On Governance
0x4E6b
January 23rd, 2022

In the wake of the SushiSwap leadership crisis and my own place in the corporate financial world, I started thinking more and more about the actual structure of governance. There are a wealth of self-help and philosophical texts on the more abstract idea of what being a leader means -- go read the Art of War, Kill Six Billion Demons, the Prince, whatever. I have always been drawn to these scholarly writing on the nature of leadership and governance. Invariably when power coalesces – be it in the state, in business, in war – there will be those who comment on it and attempt to codify and analyze the concept of “leadership” itself -- and while those are excellent for a view of the individual as leader, it was more interesting for me to consider governance. Governance, in my estimation, is byword for prudent, ethical leadership that aspires to, at the end of the day, do more right things than wrong things, while maximizing the benefits of one’s own state/organization/unit. I wondered at how we might iterate on our notions of governance in the new world of DAOs, particularly given the failures of both the traditional systems and this newest one. As always, I try to seek the middle path in all things.

My own experience in management and organizational structure stems from a long life in traditional businesses and corporate structures – I have led large teams, seen many failures of governance, learned how fragile and precarious these entities can be. Of course, as we enter not only the age of decentralized finance, but decentralized organization, we find ourselves addressing the necessity of a traditional leadership/management structure.

Under most organizations of capitalist businesses, the widening gap between the compensation of executive-level stakeholders and the rank and file has ballooned to such a degree as to almost seem preposterous. Indeed, one of the great failing of our oligarchy is that the worker has become disenfranchised of the products of their labor – while being held hostage by the repercussions of failures that are beyond their individual control (market conditions, supply chain issues, material shortages, the tastes and whims of the consumer).

By contrast, traditional leadership is increasingly immune from these conditions, by way of governmental subsidies or bailouts, generous compensation packages in the event of severance, and the ability to sacrifice those below them. Even in applications of alternative systems, we see different but pressing problems – the Soviet Union’s “hypernormalization” (a term coined by Alexei Yurchak, referring to a period in which “everyone in the Soviet Union knew the system was failing, but no one could imagine an alternative to the status quo, and politicians and citizens alike were resigned to maintaining the pretense of a functioning society. Over time, this delusion became a self-fulfilling prophecy and the fakeness was accepted by everyone as real”). Part of this was the state overproducing material consumer goods in a way that was agnostic of real demand, a misallocation of resources due to the lack of direction and working group oversight.

“Do not surround yourself with splendor. Spend your treasury sparingly. Stock the halls of your holdfast with sturdy and plain men, and do not adorn your walls. Abhor gold. If you sit next to the sun too long, you’re likely to go blind.” -Au Vam, 15 Ways of Ruling

What is, then, the middle ground between these systems – between a gluttonous head that sacrifices the lower ranks, while simultaneously not understanding the actual functions of their jobs (see, the recent C-suite anger at DoorDash over the policy of all employees making deliveries) and the inefficiencies of a disparate working groups  who trudge ever forward without assessing the success of either their mission or that of their fellows?

The answer is, of course, complicated – and if I possessed it definitively, I would be rich and living on my own island, instead of posting memes on Twitter dot com. However, we can find indicative clues hiding in plain sight: the failure of organizations like SushiSwap, the structural issues with the corporate paradigm in the United States, the hierarchies and patterns that exist in nature, et cetera.

Sometimes the Other Side is right

At the risk of sounding like a Fed, we must look at some traditional corporate organizational methods and administrative functions to solve issues with decentralized organizations. While we might all dislike this traditional world for a multitude of reasons, if you refuse to use the tools of your enemy that have made them successful, you are liable to fail. While not perfect, there at many such tools we can apply – without abandoning or betraying the philosophical grounding of decentralization.

One example of this is the simple concept of working capital budgeting – which was an issue for SushiSwap due to their executive-level multisig. The following quote is from CoinDesk:

“However, that structure meant that the team needed approval from a majority of the multisig for any form of discretionary spending.

According to pseudonymous former contributor LevX, that situation led to the creation of a second multisig consisting of more readily available signers who worked primarily on Sushi.

‘Whenever we needed money last year, we needed to persuade five people who were super busy, so Maki decided to create the ops multisig so we could transfer funds from the main treasury to ops multisig to use it quickly and efficiently,’ he said.

The team never hired an accountant or treasurer, and an effort to institute an “inverted pyramid” system of communication – where decisions were discussed internally among team leadership, then the wider team, then with the community – quickly led to internal tensions, as many felt not all financial processes were sufficiently transparent.”

