Ask 10 different people to define a decentralized autonomous organization (DAO), and you’ll likely get 10 different definitions. But there is at least one thing most agree on: DAO governance is a mess. At best, it’s an experiment in the works.
According to DeepDAO, DAOs today handle a whopping $17.2 billion in value. Yet many DAOs managing millions of dollars have proven hopeless at heeding even the most basic of lessons in business management 101. One does not have to look too far in the annals of crypto history to recall major DAO catastrophes.
Recall Wonderland DAO, an Olympus fork that birthed arguably one of the most notorious scandals in DAO history. At its peak, Wonderland enjoyed a near $2 billion in total value locked, which came to a skidding halt in January 2022 when its treasury manager — who went by the pseudonym 0xSifu — turned out to be none other than Michael Patryn, co-founder of the failed crypto exchange QuadrigaCX and a convicted criminal for financial fraud.
Or consider a more recent exploit with the Solana-based trading protocol Mango Markets. In October, attackers exploited the DAO’s loosely governed parameters to acquire a disproportionate chunk of the DAO’s MNGO tokens. In an absurd turn of events, the attacker proceeded to propose on governance forums an offer to return half their heist in exchange for the DAO not to prosecute him, then voted “Yes” on it with the stolen tokens. The vote eventually failed, but Mango still ended up paying off $47 million to the attacker.
Case studies of DAO failures are not exclusive to outrageous one-off spectacles like the ones above. Despite the Libertarian rhetoric of self-sovereignty and self-custody, dozens of DAOs that kept their monies on centralized exchanges also saw their treasuries implode during the carnage of 2022’s blow-ups like FTX.
The truth is, DAO governance isn’t easy. Founders have to balance a multitude of priorities, like solving voter apathy, committing to decentralization and product market fit. A “best practices” manual doesn’t exist, and where there is one, it’s not widely shared.
The good news? Die-hard DAOists are hard at work to rid these problems, one experiment at a time.
The problem of voter apathy
Take voter apathy, for instance, arguably DAO governance’s most widespread problem. As a “decentralized” community, tokenholders must vote if they desire resilient protocols. But token holders don’t vote because it takes time. When voters do turn up at the voting booth, or Snapshot, they lack the expertise or context to make an informed decision. Worse still, voters who care may not even be aware of a vote until it’s over.
To combat voter apathy, a burgeoning landscape of DAO infrastructure tools has been developing tools to streamline DAO voting into one-stop platforms. Products such as Senate and Goverland are trying to aggregate governance proposals across dozens of DAOs with direct integration on popular voting platforms, such as Snapshot and Tally.
To thwart low voter turnouts, DAOs are also turning to the real world of public governance for wisdom. One such tried-and-true method that has caught on in the past year is delegation, where tokenholders entrust voting rights to delegated “politicians” or “stewards” who would vote on their behalf.
From a PR perspective, delegation is nice in that DAOs get to have their cake and eat it, too. It allows the DAO to scale faster without having to pass all decisions through months of debate. DAOs also get to deflect the criticism of “insufficient decentralization” since tokenholders are technically expressing a demonstrated preference to vote, albeit indirectly.
Most major DAOs today have embraced delegation voting, and while it’s helped voter apathy to some extent, it’s hardly a silver bullet. Delegation voting in itself has surfaced with problems. For instance, delegation can descend into a popularity contest where voters simply assign tokens to popular Twitter influencers or familiar company names.
While DAOs struggle to decentralize, many seem to forget that they are still fundamentally profit-oriented organizations. That means that DAOs can’t afford to forget about revenue and growth.
To scale, DAOs centralize some decision-making in the hands of experts. One trendy idea in the past year that DAOs have been experimenting with is “working groups.” In DAO nomenclature, they also go by subDAOs. Metropolis (previously Orca Protocol) calls them pods. Maker calls them core units, and Gitcoin calls them workstreams.
Dual governance structures
In such a marketplace of conflicting values, a clear separation of powers can help foil potential insider collusion. Some DAOs are actively experimenting with such “dual governance” models, such as Optimism’s “Token House” and “Citizen House.” OP tokenholders and delegates occupy the former, while the latter is an identity-based community of “citizens” with soulbound tokens that acts as a check and balance on the Token House.
Finding a balance
In sum, DAO governance isn’t easy. Driving growth while committing to decentralization is no small feat, and it will take many years before governance reaches equilibrium.
Yet the philosophical principles that blockchain organizations embody — decentralization, transparency, egalitarianism — are all values very much worth striving for. After all, it’s unheard of for a multimillion-dollar company in the traditional business world to be debating operational strategies openly on a forum or that allows anyone to enter and begin contributing without going through a tedious interview process.
Even in its imperfect state, the open and transparent context in which DAOs operate is perhaps the biggest bulwark against the centralization of power.