Can DAOs Unlock Democratic Decision-Making?
We don't organize companies this way. Will DAOs be different?
If you’ve been paying attention to crypto over the past year, some of the interesting conversations in the space have centered around DAOs and NFTs. NFTs have both their skeptics and believers within the community, but democratically-governed DAOs are largely seen by all as an interesting experiment and the future of web3 governance. This piece will argue that our understanding around the power of democratic decision-making is mistaken and that the best DAOs will leverage a coordinated, organized minority within a larger community.
I’m going to assume most of you reading this know what DAOs are to save time, but if you don’t, go to Mario Gabriele’s excellent comprehensive overview here. He summarizes well why many are excited about DAOs:
“DAOs are a new way of organizing people. Traditionally, a company structure has been the most effective free-market approach to accruing talent in pursuit of a goal. That labor is usually persuaded and controlled through wages. DAOs seek similar ends — the creation of value — but rely on a decentralized framework in which workers, users, and other stakeholders have true ownership of the entity.”
The last phrase fits well with ideas like the “Ownership Economy” or the idea that crypto could unlock the possibility of a truly Marxist system where members of a DAO can truly “own” the means of production and direction of an organization. Capital and decision-making would no longer in the hands of a centralized few, but in the decentralized many. Power could been diffused and lead to better outcomes through the wisdom of crowds, absence of tyranny, and democratic governance.
Most acknowledge there may be some limits to DAO governance and that methods need to be put in place to increase voter participation. Perhaps a DAO may need to start off centralized at the beginning, but decentralize over time. However, most agree that the long-term goal for any crypto organization should be to become decentralized and democratically governed.
The first interesting thing to note is that the love for this form of organizational governance is directly antithetical to the way Silicon Valley technologists want any organization outside of crypto to run. Silicon Valley is obsessed with founders: individual human beings who create a company and remake the world according to their mission. Look at the website of any venture capitalist and there will be some sort of ode to founders on the homepage. Some will take their belief that founders are the only thing that matter to its logical extreme and make seed investments solely on the basis of the founder, arguing there are no “bad ideas.” Even the very word, ‘founder’, instead of the ‘90s term of ‘entrepreneur,’ that has come to dominate the Silicon Valley lexicon over the past two decades indicates the mythos that is attached to these singular humans who change the world. Many technologists also decry the government for its bureaucratic decision-making and its failure to move quickly as it makes decisions-by-committee.
So despite our love for democracy as a governance framework for nations, we still set up companies as monarchies (CEO) with a surrounding courtier class (board of directors and the management team.) I believe this underlying tension between how we think nations should be governed and how we govern companies and organizations is why many get excited about DAOs. It squares the circle and offers the possibility of democratic decision-making in large organizations.
However, when digging into this topic, I personally still wasn’t convinced that this form of governance would lead to better products, protocols, or companies. The history of every successful startup seemed to speak against that.
What was I missing? Why couldn’t I buy into the promise of DAOs?
This stumped me for ages until I read Alpha Barry’s brilliant vision for Africa in 2100. Alpha’s entire piece is worth reading, but everything clicked when he began expounding on Gaetano Mosca’s theory of the ruling class.
“‘Regardless of contemporary political myths, the existence of a minority ruling class is a feature of all organized societies. Whether these societies formally present themselves as parliamentary systems, democratic, oligarchic, monarchist, capitalist, feudal, or socialist, the reality is that ‘A society is a society of its ruling class.’...
In his Elements of Political Science, he makes the convincing case that the presence of an oligarchic elite is a feature of organized humanity, not a bug. His argument essentially rests on numerical truths. First is the fact that, even in autocratic systems, the sovereign can only execute his program through the consent of a ruling class which supports him. This is one of the key reasons why, upon winning power, political idealists, populists, or rookies find it hard to rule — they simply lack the elite networks necessary to do so. Former US President Donald Trump learned this lesson the hard way over the last four years, and the left's darling Bernie Sanders would have fared equally as poorly.
Second, and more fundamentally, Mosca argues that organized minorities always outperform disorganized majorities. This is especially true in democratic systems which rely on the fallacy that the majority of a country can rule themselves, regardless of scale. Even in the United States of America, that eager champion of "democracy" abroad (whether by economic dominance or "muscular diplomacy"), operates as a republican system for this reason: the people elect representatives who theoretically rule in their favor…
If we were to ask the average American the question "who governs America today", they would likely answer something like the President, the corporations if they wish to look smart, or perhaps the military-industrial complex if they are staunch anti-imperialists. These are not wrong answers. However, taking what we've learned from Mosca, we can arguably answer in a more complete manner.
Looking beyond the United States' formal governing institutions and through a Machiavellian lens, we clearly see that no formal institution governs on its own. The President is toothless without the backing of the Congress; the latter cannot guarantee its own power without capital from the finance and corporate class which bankrolls its elections; said corporations launder their own power through the media, which serves as the interface between the people and this same network of power; finally, the Ivy League and associated institutions create the intellectual, moral, and psychological framework which produces and reproduces every single member of this ruling class, who go on to serve as model citizens for the rest of the country to emulate. Collectively, this small minority runs — is — America.”
I finally understood. No matter how democratic or flat an organization looks from the outside, there will always be a coordinated minority at its center that wields power. That’s why even Communist/Marxist countries still reliably produce a core group of Party aficionados that direct the state. An interesting point Alpha adds is that “democracies and other regimes which seek to appear democratic are even more susceptible to elite capture precisely because their distributed nature ultimately invites organization, which leads to power. Nature abhors a vacuum, and because divided power is akin to diluted power, universal suffrage does nothing to abate this.”
What does this say about DAOs?
