Thoughts on Governance
Jason and I just wrapped up the second season of Bell Curve, which focused on governance.
The general sentiment on DAOs and decentralized governance is about as negative as I can remember it being in crypto.
We wanted to explore why, and talked to some very smart people about their ideas regarding product-governance fit, the value of community, DAO treasury management, etc…
Two of the conclusions are worth highlighting here. At the risk of generalizing just a bit, the vast majority of tension in DAO governance today stems from two challenges:
- Overemphasizing a degree of decentralization which is best suited to a specific subset of protocols
- DAOs that are startups adopting a form of governance more suited for mature organizations
My hope for this newsletter is to add some nuanced understanding to the subject of DAO governance, and explore a positive path forward for protocol builders who might be reading this.
Close to the Metal
One takeaway from this season is that the closer protocols are to being base layer infrastructure, the more it makes sense for governance to be decentralized.
One of the challenges for DAOs is, however, that the more decentralized governance becomes, the harder it is to make good decisions.
Therefore, for protocols that adopt decentralized forms of governance, there needs to be a corresponding advantage that offsets the impediment to fast, efficient decision-making.
Think of this as an immutability premium. If immutability and credible neutrality increase the value of a protocol to the point where they offset slow decision-making, the governance fit is positive-sum.
Vitalik wrote a piece that summarized this quite nicely, entitled "DAOs Are Not Corporations" if you want to dig into it more.
So what constitutes "base layer infrastructure" when it comes to crypto? I think the answer is that the community (and the market) will ultimately have to decide that.
But the criteria will probably come down to how crucial protocols are for daily life in crypto land.
For instance, gaming stands out as a great example of protocols that are not at all close to infrastructure.
Games are optional, impact only a tiny subset of the population, and whether they succeed or fail is not mission critical to society as a whole. Therefore the immutability premium is low, and would likely benefit from more centralized forms of governance.
Bitcoin and Ethereum, on the other hand, are examples of protocols that are at the very root of crypto's infrastructure.
If those protocols were to fail or become corrupted, every participant in crypto would be affected.
The vast majority of protocols today sit somewhere in between here, and ultimately will benefit from different degrees of decentralization.
Compound and Aave, for instance, seem more "infrastructure-y" than Decentraland or Audius, and would therefore benefit from a more distributed form of governance.
The problem is that most protocols today are using a one-size-fits-all solution which can be characterized as "maximum decentralization."
Most DAOs Today Are Startups
The other issue DAOs are struggling with is a mismatch between the maturity of the organization and the form of governance they are adopting.
Most companies, for example, start out with a form of governance that is extremely centralized and relies heavily on socialware.
Over time, as the company raises money, grows, becomes public etc., decision-making is distributed away from the founders to a group of executives, a board of directors, and so on.
The problem for DAOs is they are trying to adopt an extremely decentralized form of governance at a time when most of them are still quite immature, and would benefit from one or two leaders with a strong vision.
The opposite end of this spectrum would be akin to a startup launching on day one with the governance structure of a Fortune 500 company. It just wouldn't work.
Part of the reason for this is regulatory (tokens are used as a means of bootstrapping growth, and for Howey Test purposes a certain amount of tokens must be distributed early).
The trade off to this bit of regulatory arbitrage, however, is putting decision-making in the hands of a broad group of improperly-incentivized contributors who lack a common vision.
There are solutions being pioneered here. For those interested in some of the experimentation going on at the fringes I highly recommend this interview with Julia Rosenberg and Charles St. Louis.
In addition to tinkering around with different models, I think this will be solved by:
A) the passage of time, and
B) a clearer regulatory framework for distinguishing tokens from securities.
It's deeply frustrating right now. But as these organizations mature, they may actually age into the form of governance they've adopted.
The Future for DAOs is Bright
Going into 2023, I feel deeply optimistic about DAOs.
However, the more we can recognize that decentralization is a spectrum, and shy away from maximum decentralization as a blanket recommendation, the more likely we are to create sustainable DAO structures.
In 2023 I would love to see more conversation about the degree of decentralization that is appropriate for DAOs depending on the role they play in the crypto ecosystem.
Additionally, if DAOs can adopt a gradual approach to decentralization (even if it means holding off on token issuance at the outset) wherein they delegate key decision-making to specific individuals for a given period of time or until a specific milestone is met, before then opening up those decisions to more decentralized governance... the better-off I think most DAOs will be.
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