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MetaMask InstitutionalCryptoEconomic ResearchDAOs

DAO governance is not failing. Decentralization is.

The real problem is not recentralization, but the fact that we are not truly decentralized in the first place.
by Marta PiekarskaOctober 28, 2022
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Decentralization, a founding tenet of our blockchain ecosystem, is key to the reimagined organizational structures that are taking shape in the form of DAOs in Web3. The very name of this new way of organizing, decentralized autonomous organization, points to the importance of decentralization for Web3. However, the idea that DAOs may be becoming recentralized is gaining traction these days. 

I was recently asked about my thoughts about this issue. The concern does not seem unfounded. With prevailing delegation models, we are working our way to a few wallets holding most of the voting power and effectively projects being completely centralized. The model of delegation, where a contributor can assign another person to vote on their behalf, is furthering this concentration of voting power. This is against everything that we planned when Vitalik outlined the idea for  a DAOs in 2014. However, I believe that we have the cause and effect wrong. The real problem is not recentralization, but the fact that we are not truly decentralized in the first place.

To fully understand the argument, let’s go back to the creation of the first DAO in 2016. Simply called The DAO, it failed when a hacker stole nearly 3.6M ETH from the DAO. However, The DAO paved the way for the creation of more DAOs. In order to enable decision making, we introduced governance tokens – ERC20s that allowed owners to express their opinions, but only once they had proven that they cared enough to put money behind it. The trouble with this model is the idea of marrying a financial goal with a governance goal. If I buy a token and its price goes up, I need to decide whether I value the right to vote more than I value the investment. In theory, if I care about the project then I should act completely altruistically and not even consider selling the token. However, while smart contracts may not care about getting rich, they are written by humans who do. And behind every DAO there is a group of humans that need to fulfill basic needs of having food to eat and a place to live. Roughly in mid-2021, Web3 participants seemed to be following the same pattern – buy tokens during an LBP (Liquidity Bootstrapping Pool event), see where the project went and either get more involved, or just keep and see if it moons. 

Right now there are almost 5,000 projects with a token that you could become a governor of, according to DeepDAO. There are 3.9M governance token holders, out of which 693,000 are active voters and proposal makers. Before you say that’s plenty – that last number refers to wallets that participated in at least one vote in their lifetime. Now, we all know that we cannot ascertain the number of active members in a DAO by simply dividing 693000 (wallets) by 5000 (DAOs). By that calculation, each DAO would have 138 active members. Even if we assume that number to be accurate, that is not enough people to decide on the future of a project. In fact, there are only 22 DAOs that have more than a thousand active members

We often hear about voter apathy. If you are lucky, about 25% of the token holders will actually vote. That’s worse than a governmental election! I don’t think it comes from a bad place, however. Anecdotally, we know that most people who join DAOs are part of about 10. If we take a conservative estimate of five hours that a member spends being active on the DAO forum and Discord of just one, it adds up to 50 hours a week.This, on top of our actual day jobs. Realistically, each person has time for maybe two or three DAOs a week. That is where a delegation comes in handy – one can say I will pay attention to DAOs A, B and C, Jenny will focus on D, E and F, while Tom can take care of activities in DAOs X, Y and Z. We delegate tokens to one another and the case is solved. But now each of those DAOs has only one governor instead of three. This is where we come back to our argument that the real problem is the lack of decentralization. 

There are not enough people to be active members of a DAO or maybe there are too many projects. Simply put, the demand for governors and the supply of people who would be able to fill that role is mismatched. We can introduce delegation, pay delegates to vote, introduce staking and vTokens to remove the voting rights from people who do not vote. All of these are ways to deal with members who are not fulfilling their roles. Likely, there is room for more activation and more education on what it means to be a governor. 

Most importantly, we need to work on onboarding more people into Web3. By increasing participation in Web3, we can lead to growth in DAO participation. Even if we take the impressive number of 3.9M token holders, or the 71M Ethereum wallets, that is still less than 0.01% of the human population. Yes, the majority of the 7B people in the world have no interest in DAOs and likely never will. Yet, I think we can do better than 0.01%.