I am not here to adjudicate the Sushi situation, however, if we look at this example, we can see a clear failing by not adopting successful measures used by traditional finance and business. The idea of having to run entirely up the chain to receive discretionary or working funds from a diverse group of individuals across the world is as inefficient as it is daunting. The bottleneck alone not only hampers the working group, but the executive functions as well.

It should be pretty obvious why this is bad.
It should be pretty obvious why this is bad.

The solution, of course, is to practice conventional corporate budgeting techniques -- quarterly reviews, goal metrics, and, maybe most importantly, management-level individuals that can approve budgetary allocations. Here is a simple enough structure:

An extremely simple illustration of dividing total capital into working capital across projects.
An extremely simple illustration of dividing total capital into working capital across projects.

This budgeting frees up the Executive-level members to focus on their respective projects, streamlines the request process, allows for a PM that understands the logic and rationale behind the request to make the decision, and helps ensure that there is responsibility and oversight on a more practical level. The initial budgeting can follow any number of examples: Projects can be assessed according to TVM/NPV, by cash flows, by simple percentile distribution; they can be reassessed weekly, monthly, yearly; success metrics and milestones can be as subjective or programmatic as needed -- those are all relatively semantic points; the real point is that some system must be in place that is:

  1. Efficient in both time and capital expenditure.
  2. Distributed by those with the best overall insight, familiarity, and expertise.
  3. Governed by some metric of success and some division of time.

We’re talking about this at a very zoomed out, macro-level here -- kind of like Asimov’s Laws of Robotics -- where we have to approach a kind of overarching logic before we, say, break out the spreadsheets and KPIs.

This same logic can be applied to many things for a governance structure. While we might love the idea of true decentralization, what happens when two independent, relatively unsupervised individuals both end up creating what is functionally the same product? Can this be said to have been efficient in any way? When the right hand doesn’t know the work of the left, there is not only a strong chance of overlap, but a stronger still chance of some inefficiency. Now, if these two individuals were assigned/signed up for the same project, might the final product not be greater than the two individuals by the sum of their collaboration?

This is yet another point:

We might be decentralized, but our planning cannot be.

Which is to say, the utopian idea of our flat hierarchy or completely free environment will almost inevitable result in inefficiencies of time, effort, and capital. While we might be decentralized in geography, decentralized in power, decentralized in philosophical terms, but our purpose and planning must be collective and, to an extent, guided. There must be some overall knowledge of what our various goals our, what our members work on, what projects are must likely to succeed or fail, which team members’ skills are best suited to what venture, etc. We can dream of perfect self-organization, but until we’re a hive mind, it is neither practical nor profitable to act in such a manner.

All these points, of course, rely on the same thing: executive decision making.

“But Kitsune!” you cry out, “doesn’t that defeat the purpose of this whole thing?” And indeed, it would seem to. Leadership inevitably seems lead to concentration of power and a systemic unfairness. To quote the artist Jenny Holtzer, “Abuse of Power Comes as No Surprise”

Jenny is SPITTIN
Jenny is SPITTIN

How to we then take the best parts of leadership -- planning, overall vision, decision making -- and try and prevent the worst aspects? Of course, we have the model of direct governance, wherein members of our organization vote with tokens or another representative system on all impactful decisions and allocations of capital. The inefficiencies and inequalities here are numerous -- a token can be horded/acquired in such numbers are to make the vote fundamentally unfair; bottlenecks can occur, long periods of time elapsing for decisions and resolutions; ideological differences can create an unproductive debate-state where partisan alignment trumps utilitarianism and practicality. We might have a representative system, wherein the community votes on empowered individuals to make decisions -- I shouldn’t have to enumerate the pitfalls here.

My personal recommendation is for a melding of the traditional and the decentralized. At the functional head of the organization is a C-suite-esque core -- these members oversee aspects of the business mimicking a traditional set up; CFO, CTO, COO, CRO, etc. The difference is there is no CEO. Large decisions and those where this team cannot make decisions definitely are opened up to a larger representative voting system, where each member of the organization has 1 equally weighted, fully anonymous vote, which resolve in a <72 hour window for the majority of decisions. These resolutions can be binding or non-binding. Organizational flow would be divided into departmental working groups that can follow traditional labeling (Revenue, Finance, Engineering) or be project/vertical specific. At set intervals or milestones, the heads of these divisions are subject to a self-review, a team review, and an executive review -- the first being the perception of one’s own work, the second being one’s team/reporting members views, the third being the top-down view. The intention is that in the middle of these three reviews will be a common truth that can be used to assess the team member. These same checks would occur for each member of the organization. For the Executive Group, if at anytime a majority vote of no confidence is held against either an individual member or the entire group, they are removed and an open-vote proposal is made to replace them in their specific function.