Regardless of how large a DAO is or how “democratic” it appears, any successful or effective DAO will be run by a small organized and coordinated minority that directs the actions of the larger group.
This holds regardless of how far past the founding of the organization we are: centralize, then decentralize does not work in its most robust sense. No matter how large its “community,” a protocol or application without a dedicated core team will 1) drift along aimlessly and/or 2) be susceptible to takeover. 1) is especially dangerous in crypto where moats are flimsy: almost any project can be forked and innovation comes especially quickly. We’re already seeing signs of this drift with Sushi (long heralded as one of the most promising examples of DAOs) and I suspect we will see many more over the years. 2) is also a fairly likely outcome in some scenarios. No matter how they cloak themselves, a new organized minority will always come to direct power in the DAO. A truly “democratic” form of governance where every member of the organization wields equal power will devolve into disorganized chaos.
So if the promise of DAOs to usher in the power of democratic governance is false, should we give up on them entirely?
Before we answer that, let’s go back to the first principles of crypto and think why it can be used to run powerful organizations:
Crypto allows for the ease of capital formation. This can be utilized by organizations that operate on a global scale, unbounded by a singular jurisdiction.
Crypto has the promise of shared financial upside. Both membership-gated NFTs or freely tradable tokens can create communities larger than the development team and from very early days. It’s a trite go-to example in crypto, but what if early FB users had been financially rewarded for participating in the network?1
Crypto is transparent. Every transaction is publicly auditable and code is open-source.
In my opinion, the best DAOs will be run according to the principles of the following tweet by Gokul Ramujaram, a senior exec at DoorDash:
The vision and goals should always be set top-down by the core team, but the bets, ideas, and implementation can be done with community participation. This harnesses the power of community in a few powerful ways:
A surprising amount of people in crypto communities have an idea about how to build a product. They may not have the skills to code something out but they think and care about the project because they’re naturally incentivized by tokens.
A lot of what keeps protocols up-to-date on the larger space are community members as the team will often have a single-minded focus. This creates a culture of continuous innovation and experimentation.
Up to a certain extent, you can even have the community implement ideas. This can be hard-core code in some instances or product evangelism to help spread the word or for business development.
In short, community members help a project stay competitive and keep innovating, while relieving the core team of tasks they don’t want to work on or shouldn’t be working on.
What if the organized minority at the center of a DAO becomes tyrannical or community members disagree with its decisions or vision for the future?
This is where the power of crypto really comes in. Balaji Srinivasan gave a famous talk at YC’s Startup School nearly a decade ago about the power of voice and exit.
Crypto creates the possibility of exit in a truly unique way. For example, if a CEO unloads his stock or a startup founder sells early secondary, it’s usually not until much later an employee finds out and very often, they don’t have the same immediate flexibility. By contrast, crypto is freely tradable and the blockchain is publicly auditable. Similarly, if community members disagree with the decisions of the development team, the code is open-source and can be forked.
Exit is always available meaning that crypto organizations bring back the reality of noblesse oblige. Unlike our modern government, the ruling elites at the center are much more accountable for their actions. They thus have to act in accordance with the wishes of their community members. An incredible example of this is the Bitcoin block size debate. Despite the fact that many Bitcoin miners, developers, and powerful organizations like Coinbase supported a block size increase, enough users were able to signal their dissatisfaction with their approach that they were able to effectively block the upgrade. Proponents were still able to fork the protocol to Bitcoin Cash, but they were unable to change Bitcoin itself.
While Bitcoin wasn’t organized officially as a DAO, it is instructive for how decentralized governance should work. There can and should be an organized minority at the center architecting its direction, but there can and should be an easy form of exit and/or removal through voting. Voice can be just as critical to governance: the core leadership team should be removable if they fail to deliver high performance and execution.
Obfuscating reality by saying “everyone has an equal say in decision-making” doesn’t align with how power operates. DAOs should create structures of transparent hierarchy where the ruling elite is identifiable and accountable, while leveraging the power of their community to stay innovative, build a brand, and create network effects.
Some startup ideas for DAOs that I’m interested in include:
A better messaging tool or platform for transparent communication between the leaders and the community
Coordination and compensation tools for community members to be rewarded for helping execute the top-down vision (Coordinape is the most promising I’ve seen)
DAO formation tools that help navigate the regulatory landscape. I’m not a lawyer so DYOR, but from a few conversations, it’s likely that if you have an entity that is generating revenue in some way and seems like interest in a common enterprise, it can be considered a general partnership particularly if certain token holders have a large stake
I am extremely bullish on DAOs to organize groups of people who are committed and have the same principles. I love their opportunity to create organizations with frictionless exit and entry. However, I hope that by writing this piece we’ve illustrated some of the shortcomings of the current conversation around DAOs and hope to spark ideas, startups, and frameworks that leverage the reality of power structures to take advantage of where the true promise of DAOs lie.
The most effective DAOs will be run by a central coordinated minority with bottoms-up, distributed implementation of a motivated majority. This leadership team will be subject to accountability by their community through both voice and exit. DAOs unlock an interesting future for crypto governance, but it is not one of democratic decision-making.
If you’re building in the space or would just love to jam on some of these ideas, please contact pratyush@susaventures.com.
Thanks to Alpha Barry and Fjvdb7 for feedback on this piece.
One interesting question to ponder is how does financial incentivization change the behavior of network participants? Yes, early Facebook users would have been more motivated to share the protocol but it’s also possible that others would’ve seen them as less-than-altruistic in their sharing. A relationship with a network may also be less sticky if the primary motivating function is money. I’m still thinking about how these incentives change human behavior, but don’t have a firm opinion yet. The evolution of crypto over the next few years will likely produce a firmer result.