DAOn Bad: The Problems with DAOs
DAOs aren't all sunshine and rainbows. There are many challenges which are not talked about enough. I will get into these problems and a potential solution.
One of the novel innovations of the crypto space was reimagining how organizations are run. A DAO. If you want a more in detail overview of a DAO and how it operates then go here. But for a quick recap, A DAO stands for Decentralized Autonomous Organization and uses a flat & fluid structure rather than a hierarchical & rigid structure where decisions for the organization are made by the community through voting processes. Every member of the community has a right to vote and when they come to a consensus, the update/change is implemented automatically.
DAOs bring in this idea of collective ownership. Basically, if everybody in the DAO has something at stake then everybody’s incentives should be relatively aligned which will allow the organization to grow in an egalitarian way. In the early days of most projects, this works really well. The community is around a few hundred people who are all very enthusiastic and willing to build, everyone contributes their fair share to the project and works harmoniously. However, when a DAO becomes larger with tens of thousands of members or even hundreds of thousands, then you start seeing many problems. I will go over the problems in more detail below.
Before getting into the problems, I just want to mention that this post does not mean that I think DAOs should be absolutely abolished. They just need to be reworked so that they are efficient as they scale. Crypto brings in this concept of the ownership economy where participants and users of protocols and products in the economy can now own a piece of it rather than just repeatedly spending your money in the economy while the few at the top reap the benefits. Hence, the concept of a DAO in some ways allows people to organize around this concept. But enough rambling, let’s get onto the problems.
The incentives of the members
As mentioned earlier, When DAOs are relatively small they are extremely fun and productive. However, as they grow into a bigger community you end up having tons of people who don’t really care about contributing value to the protocol. Discords, Telegrams, and community forums of the bigger DAOs are littered with comments such as “Wen Tokenomics upgrade”, “Why number don’t go up”, “wen token launch”, “Wen airdrop”, “is dev sleeping?”. Okay I’m being harsh, but you get the point. You get tons of people who just want to extract the maximum amount of value out of the protocol for themselves and then leave. You rarely get people who will look into the code and suggest improvements, or contribute to improving the media or any other element of the project. It essentially becomes a scenario where 10%-15% of the members actually have a long term vision and want to build something useful while 85%-90% of the members just want to make the most money and leave.
The greed in most participants leads to the free-rider problem. You have just a few people who are actually contributing value and putting in all the hard work while the majority just sit in the chat channels and pretty much do nothing other than observe, dictate, and make memes once in a while. Founder of Yearn, Andre Cronje said it best “Delegated Authoritatrain Overlords (DAO)”. You have thousands of people who lack the long term vision and expertise to truly take a project to the next-level just yelling at you aimlessly and as a core contributor who works relentlessly it can become quite frustrating.
Governance Mechanisms/Voting
There are two major problems in this scenario, the first one is regarding the majority vs minority vote. The governance system of DAOs assume that because the majority vote in favor of an upgrade it means that the upgrade will be good. However, as is often the case, the mob usually does not make sound decisions. The mobs’ decisions are clouded by emotions, crowd-think, and a little bit of personal greed which means that more often than not the preferred upgrade will probably result in a sub-optimal outcome. Eventually, DAOs will end up falling back to the same situation as we live in today and that is politics. Malicious actors will start lobbying the non-participants and non-thinkers into making decisions that help them rather than the protocol itself and eventually DAOs will dissolve into the same melting pot of politics, drama, and bureaucracy that we are trying to avoid.
The second problem is the one token one vote system or voting power proportional to an individual’s token holdings system. This is a major flaw in the design of DAOs. Just because a person holds the most tokens doesn’t mean that their opinion is the most valid/helpful. Often times, you can have people with large sums of money just buy up a majority of the tokens to always sway votes in their favor. If the DAO is big enough, then someone can buy up token and use the governance system to systematically hurt the organization. It’s essentially a very gameable system. It’s not a system that is cut out for widespread adoption because unfortunately we do not live in a world where everybody acts with good intentions.
Structure
As organizations start to scale, a crucial element is for them to be nimble because there will be times where they will be met with crisis or an important decision and in that case they need to be quick to respond. This is simply not possible in a DAO. With people from all over the world you may struggle to get a response in even 24 hours so being nimble is almost impossible. Moreover, due to them being decentralized, they become extremely chaotic and unorganized as they get more participants. There are so many people with different levels of knowledge, skill, and experience who all have the same/similar level of power. Hence, DAOs end up having a lot of non-participating members or members that provide a net negative in value. Traditional organizations can have thousands of people working because they have a hierarchy and only a few decision makers who organize everyone. DAOs simply get crippled by their structural design in the long run because everyone is incoherently doing their own thing. It’s chaotic.
What can be done?
That’s the golden question. There’s a lot of debate around what works and what doesn’t but nothing concrete has come of it as yet. One protocol that I have seen work on this issue is Orca protocol. They propose the architecture of pods. The DAO will be divided into many pods with each pod focusing on a specific area of expertise. Each pod will have its own multisig wallet and own voting. To get into the pods there will be an NFT that you have to earn. To earn this NFT you have to fulfil certain requirements and follow certain rules and then you can earn the NFT and start working in whichever pod you would be best in. they are considering attaching a reputation system to each unique NFT as a way to show how much value a person contributes (this is not finalized). People who are malicious or inefficient can be slashed and replaced by new people and since the pods are organized in a lego-like structure, entire pods that aren’t working can simply be detached. This project is still in early stages and there are some problems with this idea but it is an interesting step in the right direction.
The ultimate goal is to be able to work efficiently in a distributed setting so that everyone in the organization has their voice heard without the overall performance of the organization being compromised. This is still a concept that’s in its early stages and will constantly be worked upon and improved upon. It will be fascinating to see the different versions of DAOs along the way and how people optimize this design for different industries. The future is bright.
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Thank you for reading.