DAO series part 1: Why DAOs won’t work (as they are today).

With increasing interest in Web3, DAOs are also becoming an increasingly important topic. How do I organize all the work, the community and how do I avoid dependence on “central players”? DAOs are supposed to be the solution. But are they indeed?

Does Web3 make sense?

I am a strong believer in the core ideas behind Web3 and decentralized organizational principles. Why? Because we need these principles for continued progress! If we look at the development of our economy and industry, we see a development from very simple activities such as agriculture and mining to increasingly complex activities in today’s digital age. The simple activities are automated and taken over by machines. There is no need to worry about organizing them. People, on the other hand, manage the complexity, using primarily knowledge, experience and creativity as resources. However, creativity and the use of knowledge are difficult to force. Consequently, top-down management structures are often not suitable for today’s complex world. This is one of the reasons why companies of all sizes have been experimenting with new organizational and leadership models for years. The holacracy model is just one example of this new “Zeitgeist” in the organization of work.

This zeitgeist now met with the technological development of blockchain, and thus the first decentralized autonomous organization, called “TheDAO”, was born in 2016.

The idea sounds quite coherent. Decentralized organizational principles like Holacracy work within a company, but do not change its basic structure and thus its underlying causes. Companies are still focused on shareholder value. No matter how hard the individual stakeholders (e.g. employees) of the organization try, the economic advantage lies primarily with the shareholders. For startups, this alignment typically begins with raising venture capital and the investor influence that comes with it. “The DAO” set out to change that, launching the largest crowdfunding campaign in history. I don’t want to go into the further course of “The DAO” now. You can find good information about this here, for example.

But what I want to capture is the thinking behind “The DAO” and DAOs in general:

• The rules of the DAO are in a SmartContract, which is an immutable piece of code. The software and thus the rules of the DAO are open source and thus can be viewed and verified by anyone. This combination is intended to prevent the arbitrary decision-making of hierarchical structures.
• Decisions according to the rules defined in the smart contract are to be made by a broad member base. Tokens are generally used for this purpose. Simply put, the holders of the tokens are entitled to co-determination.

The SmartContract is comparable to the rules of procedure of an organization. It exists independently of the organization’s members and cannot be changed or manipulated by individual actors due to the blockchain as a neutral infrastructure. Voting rights are ideally broadly distributed across the entire community and can be easily passed from one member to the next. Sounds like the ideal form of organization, right?

DAOs are insufficient for complexity

In the beginning, I noted that decentralized decision-making is needed primarily because of the increasing complexity of problems. However, complex issues and the decision-making structures needed to solve them cannot be represented in a smart contract. Even though there has been some progress in the meantime compared to the originally very simple token-based voting (for example, conviction voting), the possibilities are finite.

Complex decisions are therefore outsourced to off-chain governance in DAOs. In tools such as Telegram or Discord, the community discusses and prepares decisions. But the “one member / one voice principle” often ends in the chaos of countless and endless discussions. Even though many may have an opinion on everything, not everyone has the expertise on every topic that is required for constructive discussion and decision-making.

So structures are needed. We can certainly find these in DAOs. For example, there are DAOs with sub-DAOs or communities with committees. Much is being done to solve the problem of complexity and to enable competent decision-making.

Offchain governance, sub-DAOs and expert committees — doesn’t that sound an awful lot like classic organizational forms? Principles like “separate people from functions” and “assign activities to roles” originate from Holacracy and are anything but new. The only difference is that there was no Smart Contract until today. But why do we need one now?

Code is law — The dictatorship of smart contracts

Smart contracts are immutable rules written in software. They are intended to enable a neutral decision-making process and thus create independence from central decision-making bodies. In a DAO, rules cast in code replace management as the decision-making power of traditional organizations. Transparency and immutability make decision-making processes observable and comprehensible for all members.

But however brilliant computer engineers maybe when facing down technological challenges, they rarely have real insight into what’s happening outside the technology bubble. There is no understanding of structures and politics caused by human behavior. They want to program ways to cut through it and remove the human element. This thinking is based on the naive assumption that technology can solve complex interpersonal problems. But this is not the case. It doesn’t work in a small project team and certainly will not be on a societal level. When it comes to solving complex problems by consensus among stakeholders, software as an immutable law is not helpful. And therefore not sufficient as a foundational organizational principle.

Especially since even the most brilliant engineers are not infallible. But fallibility and immutability are not a good mixture. This was impressively demonstrated by The DAO Hack. This should be a lesson that software as a law cannot be a future model for complex organizations.

Wen Token? — The power of the community

Let’s turn to the community. In a DAO, these are the token holders. The tokens are the membership card and voting rights of the DAO. Tokens are an instrument and not the purpose of the DAO. At least that’s how it should be.If you dive into the community discussions of existing DAOs, you quickly see that the opposite is true. It’s primarily about “WEN TOKEN?”. Discussions about the “Why?” and the “How?” of the community are often completely lost. Tokens thus go from “an instrument of the community governance” to the “purpose of the DAO” within a “community” of speculators. But wait a minute, what was that about stakeholder vs. shareholder?

Another phenomenon can be found in the more popular DAOs in particular. The tokens are largely in the hands of a few crypto whales and early investors. For the financing of the project, this is quite beneficial and nothing speaks against large investors. However, if the tokens are not only investment but also voting rights in the DAO, you have to ask yourself whether this is still in line with the decentralization idea. The difference to classic, venture capital-led startups must be searched for with a lens. Rather, these DAOs suggest a pseudo-participation of a community that does not exist in reality.

Let’s build decentralized organizations

Yes, I am critical of the DAO concept. However, despite all the criticism, I very much appreciate the decentralization of power and voting rights. Even outside the crypto bubble, there are numerous use cases in which decentralized organizations and neutral digital infrastructures are useful. Wherever digital processes need to be controlled between people and organizations, and no single party should have full power over that control, decentralized organizations make sense. But these problems cannot be solved purely by technology. Solving these requires more than a smart contract and token-based DAO. The first thing to do is to create structures to make decisions efficiently. For this, the initiators must first agree on the purpose of the cooperation and create rules according to which consensus is to be found between them. These rules must be designed to be independent of any one of the initiators and must also apply to new members on equal terms. All of these are organizational principles whose design should be the focus of attention. Only then is it time to ask the question of what of this can be written in software.