There is a parallel to be drawn between blockchains and DAOs. DAOs are built on blockchains, but they don't reach consensus in the same manner, nor should they. Blockchains strive for "credible neutrality." Meaning, no one should be able to take over a blockchain like Ethereum; no single individual can control it or force an illegitimate transaction to be recorded, nor can anyone censor someone else's use of the protocol.
DAOs are organizations that operate on "credibly neutral" protocols. However, the credibility they struggle with is of a different type. DAOs need to establish credible decentralization. It should not be possible for one person or a small group of people to hijack the DAO and either alter its mission or attempt to accomplish the mission in a centralized manner. DAOs strive for “credible decentralization.”
I believe that a significant area for innovation is in the development of protocols that ensure decentralization for DAOs. In a sense, these are meta-protocols. While DAOs can make decisions, these meta-protocols are guidelines or boundary conditions that ensure they maintain decentralization while doing so. I will provide two examples of such meta-protocols (note I won’t talk about Sybil resistance as that is already a well-explored topic).
1. The DAO Reaper
The DAO Reaper project represents just the type of thinking that is required. The project relies on metrics and reputation systems to judge how decentralized and community-focused a DAO is. If the DAO strays too far from its original mission and commitment to the community, the reaper comes. Meaning that the treasury will be liquidated and sent to a good cause, something that promotes public goods.
Well, it might seem harsh, and the image of the reaper isn’t particularly pleasant. The idea is really straightforward. It is a check on power acting as a safety valve that ensures the money ends up being put to good use. Ideally, it is used to complete the mission as defined, but if not, then public good.
If a DAO signs up to be part of the DAO Reaper, it will signal a credible commitment to the community, decentralization, and the mission. Become a member and fund the treasury, and if the DAO strays too far from its promises, the DAO hands over the money to public goods (for more info follow @0xTconomist @dao_punk @mroddy5280).
2. DAOmocracy (or Randomocracy)
The idea at face value is quite simple. Select random members of a DAO to make important decisions. Power wants to pool and become centralized. If decisions are made by the same group over and over, distributed systems erode. The answer, take away these nodes. Ensure the community is algorithmically involved all the time.
The mechanism has many benefits. It reduces the informational burden on decision-makers, who can become overwhelmed with the information they need to make informed decisions. In fact, it's often in the best interest of those making proposals to inundate voters with too much information. As a result, people may simply vote "yes" if everyone else does, especially if the proposal is too lengthy.
DAOmocracy solves this issue by allowing a small group to fully read and research each proposal. The best decisions are then rewarded, and collective choices that benefit the public are a key goal. This process aligns with retroactively funding public goods.
If a DAO adopts DAOmocracy it will signal a commitment to decentralization as the process essentially enforces distributed power.
Why Though?
Limiting yourself signals quality. In economics, there is a field of study called "Information Economics" that examines the value of information in this context.
To illustrate this point, let's consider a seminal paper in the field titled "The Market for Lemons." In this paper, the author uses the example of a used car market, where a bad used car is called a lemon. If buyers can't distinguish between good and bad cars, sellers of bad cars will try to charge too much hoping the buyer thinks it’s a good car. There is no incentive for buyers to offer full value for a good car, given it might be a bad car. The result is that only bad cars are supplied to the market. If a good car can never fetch a fair price, why bother staying in the market? You can repeat the process in your head, and realize only bad cars will be supplied.
In economics, the solution is called a "separating equilibrium". Essentially, buyers must be able to verify the quality of a car. For example, they can obtain an inspection report from a reputable mechanic. This allows good car sellers to re-enter the market, while bad sellers are forced to sell their cars at a fair and low price.
How does this relate to DAOs? The protocols mentioned above serve as a mechanism that provides a signal to verify a DAO's high quality or commitment to decentralization. DAOs that are truly committed to being decentralized around a community will be willing to pay the price and restrict themselves because the valuable signal of quality outweighs the cost. Importantly, this commitment should be reflected in governance token prices. Personally, I would be willing to pay extra if I know the DAO is truly committed to community and decentralization. We need a DAO mechanical inspection to reveal the value of a given DAO.
Signals are valuable, and in the market for DAOs, we need more of them. Currently, when you join a DAO, there are few ways to verify commitment to the community and mission. And given DAOs have not been committed in the past, many people no longer assume that DAOs are fully decentralized, which is a dangerous trend. We don’t want to see the good DAOs begin to leave the market.