The goal here is to balance the power the Executive Group has of overall vision, by making them answerable to the entire DAO, which is empowered to remove them at any time by majority vote. Management, which traditionally has some of the greatest opportunity for abuse, is held is check by pressure from above and below -- my hope is that by making the position open to more scrutiny and expectation, it will attract/work best for those who genuinely want the project/department to success and are willing to engage in cooperation for the best end result.

“The king Au Vam was known for keeping a peculiar member of his council – a low-born scullion, who would serve tea for his grand war parties. This country maid kept the company of ten of the most powerful generals in the Yellow City, and was privy to their most tenebrous plans, yet was scarcely sixteen summers of age and educated not a whit.

Her purpose was thus: if the grand designs and monolithic schemes of any of these mighty and august men could not pass the base judgement of a girl of sixteen summers, they were immediately discarded.

Thus did Au Vam win nearly all of his battles.”

-Histories of the Yellow City, Vol. 32, paragraph 3 (A.S.C. 189)

This one might be a little out there:

Pay your people.

Yes, we all love to contribute to a cause, to a vision. Yes, many people can claim selflessness or alternative reasons for involvement (you’re not in it for the tech, buddy). But incentivization is still one of the most powerful motivators. Beyond that, compensation serves to legitimize the project to its participants, solidifying it as something real. People will work harder on something that feels tangible or official. Retention will be higher, milestones more easily achieved, better talent sourced. (Not a shill, but I like what these guys are doing: contribute.xyz). How much people are paid -- whether it is a flat structure, a ratio-scale, a mixture of sources, equity, asset, etc. -- is negotiable, but I firmly believe participants must be compensated as early as humanly possible. Raises or additional compensation can be structure either as a decision of the Executive Group or as a vote of the public DAO -- except for the compensation of the Executive Group itself which will always be subject to a vote from the DAO for increases/decreases. Metrics can include a flat percentage of overall growth or be tied to the aforementioned reviews.

The unglamorous and unexciting is as important as anything else

This is painfully obvious but bears repeating. All of the little pieces of connective tissue are as important as the rest of the body. Administrative tasks, scheduling, meetings, check-ins, milestones, budget and spending reconciliation, legal minutia, HR, PR, what have you -- all of these are extremely vital and important. Everyone wants to be the genius who unveils the new product -- the problem is that this rarely exists. There are many links in the chain to success, fruit can only come in this case from the ministrations of many gardeners. In our rush to towards a dream, let us not forget to build roads and aqueducts, supply lines and farms -- the day will come then the reach of singular genius will exceed their grasp.

What we must avoid

  1. The consolidation of absolute power by the Executive Group or an individual.
    • We can check this by the public DAO vote. To be slightly optimistic here, we must select these officers on criteria of high moral fiber, utility judgements, public perception, and track record.
  2. The inefficiencies of a fully direct voting system.
    1. Managers and Executives must be allowed to have some discretion as it pertains to day to day activities, tine-sensitive decisions, and allocation. An X-amount of hours vote cannot occur for each decision.
  3. Over-management
    1. Management has to find the balance of allowing for self-directed work and projects, as well as not hampering or hindering their Working Group.

These, of course, are delicate balances that must be worked through. So:

Be flexible in our thinking

At all times, we should endeavor to stay open to new lines of thought and concepts -- especially those that challenge our own. To imagine that we have found the best possible answer is the height of arrogance -- instead, let us endeavor to find the right question to ask. Iterate constantly, try new methods, be open to reasonable conversation and debate, never settle. Down this path of constant reflection and calibration is a more-perfect end-state.

But of course…

This is only my point of view -- a personal and therefore inherently flawed on. This is not fully autonomous nor decentralized, but nor its it the grinding monolith of tradition that has dominated our world for centuries. This is not for everyone -- maybe it is for no one -- and I am certain superior questions exist. What I am seeking is to continue asking the (hopefully) right questions, in service of arriving at better and better answers. We currently operate in a time where rapid iteration is possible like never before, where we can experiment on a large scale -- particularly with financial and organizational instruments. We also find ourselves at a time where the traditionally gatekept and exclusive methods of governance, leadership, decision making are being challenged, with new alternatives and better solutions presenting themselves constantly. The idealist in me hopes desperately for a future of greater equality and egalitarianism, where disenfranchisement and the disproportionate distributions of power and wealth are being torn down in front of our eyes.

I will settle in the short term, however, for the incremental improvement of this new decentralized, non-traditional organization. And hopefully one will hire me and I’ll be rich and can shitpost all day.

Thank you for reading~

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