DAOs: Web3 Discovers Political Science

Last week Vitalik Buterin, Ethereum’s prominent co-founder, published an essay defending decentralized autonomous organizations: DAOs are not corporations. He argues DAOs are useful and being unjustly tarnished because of their incorrect application by misfiring entrepreneurs.

This should be addressed because DAOs are emblematic of the jargon hype cycle–technical founders win investment for using convoluted technical language that oversells the promise of today’s tech reality. DAOs are slow moving democracy in code, not a new dawn that will crush centralized counterparts. Centralized enterprise is not commercial authoritarianism, it is dynamic capitalism. Confused hype like this creates boom and bust dynamics that makes charlatans rich and sets genuine innovation back.

The jargon hype formula is roughly:

1. Media, which also does not understand technology, oversells an emerging technology. This primes investors creating a sense of FOMO. E.g. The DAO is a major concept for 2022 and will disrupt many industries
2. Devs talk to investors using overly technical language. Investors ascribe their failure to fully understand the technology as being a good indicator
3. Investors have limits on due diligence and devs receive investment thus completing the perverse incentive
4. There’s a further positive feedback loop of investors making public their buy-in and the sense of investor FOMO, the bigger the VC the better. E.g. CreatorDAO raises $20M from Andreessen Horowitz

DAOists leverage the jargon hype cycle

Vitalik outlines the three areas DAOs ought to be used:

Decentralization for making better decisions in concave environments, where pluralism and even naive forms of compromise are on average likely to outperform the kinds of coherency and focus that come from centralization.

Decentralization for censorship resistance: applications that need to continue functioning while resisting attacks from powerful external actors.

Decentralization as credible fairness: applications where DAOs are taking on nation-state-like functions like basic infrastructure provision, and so traits like predictability, robustness and neutrality are valued above efficiency.

If you think groups that place a premium on compromise, freedom of speech, and fairness call for a normal democracy, you are not alone. Locke, Montesquieu, and Rousseau are the blocks from which we learned good governance, not today’s DAOists. We are re-litigating 300+ year old ideas from the enlightenment. The DAOist community is painfully re-discovering governance and reaching the same conclusions that intellectual giants already scoped. Bad decisions that cripple otherwise good projects are happening as a result.

Some may point to ConstitutionDAO as evidence of success, it raised $47M after all. I agree that it was fun! We had a clear mission and no scarce resources (the catalyst of politics) to distribute amongst ourselves. It was motivating to know we had a say in what to do with the constitution. But campaigning is not the same as governing. DAOs can co-opt an inspired group but have not shown they make effective startup governance.

Personally, I don’t want Worldhaus to be one of the crippled projects in the DAOist fantasy.

A more reasonable framework for matching groups and governance is the following:

The more we depend on an entity the more they should be decentralized

We need slow moving and reliable decentralized institutions to create the dynamism that comes with centralization. We need a decentralized Ethereum and a thousand centralized web3 startups. The United States does a good job of this with a very hard to change constitution, a hard to change code of laws, a reasonably hard to change corporate landscape, and easy to change creative ventures.

• Decentralized Groups: Personal security, basic education, physical infrastructure, and the financial safety net should be strongly decentralized in control via a democratically elected government (or web3 equivalent)
• Semi-Centralized Groups: Important but not critical groups should be semi-centralized via government regulation, like large energy and banking companies
• Centralized Groups: The least responsible groups should be strongly centralized like art, startups, and film. Decisive action and coherence are prized over stability and robustness

DAOs are just online democracy, relevant for L1 protocols, and not relevant for startups. The investment they hoover up sucks the oxygen out of the ecosystem reducing overall innovation. The hype costs us but I guess there are worse forms of government DAOists could be pushing.