For societies, legitimacy is like the air we breathe. We take it for granted. We don’t notice it. But if it disappears, everything can collapse. This is why it is so important to understand how legitimacy is established in DAOs.

Why Legitimacy Matters

Legitimacy is usually understood as the right to exert power, or the acceptance of an authority. It can be applied to a person or a group of persons, a regime, a decision. Until recently, political and economic systems in the Western world were enjoying a solid legitimacy. Very few people were disputing the democratic regime, or the need for executive leadership in businesses.

But things have changed a lot in the past few years. Legitimacy of our most solid institutions has been deeply shaken.

Look at the elections in the USA, a country that many see as the beacon of democracy. The disputed election of Bush vs Gore in 2000 gave pause to anyone believing in the fairness and the robustness of its electoral system. As everyone knows, the last presidential elections led to an unthinkable event:  an attack on the United States Capitol. The former President considered that his victory was stolen. A significant part of the citizens supported him and regarded the result as wrong. For many, elections lost their legitimacy.

It’s not just about politics. While people seeking power often lose credibility, experts and scientists of public administration are the one recommending policies. In matters as critical as public health, they have been generally respected. The Covid-19 pandemic was marked by an unprecedented lack of trust in these experts and a significant backlash against vaccination policies on a global scale.

The lack of governmental action regarding climate change highlights an erosion of the legitimacy of science, even in instances where a broad consensus is reached among scientists across various disciplines. It is intriguing to note that the failure of democratic regimes to implement environmental policies in response to growing safety and security risks could potentially enhance the legitimacy of authoritarian governments such as China, should they take swifter action in addressing climate change compared to Western liberal democracies.

Even nation-states, the cradles of modern political legitimacy, are no exceptions. Brexit is a case in point of a national divide based on the perceived (il)legimacy of European institutions vs national ones. Unsurprisingly, once the legitimacy of such institutions are questioned, cascading effects bring about similar revisions within the UK (Scotland) and Europe.

Today more than ever, legitimacy is not a given. In our world, more complex, more open, more diverse, legitimacy is always challenged. Understanding how to establish it and to maintain it has never been so critical.

Legitimacy of DAO Patterns

Let’s turn now to DAOs, and examine how current patterns contribute to or threaten the legitimacy of DAOs as institutions.

Coin voting

In a majority of large DAOs, coin voting is the most common way to make collective decisions. It’s been harshly criticized from the start, but it’s still prevalent because of how easy it is in crypto to create thousands of fake addresses. Basing the vote on scarce assets like token holdings is harder to cheat with. And it has some legitimacy: the more token you have, the more skin in the game. Many people consider it acceptable, as long as the token distribution is broad and there’s a broad base of diverse token holders active in voting. But this is hard, and the progressive exit of initial investors and founders doesn’t always lead with less concentration of power.

Besides, most people hold tokens for speculation purposes and have no interest in governance. Therefore, coin voting greatly suffers from voters’ apathy. Even when the token distribution is broad, having only a tiny part of voters among token holders makes control exposed to capture, and that alone creates a lot of suspicion around the system.

Delegates

The most common way to address those issues is to use voting delegation. In many prominent projects, token holders are nudged towards delegating their voting powers to delegates who commit to represent them. Delegation creates legitimacy in multiple ways. People voted in as delegates already have a good reputation, so there’s a transitive effect. Then the representation leads to a bigger % of tokens expressed on every vote, and a higher turnout makes votes more legitimate. Lastly, delegates commit to spend time educating themselves on issues submitted to vote and actively participating in deliberations and decisions.

While voting delegation makes coin voting better, it’s mostly about appearances. Delegated voting in DAOs superficially looks like a form of liquid democracy, but delegators often transfer their voting power during airdrops, and they never check how it’s used. They just don’t care. Delegates are not accountable, poorly incentivized, and there’s no organized communication and coordination between delegators and delegates.

The whole idea of large organizations in which all members decide about everything is absurd anyway, being directly or via delegation. Given human cognitive capabilities and time constraints, there’s no chance it can work, and it’s actually quite unreal that anyone could have thought it might work. Organizations scale through specialization. Hence this other common pattern introduced by projects like yearn and index, and adopted by major DAOs like Maker : workgroups.

Workgroups

Smaller workgroups or subDAOs are funded by the DAO and perform essential activities for it, just as business units or departments of a large firm. SubDAOs are legitimate because of the professionalization of these activities, and the fact that such groups and their members are elected by the DAO rather than designated in a top-down process.

However, subDAOs come with significant transaction costs compared to traditional departments in a firm, accountability is difficult to achieve, and they mostly work as independent units, making strategic coordination a challenge.

