Crypto's Direct Democracy
In 2009, Mark Zuckerberg shocked the VC world by agreeing to sell 2% of Facebook to an investor that hardly anyone outside of Russia had ever heard of: Yuri Milner.
Milner, on his first ever visit to Silicon Valley, managed to convince Zuckerberg he was a better partner for Facebook than any of the storied VC firms that had been constantly offering their money and services.
He accomplished that largely by insisting he did not want any role in the governance of the company he was buying into.
He did not ask for the board seat that would typically come with an investment of that size — Zuckerberg had recently turned down a similarly sized investment from a VC asking for two board seats.
And he assigned all his voting rights to Zuckerberg.
Those may sound like concessions made to get a foot in the door, but Milner assured Zuckerberg he wouldn't have it any other way: Facebook was a founder-led firm, and he wanted to empower the founder to continue making all the decisions.
This seemed radical at the time but probably should not have — shareholders in publicly listed companies have historically never been very interested in exercising their voting rights.
When Warren Buffett joined the board of directors at the Washington Post, for example, he assigned his vote to the Graham family — he was there as an advisor and thought the family should continue to make decisions at the family-led Post.
Shares that do not have voting rights sometimes even trade more expensively than those that do (see, Dax constituents Henkel and Sartorious).
And retail investors are mostly content to hold their stocks in index funds and ETFs, where the votes go unused. As do the votes on all of the vast hedge fund holdings of stocks held on swap.
No one seems to care about voting rights!
And I'm with them: I don't want to vote, either.
Nor do I want my fellow shareholders deciding on anything other than whether to sell the company — like most investors, I trust CEOs to make better decisions than the hoi polloi shareholders would do. If not, I wouldn't own the stock.
And yet, crypto's experiment in reinventing corporate governance is going in the other direction: Companies will be DAOs and token holders will vote — on everything.
After reading about the MakerDAO saga in a post by Luca Prosperi, I'm not sure how that's going to work out.
All You Need is LOVE
I generally think of MakerDAO as the best, most advanced experiment in both crypto utility and governance — the one you want to hold up to skeptics and say, Look! It works!
And the one you want to hold up to the SEC and say, Look! It's not a security!
Part of Maker's appeal is its apparent simplicity: Deposit ETH, receive DAI, and maybe get liquidated if you're unlucky.
That sounds like a process which can be managed effectively via decentralized governance: It seems reasonable to have community voting on qualifying assets, collateral ratios and liquidation procedures. Everyone can understand and have an opinion on those things.
But MakerDAO may also be DeFi's first, best hope for onboarding real-world assets into DeFi in a scalable way, which will entail far more complexity.
I've never really understood how real-world assets will interact with on-chain DeFi, but I've been hopeful that a protocol such as Maker will figure it out — because without real-world assets, DeFi will remain a niche activity, pursued only by crypto hobbyists.
After seeing how the DeFi sausage is made in Luca's post, it feels like a steeper climb.
The failure of his "LOVE" proposal to institute a "lending oversight core unit" that would have advised the Maker community on the credit risks it takes has me questioning the ability of DeFi to expand into the real world.
I wonder if DAOs will be able to govern anything other than software that runs itself.
That may well be an overreaction, so you'll have to read the post yourself and form your own opinion. (But you should be reading his engagingly written substack anyway: Luca is the Italo Calvino of DeFi.)
And it may also be that crypto is just transparent in a way that I'm not accustomed to.
But after reading, I think you'll at least agree that decentralized government is messier, more complicated, and, well, less decentralized than you probably thought it was.
Decentralization seems, in some ways, like a simplified form of organization: There are no layers of management to navigate or org charts to be baffled by.
But there are still power structures — they are just invisible.
And there are still hierarchies — they are just not formalized.
My takeaway from the Maker saga is that DAOs can be centralized in an informal way that imparts control without assigning accountability.
That feels like regulatory arbitrage, for one thing.
And for two things, it feels like it opens the door for self-dealing.
By Luca's account, entities controlled by the founder of MakerDAO were asking for $1 billion of unsupervised loans in proposals put to token holders.
There's nothing necessarily nefarious about that.
But it is surely the kind of thing you'd want adjudicated by a professional credit risk committee and not by the lobbying efforts of influential insiders — which seems to have been the case at Maker.
That credit risk committee is what was voted down in the LOVE proposal.
Luca told me in a Twitter DM he thinks "DeFi can expand into complex assets," which sounds hopeful.
But also that it needs "to reinvent governance from the ground up," which sounds like a long, hard, messy slog.
The good news is that Maker will continue to experiment and innovate — token holders voted this week to grant the very real-world Huntingdon Valley Bank a $100 million credit line, for example.
So, maybe everything is fine, and DAOs really will find a magical mix of decentralization, efficiency, oversight and resilience that will reinvent corporate governance.
But it's perhaps worth noting that at Meta (née Facebook), shareholders continue to be happy to have the founder make all the big decisions — like pivoting to the metaverse and, most recently, radically changing course to better compete with TikTok.
Will DAOs find a governance model that can be similarly nimble?
I hope so.
But I also hope they don't ask me to vote on it.
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