Much ado has been made of decentralized autonomous organizations (DAOs). Broadly speaking, these projects inscribe their rules, rights and responsibilities to smart contracts which live indefinitely and immutably on the blockchain. Holders of the DAO’s corresponding crypto token may participate in votes which automatically invoke those contracts to execute functions and pass new legislation.
The prominent early experiment of this scheme was aptly named The DAO. The DAO deployed to the Ethereum blockchain in April 2016 on the back of one of the most successful crowdsourcing campaigns in history, drawing in over US$100 million and nearly 14% of the ETH in circulation.
The stated purpose of The DAO was much the same as any corporation — To create value and enrich stakeholders. Through the wisdom of the crowd, proposals would be curated and voted on to receive funds from The DAO’s treasury with the expectation that profit would flow back to the investors.
No hierarchies here!
It was a radical experiment. Could an organization with no hierarchies, belonging to no nation state, holding no intellectual property and enlisting no employees succeed in a post-industrial world and create profit for its some 18,000+ beneficiaries?
Unfortunately, the experiment ended almost immediately.
On June 17th, two months after The DAO launched, a hacker exploited a combination of flaws in its code to drain US$70 million worth of ETH from The DAO’s treasury. The impact rippled around the blockchain world, and the Ethereum network resorted to a controversial hard fork to retrieve the stolen funds. It sounded a predictable death knell for The DAO, which was defunct and delisted from major exchanges before the end of the year.
That was the last time anybody tried the great DAO experiment. . .
. . . Just kidding!
The DAO is now a distant memory and there are well over 100 DAO projects holding billions of dollars in capital, the ranks of which include Maker, Aragon, Gitcoin, Moloch, The LAO, MetaCartel and now even Uniswap. These organizations are deeply important in the crypto ecosystem — Maker’s USD stablecoin product, DAI, has over US$3 billion in circulation.
As many DAOs as there are, most of them fall within just one of two categories: Governing DeFi protocols and issuing venture capital or grants. There are a few practical reasons for this:
- DeFi is hot hot hot. After all, decentralized finance is the reason Satoshi Nakamoto created Bitcoin in the first place.
- Governing DeFi protocols is mostly a number-tweaking game. It’s relatively simple to turn dials and pull levers by vote.
- The blockchain ecosystem is new and booming. There’s a lot to be built and as much funding needed.
- Giving out funding is also fairly simple. Vote on proposals and send over the money when they pass.
It appears that DAOs have found their early foothold in these niches. But where do they go from here? If DAOs are to evolve further into a general alternative to the hierarchical corporation, they need the capability to act in more substantial ways than merely moving money around in digital space. Even the simplest company needs somebody to answer the phone. Of course, these DAOs do exist and some of them will even answer the phone. How is that?
This is something of an open secret — our DAOs are neither truly autonomous nor fully decentralized.
Behind all DAOs are people who do everything not programmed into its smart contract infrastructure. Maker, for example, elects a representative to manually transfer votes from their forum into an on-chain governance proposal. Uniswap proposals are implemented by their core development team. And somebody has to maintain all of these websites. These organizations have engineers, managers, executives (and executive assistants), marketers and more working off-chain and behind the scenes doing the myriad things needed by any functional organization. Today’s DAOs have wrapped much or most of their product functionality into a decentralized, autonomous framework. They themselves, however, are neither of those. There is still an air gap between vital organizational functions and the blockchain — a gap between the decentralized constituency and their organization.
This is important. Operations beyond the scope of the DAOs programming and oversight of its constituents are then externalities. This means that DAOs are subject to externalities **intrinsic to the operation of the organization itself. **That is, participants in supposedly decentralized and autonomous organizations are necessarily beholden to individuals and processes which they have no direct oversight over and which they must trust to act in their best interest. Uniswap’s community must take it on faith that their proposals will be executed by the core team. Maker’s community relies on privileged persons to facilitate fundamental functions of governance. If these trusted processes fail, DAO participants suffer the consequences.
What can we do? How can DAOs become truly autonomous and fully decentralized?
Answer: They can’t and shouldn’t.
For one thing, it’s dubious if something can be “fully decentralized” at all. Take The DAO for example. It could be persuasively argued that all of the power in The DAO had been concentrated (read: centralized) into smart contract code written in just a few months by just a couple of people. It was a single point of failure, exploitable by a lone hacker to bring the whole thing crashing down. The more we obsess over what we are “decentralizing”, the more we may be turning a blind eye to where power is in fact being centralized. Nathan Schneider of the Metagovernance Project writes as much in his paper Decentralization: an incomplete ambition:
“…even the most apparently decentralized systems have shown the capacity to produce economically and structurally centralized outcomes. The rhetoric of decentralization thus obscures other aspects of the re-ordering it claims to describe. It steers attention from where concentrations of power are operating, deferring worthwhile debate about how such power should operate.”
It is difficult to even imagine a fully decentralized organization, or at least a functional one. For all practical purposes, individuals occasionally need to make unilateral decisions in order to get things done. By reductio ad absurdum this seems axiomatic. Only one person should type on a keyboard at a time, and you can’t take a phone call by committee. It took Twitch Plays Pokémon 16 days to beat the Elite Four. Your average 8-year old can do it in a couple of days.
Uniswap has a core team of developers because a core team gets things done. While the blockchain space is still new enough to permit the occasional lone genius, gentrification is happening and the expectations for organizations are growing. As the demands on DAOs grow, it is more likely that power will be increasingly centralized to satisfy those demands rather than decentralized, as hierarchal organizational structures are a proven method of productivity.
So we pose a more important question: How can we maintain accountability over centralized aspects of DAO operations?
The point here is that if a centralization of power is directly accountable to the constituency of a DAO, then it’s no longer an externality. This is the basic principle of popular sovereignty, the origins of which date back at least as far as the Roman Republic, wherein persons are given the responsibility of representing the will of the people. Such representatives are, in theory, held accountable to the people by the possibility of being deposed. Democracy has not come up with much better in thousands of years. The practicality of Republicanism is the same as for our DAOs — even now in the information era it’s unfeasible for an entire population to vote on every little thing. Instead, we give somebody temporary power to do it for us and check in on them every so often.
The capability for such delegation is critical for DAOs if they are to scale, broaden their operations, and cooperate with each other. It’s also critical that they do not further compromise their “decentralized” and “autonomous” ethos in doing so.
We propose a system for DAOs to encapsulate such centralization, resource allocation and privilege within an additive, accountable framework. This framework allows DAOs to conditionally delegate power and resources to chosen or yet-undetermined entities in pursuit of its directives via their existing governance mechanisms. By this process, DAOs can eliminate the air gap between off-chain operations and on-chain accountability. By the same system, we enable a new species of entrepreneur to emerge in the DAO ecosystem and push the flywheel of value creation for the space as a whole.
More about Cambrian Protocol’s accountability framework in Part 2!