Ungovernance

The last pattern I’d like to mention is ungovernance, ie. the complete automation of rules so that legitimacy isn’t brought about by the authority of the DAO as a collective, but by some piece of code that cannot be changed. The ‘A’ of autonomy prevails over the ‘D’ of decentralization.

Ungovernance is great at ensuring that nobody can tamper a process, and that minorities are totally protected from the tyranny of the majority. It reinforces the option of exit vs. voice: when participants disagree with the way the system works, their only option is to leave and opt for another one.

The main issue with ungovernance is that complex systems need adjustments, especially in their initial stages. Premature ossification prevents experimentations and makes them unable to cope with unexpected conditions, leading to crises that require human interventions, from outside the system.

I’d like to introduce another pattern that is well known in political science and organizational design, but that hasn’t been much experimented in crypto projects: multistakeholder governance.

Multistakeholder Governance

“Caring for all stakeholders (and empowering them to govern) leads to better outcomes. We need to acknowledge that the success of an organisation depends on satisfying multiple priorities”— From Purpose Statements to Guiding Questions, by Daniel Ospina, RnDAO

Large-scale DAOs can also be seen as complex organizations that need to include diverse perspectives in order to make the best decisions.They have often been compared to nations or cities, rather than organizations and firms.

In a city, public policies like urban planning require deliberation, collaboration, and coordination between diverse agents: residents, community organizations, businesses, local councils, state agencies, developers… The same inclusive logic should be applied to large DAOs.

Multistakeholder governance exists in many organizations that are too complex and loosely coupled to tolerate a tight coordination based on hierarchical relationships. Think about international bodies like the W3C, ICANN, or the WHO. Their decision-making process includes deliberation with a wide array of different actors, from governments, research institutions, NGOs, firms, or state agencies.

Another well-known example is the dual parliamentary system, based on a lower and an upper chamber, in countries like the USA, Great Britain, France or Germany. They all have their specificities, but the main rationale is that different points of view should be taken into account when decisions apply to complex systems. For instance, the Senate in the US emphasizes the interests of the states, while the Congress represents the citizens.

While in the Anglo-Saxon model of corporate governance, the interest of shareholders prevail over other stakeholders, multistakeholder governance also exists in companies elsewhere. In Germany, for instance, boards of large companies necessarily include representatives of workers. That confers a much stronger legitimacy to board decisions and foster consensus around difficult decisions.

Multistakeholder governance and platforms

Chris Dixon described how centralized platforms tend to abuse both users and third-parties, once they dominate a market:

“When they hit the top of the S-curve, their relationships with network participants change from positive-sum to zero-sum. The easiest way to continue growing lies in extracting data from users and competing with complements over audiences and profits. Historical examples of this are Microsoft vs. Netscape, Google vs. Yelp, Facebook vs. Zynga, and Twitter vs. its 3rd-party clients. Operating systems like iOS and Android have behaved better, although still take a healthy 30% tax, reject apps for seemingly arbitrary reasons, and subsume the functionality of 3rd-party apps at will”.

Web3 and DeFi protocols are platforms that enable developers to build a new range of services. Distributing ownership gives them a chance to remain neutral as they grow and “emphasize collective enhancement instead of value appropriation”.

Initially, there was a naive belief that a wide distribution of network tokens would ensure that the predatory tendencies of platforms would be reined in. Countless occurrences of plutocratic capture and decentralization theater proved that the technical distribution of ownership doesn’t equate to a genuine decentralization of power. Moreover, balancing the influence of different stakeholders with different interests, resources, and demographics, cannot be achieved with a single, unidimensional tokenized instrument.

Multi-stakeholder ownership implies that “classes of stakeholders experience meaningful financial or governance rights from co-owning part or all of the company that operates a platform in which they participate” (The emergence of democratic firms in the platform economy: drivers, obstacles, and the path ahead, by Mannan M.).

Key stakeholders of platforms

There are three types of stakeholders that are considered as fundamental to most digital platforms: operators, consumers, and producers.

• Operators are responsible for building and operating the platform itself. They provide the infrastructure, technology, and resources necessary to create and maintain the platform, ensuring it runs smoothly and efficiently.

• Consumers are the individuals or businesses who utilize the services provided by the platform. They engage with the platform to access content, products, or services tailored to their needs.

• Producers are creators, suppliers or service providers who contribute goods, services, or content to the platform. They supply the products, services, or information that attract and satisfy consumers.

