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Governance & DAOs
The Blockchain Sector @ 2022-12-15
The Blockchain Sector provides information relating to emerging financial technologies. It should not be considered financial advice. Disclaimer below.
A DAO is a decentralized autonomous organization. An organization run, not by a company, or shareholders, or a board of directors, but by token holders. DAO members can remain anonymous and vote using their token allocations to control the future of that protocol.
This sounds like utopia in theory but in practice we've seen communities descend into chaos due to unfair voting, contrived proposals and bad policies.
The current architecture for decentralized finance hasn't changed much Since the inception of The DAO in 2016. A governance token will be distributed to stakeholders within the project, providing them with the ability to make proposals and voting rights to decide which proposals are implemented.
We've seen vote delegation become popular in the Curve wars where users can hold on to their tokens and allocate someone on their behalf to vote for them. This is often incentivised by open and transparent bribes.
In my opinion, this system lacks efficiency and can lead to problems within the community.
Unfortunately, more often than not DeFi protocols have core teams who either directly or indirectly control the majority of votes. Often we will see a governance proposal passed where the votes are cast by just a handful of addresses and these are all linked to core team members and early investors in the project.
Do these mechanics fit the ideals that we strive for?
There is a post here by Andre Cronje who gets more into the principles of what decentralization should aspire to: https://andrecronje.medium.com/the-decentralized-ceo-2524765b13bf
Perhaps with DAO architecture there is no one single solution that fits every project. We could look at history and build systems more closely to what has worked over the last hundred plus years in political systems.
In Western democracies two-party politics has been successful. We generally have a left wing liberal group, and a right wing conservative group grappling for power. Elections are held at multi-year intervals to decide which group remains in control. Day to day voting power is allocated to members of a committee who make it their full time job to review, understand and vote on matters at hand.
Governance is different from operations
To my knowledge, we haven't seen defy take on a kind of modern political governance structure. There's no project that I know of which has used something similar. Perhaps it's a big ask for good developers to completely hand over control to a fully decentralized governance system.
If a core team ran into difficulties they could perhaps be voted out and a new team put in place. There's also questions about compensation and how much value should be put towards the governance of a protocol itself.
If you take a standard AMM decentralized exchange which charges 0.3% in fees per trade.
What percentage of those fees should go towards governance and future development of the protocol?
What percentage should be locked up in the treasury?
What percentage should go to holders of the governance token?
What percentage should go to liquidity providers that are actually providing the service and accepting the permanent loss that comes with it?
There is a danger with this system of collusion between the two main parties. If the two parties are formed from the same team and there's no real fight for power, Ideally what you want is people with the protocols best interests at heart but with their own self-interest motivating the work they do. The ascension to gain status and financial reward for what they contribute in terms of governance and development of that protocol.
In almost all democratic states we have seen a gravitation towards a duopoly of politics. However to maintain credibility the governance system needs to be open for all. If SBF wants to create his own party, get elected and take on a leadership role within a decentralized protocol, there should be nothing stopping him from at least attempting this (except prison wifi).
In recent years there has been an emergence of celebrity politicians. This is a danger and a threat to the future of political systems in the real world and within the blockchain sector. The people most capable of rallying up votes and getting an exposure for their ideas are the people with the loudest voices on social media.
This might not be optimal. To find the best people to forward the interests of a DAO we want to avoid a situation where Andrew Tate becomes the master chef at Sushi. This is a hard problem to solve where fair launch voting mechanisms ensure retail investors cast the majority vote.
I'm not sure what the final outcome will look like and how governance structures will evolve over the coming years. It’s an interesting area where we are going to see a lot of development and emerging technology to help build important social experiments.
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Disclaimer: Not a financial advisor, not financial advice. The content I create is to document my journey and for educational and entertainment purposes only. It is not under any circumstances investment advice. I am not an investment or trading professional and am learning myself while still making plenty of mistakes along the way. Any code published is experimental and not production ready to be used for financial transactions. Do your own research and do not play with funds you do not want to lose.