DAOs are supposed to be fully autonomous and decentralized, but are they?

Original author: Kevin Tai

This article is an opinion article by Kevin Tai, co-founder of Linear Finance, published on Cointelegraph. The following is the full translation.

Are Decentralized Autonomous Organizations (DAOs) truly decentralized? Let’s look at why they struggle to achieve this goal.

While the organizational structure of a decentralized autonomous organization (DAO) is fundamentally supposed to be "decentralized," some of the largest DAO protocols, including Uniswap, are not. Many day-to-day activities within a DAO still require a small number of core members of the organization to make major decisions. This raises the question of whether a DAO is fully decentralized. If not, is full decentralization possible?

Figure: DAO’s organizational structure

More broadly, DAOs can be compared to how a democratic country is run. While ideologically the people make decisions for the country, the country is still largely run by a small number of powerful people who hold most of the license to decide laws and control decision-making. DAOs are similarly similar to large organizations, where shareholders are allowed to vote, but key policies are decided by the board of directors.

DAOs are different in that they possess qualities that are more attractive than traditional organizations. For example, if anyone has an idea within a traditional organization, the idea must go through a manager before reaching the top. In a DAO, because of the flat structure and lack of hierarchy, everyone can act on the proposal.

Community members come together to vote on proposals that will help the future operation of the protocol, and once the proposal is agreed, it is executed in the smart contract. Under this community cooperation, it is in the best interest of everyone within the DAO to agree to proposals that are beneficial to the protocol due to incentives. A protocol that attracts more users will drive up the value of the token, which is also what token holders want.

Although it seems that complete decentralization has been achieved, the reality is that it is very difficult to achieve complete decentralization.

Why DAO projects still have difficulty achieving full autonomy

DAO protocols face difficulties on the road to full autonomy because achieving full decentralization is challenging, and for good reasons.

Decision makers do not have enough responsibility, which makes the core founding team unable to fully trust a system where anyone can control decisions. Relying on a large community without direct consequences will create tension within the collective, leading to a slow decision-making process, which in turn affects the entire company.

Today, almost all traditional early-stage startups have very few decision makers. This is mainly because in the initial growth stage, a wrong decision can greatly affect the growth of a company, which also makes many early-stage founders extremely careful in selecting members of the core team. In this case, founders can make decisions quickly and act quickly. However, DAO violates this principle and emphasizes the importance of consensus and community voting.

One of the main qualities of a DAO is that it is a community-led organization that considers possible short-term gains. In this case, the founders need to trust that the community itself is capable of making the right decisions based on long-term goals and vision. In general, there are no absolute restrictions or responsibilities for joining the DAO community, which makes it impossible for the core team to trust everyone's intentions. Therefore, for some protocols, a more rigorous recruitment process is required to ensure the integrity of new DAO members.

Decentralization needs to be done in stages

If a DAO is to maintain its essence, where the community is able to make decisions equally, then decentralization needs to be done in stages. However, giving a certain degree of control is necessary so that the organization can maintain shared prosperity. While the participating community should be given the power to make suggestions and make decisions, gatekeepers or a council that can effectively uphold the company's core values ​​may be needed.

Most successful DAOs, such as Uniswap, MakerDAO, PieDAO, Decred, etc., have different gatekeeping systems, and proposals go through different stages before being accepted. For example, in Uniswap's governance protocol, there are multiple execution stages before any proposal is accepted. In its final stage, a group of voted users have the right to terminate the execution of any proposal they deem to be malicious or unnecessary. In contrast, MakerDAO has a more open community, and people do not need to hold their tokens to participate in off-chain voting. However, its proposals will be strictly reviewed.

The community is the foundation of the DAO, and it is crucial that the DAO moves towards a structure that is not entirely dependent on the core team. Currently, voting is an important part of interacting with community members. However, future protocols must pay more attention to the participation of community members and collaboration with developers.

We are more likely to achieve this goal if we take incremental steps toward the ideal of “full decentralization” than if we jump in headfirst and stick to those principles. DAOs are a new form of business, and we need to learn and adapt as we go. It is for this reason that if we want DAOs to become mainstream in our daily business activities, we need to do it right.

Building shared prosperity

Most DAO protocols are still in the early stages of building a more mature DAO. Shapeshift is a good example of a company that is a cryptocurrency platform for global transactions that “fragmented” its architecture to become more decentralized.

The idea of ​​building shared prosperity where everyone can actively participate in the operation of the organization is still far from reality. Nevertheless, DAOs represent a revolution in which control is decentralized. DAOs also represent a platform where people can achieve shared prosperity in a transparent and efficient way. More work still needs to be done to realize this romantic idea, but by constantly learning and taking new steps along the way, DAOs can achieve complete decentralization.

This article does not contain investment advice or recommendations. Every investment and trading action involves risk and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Kevin Tai is the co-founder of Linear Finance and has over 13 years of experience in the financial services industry. During the dot-com bubble, he worked at Broadview International, a boutique investment bank in Silicon Valley, focusing on M&A transactions in the fields of enterprise/CRM software and mobile applications. He has also worked for many well-known banks, including Standard Chartered, BNP Paribas and Credit Suisse, responsible for lending and alternative asset products. He holds a bachelor's degree in finance from the Haas School of Business at the University of California, Berkeley, and an MBA from Harvard Business School.