Many examples of such groups forming interconnected ecosystems come to mind in the Web 2.0 space: Apple store, YouTube, Etsy, Kickstarter, Upwork, Spotify, Uber, etc.

The same categories apply to protocols in the Web3 space. Here are a few examples:

Of course, there are more than 3 types of stakeholders in these ecosystems, just like with international organizations, nations, or Web platforms. But holding tokens gives everyone the opportunity to have a voice, as long as one of the groups uses governance tokens to weigh votes within the group. What we’re advocating for with multi-stakeholder governance is not to totally get rid of token holders’ influence, but to have it balanced so that it’s not the only source of legitimacy.

In the case of Mangrove, we’re seeing the ‘DeFi users’ group as the constituency of token holders. Some users of Mangrove will be part of it when they receive incentives in the form of MGVs, our token of governance. But this group is open and permissionless; once the token is publicly available, anyone can buy it, without necessarily using Mangrove. Using token holdings as a criteria also enables to include investors in this group and in the governance.

Giving a voice to stakeholders

Distributing influence among stakeholders is done by defining groups or classes of voters that have a set share of the overall voting power, regardless of the number of members in each group.

This ensures that the main interest groups are always represented in strategic decisions. Neither the turnover within each group nor the transfer of tokens can alter this balance.

At Mangrove, we intend to allocate one third of the voting power to each of the main groups:

Each group has a third of the voting power. This is not an initial distribution scheme, but a permanent allocation of power to each class of stakeholders.

Votes can be counted as the aggregated percentage of voting of each group, and by the number of groups voting for a given option.

To each stakeholder group its consensus mode

Implementing a multistakeholder governance system on-chain brings about flexibility with respect to how consensus is formed in each group of stakeholders.

Operators are generally a small number of individuals who know each other. Their influence comes from their significant contribution to the creation and operation of the protocol as a whole. They could opt for a cooperative-based, one-person, one-vote model to express their choices in the DAO. Or use something more nuanced, like a reputational token that members receive on every epoch, so that it factors in the time they’ve spent on the project. Or apply a decay function so that contributors leaving the group lose their influence faster.

Producers can generally be measured based on the on-chain trace of the economic value contributed to the protocol. Each member of this group is often a collective itself. They engage with the protocol in order to run an economically-sustainable activity which triggers protocol fees. This information can in turn be used to weigh the respective influence of each producer within the group.

The group of consumers is the broadest ones. It makes sense to use coin voting as the consensus mode within this group, since users uninterested in governance will just sell or delegate, and other types of stakeholders can find a voice by buying tokens on secondary markets.

Minority protection

Multistakeholder governance shines at minority protection. Stakeholders who play an essential role should always have a voice, regardless of how many tokens they own. This is made possible by the multiple ways votes can be tallied across different groups.

For instance, ordinary decisions might be made when an option reaches a majority of the aggregated percentage of voters from the 3 groups.

Extraordinary decisions (such as a change of the governance system), on the other hand, should require a supermajority, that may require at least 2 groups voting for an option, or even a majority in each of the 3 groups.

Even a small number of whales colluding to seize power by accumulating governance tokens would be unable to control a majority of the 3 groups: their power would be limited to one third of the governance, making their attempt moot.

The core team or the DAO’s working groups (depending on the current stage of decentralization of the DAO) would be similarly protected. As operators, they should have an essential role in governing the protocol as a commons, regardless of their token holdings – but not to the point that they could rug pull the rest of the DAO.

Producers’ interests will be protected from predatory behaviors that plague Web 2.0 platforms, from arbitrary ban to confiscatory fees. They have a say in key decisions regarding platform access, infrastructure’s neutrality, and economic parameters.

Conclusion

DAOs offer a promising path for improving human coordination. Their potential lies in amplifying the efficiency of traditional hierarchical organizations by harnessing the diversity of perspectives and participant autonomy. However, this promise can only be fulfilled if members recognize the collective as legitimate and have a real sense of ownership and agency.

Coin voting was intended as a tool to make this sense of collective ownership and inclusion tangible.Unfortunately, it has proven to be disappointing, as an example of "decentralization theater" where a select few individuals maintain lasting control over Web3 projects.

Multistakeholder governance, widely tested in traditional political and economic organizations, provides a governance model better suited for large DAOs, by ensuring the representation of all viewpoints and the protection of each party's interests.

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🙏 to @0xJustice, Adli Takkal Bataille, akrtws, Daniel Ospina and RnDAO, dydymoon, Ori, Paul Frambot, and Pierre Person for their valuable reviews and insights. Special appreciation goes to Dr. Morshed Mannan for his detailed feedback and subject-matter expertise.*