The Centralization Problem Within DAOs

It's a testament to history that the more things change, the more they stay the same. Early human societies were so different from what we have now, yet they are also the closest example to what we are trying to build today with decentralized governance.

For instance, governance in hunter-gatherer communities often involved one person raising a motion on a pressing matter which the whole community deliberates on. Decisions were often collectively made and community-driven. However, as these communities expanded and prospered, so did the need for centralized authorities to eschew communal-driven decisions. This solved core issues of efficiency, faster decision-making and the need for specialization.

Today, the days future-past of egalitarian societies and community-driven societies is making a return through DAOs backed by blockchain protocols. DAOs which are short for Decentralized Autonomous Organizations, are governed by the principle that code is the law and governance can be community-driven.

DAOs are not without flaws, chief among them is the plutocratic problem - caused by the concentration of majority tokens in a small group of people driving the collective decision-making of the whole community for better or worse.

This essay looks at the dimensions of this centralization problem within DAOs from different angles and gives hopeful solutions;

1. Problem: Users see governance tokens as yields, not voting rights.
   Solution: There is a need to decouple financial incentives from governance tokens. Although, in theory, a governance token aims to reward users for being part of the DAO. In reality, the financial incentives for holding governance token is stronger than voting rights. These users rarely participate in voting, preferring to use these tokens for purely speculative purposes. The solution to this problem is to make governance tokens available strictly for a vote. Users who want to speculate can invest in a new class of tokens called 'equity tokens' for earning yield.

2. Problem: The quorum for voting focuses on tokens instead of voters.
   Solution: The quorum mechanism should require a minimum number of voters (say 60 – 75% of community members) to participate in a proposal to pass instead of a minimum number of tokens. It democratizes the voting process by shifting the dynamic towards the larger community.
   Adjacent to this solution, is stimulating voter participation among DAO members to make it more community-driven. This is more of a social problem, that requires vocal and politicking members of the community who can speak up and make up a case for a proposal and carrying everyone along in the process. Voters will also vote when they are passionate about about the proposal and the change it can bring.

3. Problem: Private sales to investors.
   Solution: If it is not evident yet, major token holders, often investors in a good cause, are the biggest threat to decentralization. The question of course is, how do we reward investors for their good faith? and the answer is quite similar to the equity token suggested earlier. But beyond that early investors are not just villainous plutocrats seeking to bend the DAO to their will. Usually early investors are also the core-developers, early adopters as well as angel investors who really care about the progress of the DAO.

Invariably they will be the most the passionate at least at the early stage, and here is the hidden advantage. We do not need to over-compensate investors by vesting them with governance token that shifts the power dynamics dangerously early on. Rather, we need to lean in to the soft power they possess early on and let them use that to guide everyone else. This part is segue to a decentralized governance process that is actually quite visible and efficient in the Ethereum community - which is the standard EIP process.

ADAPTING THE EIP PROCESS TO DAO GOVERNANCE

The EIP process is how the Ethereum community has deliberated and approved new features for the blockchain from time. This adaptation is a careful look on how it can be used effectively for DAO governance. There are two adaptation of this proposal: one is for important proposals which refers to proposals that are expected to take weeks to deliberate upon and urgent proposals which refers to proposals that have to be deliberated upon and approved within a week.

IMPORTANT PROPOSALS

1. Idea Stage: One/more person(s) introduce a proposal to the DAO community. They invest 100 tokens.

2. Draft Stage: This person(s) must now get 25% of the community to sign and endorse the proposal. Each endorsing member must then put in 10 tokens. Fulfilling this condition moves the proposal to the next stage. It’s possible that the proposal is modified at this point due to the input of the new sponsors of the proposal.
   Stagnant: failure to get the 25% quorum stays the proposal, and it cannot move forward until this condition has been met.

3. Review Stage: At this stage, the proposal is presented before the core contributors - the core contributors are the people with high reputation scores (there can be a cap that members with 50% and above can sit and participate in the review stage). Their job here is to decide if the proposal is the right fit for the protocol. The idea behind this is that highly active members will be knowledgeable and aware. Additionally, this is a sensitive stage and role for the participants. They are also equally asked to stake their governance tokens (note that anyone can hold governance tokens, but only members with a high reputation score can use them to vote/veto).
   Stagnant: a proposal is stagnant here if the core contributors are not able to agree to the proposal.
   Withdrawn: a proposal is withdrawn here if the sponsors disagree with the suggestions or modifications by the core contributors and thus withdraw from pushing forward with it.
   Last Call: a review goes to the last call if the sponsors and core contributors agree on the details of the proposal and push it forward.

4. Last Call: Once a proposal reaches the last call stage the proposal is open once again to the community for general voting. One member, one vote and 2/3 of the voting public must agree to the proposal for it to be finally approved.

5. Final: This is when the proposal has been voted on and approved now it can be implemented on chain.

URGENT PROPOSALS

The urgent proposals is basically the abridged version of the earlier one and skips to review stage as fast as possible. For urgent proposals, the decision is made by the core-contributors solely.

1. Idea Stage: One/more people can push a proposal by investing 10 tokens.

2. Review Stage: At this stage, the proposal is presented before the core contributors - the core contributors are the people with high reputation scores (there can be a cap that members with 50% and above that can sit and participate in the review stage). Their job here is to decide if the proposal is the right fit for the protocol. The idea behind this is that highly active members will be knowledgeable and aware. Additionally, this is a sensitive stage and role for the participants. They are also equally asked to stake their governance tokens (note that anyone can hold governance tokens, but only members with a high reputation score can use them to vote/veto). A review goes to the last call if the sponsors and core contributors agree on the details of the proposal and push it forward.

3. Final: For urgent proposals, once it has passed the review stage, it can be immediately implemented.

Adapting the EIP process can further decentralizes the decision making process for DAOs and makes a case for only important proposals being pushed through deliberation due to the required investments and quorums. Furthermore, the process for validating urgent proposals ensures unnecessary time is not wasted and core-contributors who are very familiar with the project can bring their knowledge to bare and make DA0-friendly decisions.