Thoughts, stories and ideas.

Governance and DAOs

Governance and DAOs
Crypto protocols are meant to be governed by decentralized communities of stakeholders. Not because it’s more efficient, or important for ideological reasons, but because it’s necessary to unlock their core value proposition: that the underlying protocols will continue to run as designed, and will remain open to anyone who wants to use or build on them, without having the rules shift under their feet.

These are not our words, they are Andreessen Horowitz's Jeff Amico's.

As an early VC investor in crypto startups, A16Z is knee deep in decentralized governance. They are constantly exposed to it as investors and token holders in some of the leading decentralized protocols in the space. Their experience tells them than decentralization of governance is another of the key features that are building  crypto's identity. To them it is a matter of trust: decentralization is the guarantee that projects will be transparent and remain faithful to their foundations.

The ultimate goal is to replace intermediaries like global banks and tech platforms with software built on top of networks that direct the value they generate back to the users who own and run them.

Again, not our words: this comes from The Economist.

Today we will be talking about yet another acronym in crypto space. One that is likely to become as important as DeFi and NFTs and join the club of the most important applications of blockchain to date. We're talking about DAOs.

The acronym DAO stands for Decentralized Autonomous Organization, and the concept refers to groups who are organized around transparent, somehow democratic, binding and self executing mechanisms. Blockchain technology built a bridge between digital decision making and the movement of funds that opened the door to a new way of remote, global, digital, way of working together. Blockchains can host programs where the conditions for how people can cooperate are written in stone and open for anyone to read. DAOs are a new way of cooperating that is, like many other tools

This is what a home owner's association would look like if they were deciding on whether to fix a fence or not, while behaving like a DAO. This is a very modern group of neighbors who communicate frequently via an app where decisions are discussed and voted. And the fence around their building is broken.

Their app shows them the proposal to paint the fence with three different possible outcomes expressed in detail. What the problem is and what the possible solutions are

a) Simple fix: just solve the problem with the hole and get on with life. The fix would cost $500, it would be repaired by Contractor X in a matter of three days. The contractor would charge 50% in advance and the other 50% once the community votes to agree the job is satisfactorily finished.

b) Full fix. For those who think the hole is just a symptom of general deterioration, there is also the option to spend $5000 in changing the whole fence. Contractor Y would do the job in two weeks once an initial 20% payment is done. The community would unlock the rest of the payment through a vote 15 days after the job kicks off.

c) Just pass. Holes give fences their unique flavor.

💡 A fully decentralized and autonomous organization would require all the details to be written in stone. Or, in better terms, written in code. What are the payment details for the association, Contractor X and Contractor Y; when would payments be made, when would the final consultation about the results be launched and for how long it would be open for voting. What are the voting thresholds to consider a vote approved or rejected, how is communication managed with the chosen contractor, what happens in case the job is not appropriately finished... Every single detail would need to be laid out so that a machine could perform the approved task without bringing up any questions.

In a DAO, once the neighbors voted on their favorite opinion, the decision would be automatically executed, for example, sending the initial payment and starting a counter before the final consultation is launched in the community's app.

According to Linda Xie´s definition:

A decentralized autonomous organization (DAO) is a group organized around a mission that coordinates through a shared set of rules enforced on a blockchain.

Or in other, more down to earth, words from Cooper Turley, they are internet communities with a shared cap table and a bank account.

DAOs are a new way of making decisions.

Decentralized Autonomous Organizations are the iteration of online communities spun from crypto. They share features with previous manifestations of digital ways of associating, such as good old mailing lists, forums or Facebook groups, to which they add the component of decision making and financial allocation.

Financial incentives are not just another ingredient. They are the fairy dust that makes communities fly. Web 2.0 brought unparalleled borderless cooperation between peers thanks to digital platforms. Now the  communities formed by those people have a budget. This makes motivation and drive different.

There are many use cases for DAOs. Turley mentions some possible categories, and one single DAO can belong to one or more of them. Some of them are:

  • Grant DAOs, where participants pick projects to fund among a list of requests. Grant DAOs are frequent in the DeFi space, where the community of token holders are constantly seeking ways of making the community grow.
  • Protocol DAOs, frequent in DeFi: users can decide how the protocol should work and vote for changes in the code. For example, when a liquidity pool wants to add a new liquidity pair.
  • Service DAOs, where human resources and talent are allocated.
  • Collector DAOs, where participants with a common interest meet, debate and decide. They are frequent in the NFT space, where a DAO can be made of the owners of a certain collection, and can decide on measures beneficial for the project, like purchasing more items or even burning some to make the rest more valuable (#truestory).

DAOs obviously have many downsides. They are still an immature way of decision making, often prone to inequality and unfairness. Sometimes they are plain unnecessary, and just an empty mannerism from over enthusiastic players. But if value is to be retained within the confines of crypto, instead of shared with big institutions and corporations, governance in general will have to play a very important role coordinating a huge variety of wills.