On Web3 Governance

Soon after drafting this piece proclaiming DAOs as an important new governance tool for stakeholder management, this tweet stopped me in my tracks:

Not just because I respect Albert tremendously (read World After Capital if you haven't yet for a terrific primer on what the move to the digital age will require).  Also, of course, he is right. New governance models have not yet been tested.

That pushed me to think about what governance practices web3 organizations and DAOs in particular could consider to help improve the chances of managing successfully through inevitable downturns.

As background for governance systems in crypto in general, Vitalik Buterin has a terrific essay here, building on Nathan Schneider's paper here.  But Albert raises the specific question of maintaining momentum, or even organizational coherence, in a downturn.

The fundamental tension seems to me between the forces of centralization/efficiency/clarity and decentralization/community/creativity.

It reminds me of Nassim Taleb's parable of the pilot in Skin in the Game. He makes the point that contractors (analogous to community members) are not committed to projects in the same way as full time employees.  Traditional employers have more leverage over their employees than a DAO has over its community members. When times get tough, as we can expect in any organization, will the DAO contributors still show up?

Of course, for DAO advocates the lack of leverage between the organization and the community is exactly the point.  Community members have autonomy and ownership. They contribute to projects, or not, using their own judgement and discretion, not because it is demanded by a hierarchy.  

Governance challenges are further increased by speculators buying tokens in the protocol on the open market. Many DAOs use coin voting governance, opening up to both anti-democratic leadership (whales), and the risk of direct attacks on the organization from malevolent actors.

The tension is between what Ben Horowitz has referred to as 'wartime' leadership and community ownership unavoidable.  Advocates for DAOs must acknowledge they are a weaker (in some dimensions) form of governance than traditional organizations, and plan around it.  If they can do this successfully, and compete in an orthogonal dimension using a global, passionate on-demand community as their talent source, then DAOs could provide human capital upside, while minimizing the downside.

Thoughtful planning to me involves a set of Ulysses' Contracts which irrevocably bind the organization to certain actions.  These pre-commitment devices are used to set community standards and goals.  What is the purpose of the organization? How do smart contracts in the governance of the organization ensure alignment to that purpose?  

DAOs have a unique advantage over traditional companies in being able to make credible, long-term commitments to all constituencies.  Organizations should use this advantage to narrow the scope of decision making for governance processes.

Vitalik makes a similar point in another terrific essay against coin voting governance (here).  He outlines the risks of direct coin based voting systems for governance then names several potential solutions including limited governance.

Where pre-commitments are not possible, delegated authority can be given to DAO representatives.  Yes, this is a form of representative democracy instead of the true 'will of the people' that many DAO advocates want.  But in areas of greater complexity, having a designated, empowered team can provide critical stability and leadership.  

Here's where common ground may be found:

• Delegated authorities should be limited, and representation should be time-bound, with affirmative voting form the community
• Tasks delegated to representatives should be documented, all compensation public.
• DAOs should always have rage quit option

I believe this is largely in line with the governance behavior we are seeing in many DAOs today.  Nouns DAO votes on proposals to pay (in ETH, from corporate treasury) for developers to create projects for the DAO.  

I don't see how that is, in principle, any different than the DAO community coming to consensus on a proposal to pay a project manager a fixed amount (e.g. salary) for a set period of time to coordinate multiple ongoing projects in an approved overall budget (e.g. build a working a dApp).  Projects with greater complexity can empower designated team leaders with a budget and mandate to fulfil a goal on behalf of the organization in a set period of time.

One feature of web3 that helpfully constrains any abuse by leadership is forking. Because any set of actors can simply fork the ledger, there is a natural constraint on governance decisions.  If the designated leadership loses sufficient will of the community, it will splinter. Putting more decisions on chain also provides transparent records of how decisions are made, also a substantial improvement to current corporate governance.

This evolution in DAO governance will require trust.  It is possible trust for trust to develop while anonymity is maintained for the DAO leaders, but I suspect it is much harder.  For DAOs to scale impact on a global level, the leadership will have to forgo anonymity to improve trust.  

I'm not done exploring this topic. I believe considering the mechanisms for effective governance in Web3 is vitally important.  Technological improvement alone will not bring about the global benefits of digitally native organizations; our understanding of governance and leadership also must evolve.