Overview of DAOs and Governance

A range of articles I've put together to help explain why DAOs are interesting, what is wrong, and how we can try to fix it.

DAOs are probably one of the most controversial topics in crypto.

So much so, when I asked on Twitter why DAOs have failed, I was overwhelmed with various takes on why:

• Delegates not the same as full time board members,

• Soviet Union vibes, everyone owns something, nobody owns it, and nobody has a direct interest to maintain or improve its condition,

• People vote for their own short term interest at the cost of long term success,

• People lack the expertise to make educated decisions across multiple subject matters,

• DAOs, throughout history, only worked with a very small group. Large groups centralised with leadership & hierarchy.

• Handing power to people who don’t know what they are doing

Others commented that DAOs have not failed. DAOs will simply become blockchain-oriented responsible entities (BORGs) and other legal structures like LLCs. There is a long tweet that summarises many of the apparent issues in DAOs.

After two years immersed in DAO governance at Arbitrum, I want to reflect on what’s working, what isn’t and where we go next. To accomplish this, I have put together several articles:

• Why DAOs are interesting

  • From Rough Consensus to Autonomous Execution: How I Learned to Appreciate DAOs

• What is a DAO

  • DAOs: Stakeholders, Autonomy, and Organisational Design

• Proposal Process in DAOs

  • DAO Politics: Holistic Challenges in the Proposal Process

• Towards More Effective Governance

  • Learning From Failures to Build Better DAOs

• Moral and Ethical Issues

  • Vote Buying as a Service, LobbyFi and DarkDAOs

Let’s take this opportunity to provide a summary for the articles, but I do recommend to take the time to read them. Again, it reflects ~2 years of direct involvement in governance, and a dexade of indirection observation in the cryptocurrency realm.

The Core Problem is Governance. Every protocol has two layers. There is an operational component that runs 99.9% of the time and a governance backend that can be invoked to change the live system. Regardless if it is Bitcoin, Ethereum, another L1, a rollup, or even a smart contract on a public blockchain.

Governance manifests itself when a group of stakeholders need to make a decision that changes the system’s rules or push the ecosystem forward. Even immutability — often seen as the absence of governance — is itself a governance decision to restrict any future changes.

Historically, in networks like Bitcoin or Ethereum, governance has been implemented through rough consensus. An intentionally ambiguous process with no single leader. Influence is hard to measure, and changes depending on the issue at hand. It has evolved over the years to fend against hostile takeovers of the system.

DAOs take the opposite approach.

The voting system explicitly defines voters, distribution of voting power, and exactly what is governed. It operates through a transparent proposal process that allows anyone to submit ideas, initiate discussion, and trigger a measurable vote. The very concept of a hostile takeover becomes more ambiguous. Proposals that pass the voting system due to an actor that acquires overwhelming voting power can still be considered valid.

Over time, DAOs have expanded influence beyond software to managing treasuries, deciding organisational hierarchies, and having authority over legal entities. The software works as intended, but problems arise in the human realm, as the proposal process must handle conflicting interests amongst hundreds of actors.

This leads to a whole host of problems including:

• Rigid proposals that can’t adapt to reality,

• Swarms of vendors seeking funding,

• Overpaying for services,

• Committees that don’t coordinate,

• Voter apathy from excessive volume,

• Excessive lobbying,

• Lack of accountability from proposers.

Many of the problems arise not out of malice, but from good intentions by the parties involved. For example, proposals are rigid so authors can be held accountable. But rigidity also makes execution harder and less effective.

The immediate solution is to step back, understand the source of the problems, and reset expectations in DAO governance:

• Governance should be rare. Proposals should be deliberate, strategic, and large in scale. They should earn attention from voters because they matter and not because it exists in the pipeline.

• Governance is expensive. It takes time and resources. Everyone must come together to review the proposal, discuss it, and vote on it. A scarce resource that should be respected and a culture should emerge that discourages low-quality proposals that do not meet an exceedingly high bar.

• Governance needs trusted teams. DAOs need full-time actors whose job is to execute the DAO’s will. Not vendors or contractors, but teams who ultimately depend on the ecosystem’s long-term success. They should be empowered to make decisions, hire and terminate vendors, and execute initiatives on behalf of the DAO.

• Governance is not for everyone. Most people should not be involved in proposals or governance. Their involvement should begin after a proposal has passed and it is time to find the talent with the appropriate skills to carry out the work. Traditional processes like recruitment, outreach, and onboarding still work. Use them.

• Governance is serious business. Toxicity and status games drive away good contributors who do not want to get involved in the politics. A healthy DAO culture must make this behaviour unacceptable and stomp it out in an unforgivable manner. Otherwise, it undermines the legitimacy and authority of the DAO itself.

Good governance is what makes large organisations and ecosystems successful. DAOs are one way to implement it. The final organisational structure must serve the people, the system, and what is being governed, regardless of any constraints that ideological advocates may wish to place on it.

People will remember governance systems that leave a real impact on the world and make everyone wealthier as a result. They won’t remember systems that failed because they clung to ideals that didn’t work in practice and did not attract those who want to build.

I am grateful to my colleagues at the Arbitrum Foundation like Andreea, Raam, Cliff and Mateusz, who have spent countless hours and even more brain cycles working with me to improve the ArbitrumDAO.

All views expressed here are my own and not representative of my employer. They are just personal musings and strong opinions, weakly held.