long run for Ethereum. Is Vitalik right?

Some logical arguments have been made in support of off-chain governance for cryptocurrencies. For one, those with the technical expertise are in a better position to make the best informed decisions– especially compared to retail investors who account for the majority of  trading volume.  Second, there is no incentive for the creators of a cryptocurrency, large stakeholders of their own tokens, to enact changes that will hurt the value of their token for the long-term. Controversial decisions result in sell offs, as seen in the past with noteworthy hard forks that have occurred on some of the biggest blockchains.

In the debate between off-chain and on-chain governance one thing is indisputable– both can be successful models of executing decisions on a blockchain, and there are large scale examples to back the success of either side. However, with popular off-chain governance solutions like Snapshot, the community can fall prey to bad actors that abuse the centralized trust that off-chain governance requires. 

The DAO Concept 

The basic concept behind a DAO is that community members are able to create and vote on proposals to run an organization. Some popular types of organizations formed using the DAO model include investment DAOs, social DAOs, gaming DAOs, among many others. Voting power in a DAO is most often proportional to ownership of the governance token, sometimes minted as NFTs.

Diving into technicality, the DAO concept initially became feasible by utilizing Ethereum backed smart contracts. Smart contracts provide the foundation for DAOs to operate with minimal central authority. As long as some predefined condition is met, changes to the blockchain can be made with little interference from any single individual. An important note is that despite Ethereum being a pioneer here, developers have increasingly turned to more efficient chains such as Verse Network to build their DAOs and avoid obstacles such as high gas fees.

One of the better known applications of this powerful organization is the investment DAO. Members– holders of the governance token– pool capital together to make VC-like investments into different projects that are voted on by the members. Now, enter Fortress DAO.

FortressDAO: A Slow but Sure Death 

Fortress DAO (FORT) is one recent example of an investment DAO with a history spanning back to just November 2021. Unfortunately for FORT token holders– and in spite of the initial anticipation of the project– Fortress also highlights the potential for disaster when a DAO operates under a flawed off-chain governance model where votes from the community are not executed.

Fortress DAO is currently facing major issues at the hands of the project's CTO, Avraham Eisenberg. Eisenberg has allocated almost 100% of the project’s treasury into FUSD, an unlisted interest bearing stablecoin governed by none other than Einsenberg himself. This less-than-sound allocation of treasury, combined with the scheduled supply expansion of FORT, has resulted in the token plummeting from a November high of $193 to around $4.88 today. FORT is being diluted into the ground and no new investors are looking to pay for a stake.

It does not take a crystal ball to see where Fortress DAO’s fate lies ahead. In reality, you only need to check out their dashboard. Crunching the numbers shows that if the dilution of FORT continues ahead with no major changes, combined with no new money entering the project, the token will be diluted to $1 (an important threshold) within the next 6 months. 

After FORT crosses $1, the whole project will be shut down automatically. A smart contract is coded to execute this shutdown, meaning that the project’s assets will be paid out pro rata to FORT holders, marking the permanent end to Fortress DAO. In another blow to members, that payout looks even more dim taking into account the high exit fees needed to liquidate those assets.

(For an in depth explanation of Fortress DAO’s financial situation- read here)

Faced with these gloomy prospects an obvious question comes to mind. What is stopping members from drawing up proposals to better allocate the project's treasury, or simply to stop further dilution of the token?

Something went awry here, and the problem is found within the true decision making power that underlies Fortress DAO’s off-chain governance. FortressDAO is guarded by a multisig wallet where only the founding members hold the keys for concrete changes to be enacted. Essentially, the founding members call the shots in spite of member’s ability to draw and vote on proposals. 

Much like a representative democracy, the power to pass popular legislation depends on those representatives– the founding members–  to act with the will of the voters. Put simply, member proposals on an off-chain governance solution like Snapshot and votes are for show, and the real decisions trickle down to those few individuals.

One last ditch proposal to replace the project’s CTO has garnered 245k votes. Digging past the surface level unveils that this last ditch effort appears doomed to fail– unless CTO Avraham Eisenberg chooses to oust himself. FortressDAO members are left here with their hands tied.

The future of the DAO concept relies on sustainable governance models– one where token holders truly determine the path forward for their projects. In the meantime, unsustainable DAOs such as Fortress are bound to fail, leaving their truly decentralized counterparts to rise up and pave a long term path forward for the DAO concept. As the (many) good diamonds in the rough prevail, perhaps we can expect to see on-chain governance DAOs occupy the center stage. 

With Verse, anyone can start their own DAO seamlessly and execute their governance on-chain at minimal fees. The Verse team is excited to prove the DAO concept for the long term by continuing to help more teams build out their DAOs with sustainable on-chain governance!