Complexity of Dao and Web3 governance

For a long time, because the centralized institutions failed to complete the supervision of social infrastructure and finance in a safe, fair and transparent manner, Web3 was born. Web3 is built on a distributed network (such as blockchain) with minimal trust. It realizes digital management of infrastructure through cryptography, consensus protocol, automation, etc. - and turns human from the human governance mode of third-party trust to the governance mode of technology assurance trust. This concept is called cryptographic truth.

Cryptographic truth combines cryptography and decentralized incentive mode to generate "golden records" under distributed entities and deterministic computing applications

In the application of blockchain infrastructure, in addition to defi and NFT, a new product of social structure - Dao has also been born. Dao organizations authorize independent entities to jointly manage open-source infrastructure applications or shared assets. One of the most important aspects is the management of smart contracts. In essence,Dao extends the concept of trust minimization to human collective decision-making
The following content will give a detailed description of Dao, starting with the basic knowledge of Dao, and then discuss the trade-offs that Dao must make to achieve sustainable development.

Dao Basics

To understand the benefits and trade-offs of Dao, the first step is to define what Dao is? Understand the various types of Dao, outline their vision, and understand the different Dao tools and governance architectures.

What is Dao?
Dao is the decentralized autonomous organization.The general purpose of Dao is to make collective decisions in a way that is more decentralized, transparent, and trust minimized than traditional organizations。 In short, Dao is a new type of human organizational structure, which allows people to work for a common goal on the basis of common understanding, and all participants can independently confirm the operation of the organization.
One of the unique features of Dao is that it uses smart contracts based on the blockchain. These contracts fix their decision execution and ownership allocation in the form of code. The combination of smart contracts is the basis of its innovation. Because the code running on the blockchain (i.e. smart contracts) is open and auditable, and the decentralized nodes provide network protection, ensuring that the rules and management of Dao are open and transparent to all members, And prevent tampering by internal members or external entities.
It is worth noting that although the word "autonomy" is a part of the word Dao, Dao is not completely autonomous. Dao is composed of human beings, so it needs manual operation by users. For example, users need to vote, deploy code and debate proposals. Human beings still need to interact with smart contracts (provide input) so that they can perform relevant operations (output).

Classification of Dao
At present, Dao can be roughly divided into six categories:
Protocol Dao: for the development and management of decentralized applications (dapps) or infrastructure, protocol Dao mainly focuses on open source technologies, similar to companies or foundations.

  • Tezos is a public chain that uses the governance structure on the Dao chain to activate the protocol upgrade. The most noteworthy thing is that it needs to obtain the majority consensus before it can be approved through the representative based voting system.
  • Makerdao is an organization that manages decentralized stable coin Dai. Dao participants are responsible for setting agreement parameters, such as adjusting interest rates, adding / deleting collateral types, and joining / leaving core teams.

Investment DaoThat is, to manage and invest in the Treasury under the control of Dao. Investing in Dao is mainly focused on creating profits for its members, similar to private equity funds or hedge funds.

  • Bitdao, a variety of strategies voted by bit token holders to increase their investment income. Bitdao claims to have allocated more than $638 million for Web3 project investment.
  • Metacartel ventures (venture Dao), a for-profit Dao, focuses on investing in early dapps. They propose a community-oriented membership structure and provide more flexible participation than traditional venture capital funds.

Cause based DaosThis kind of Dao mainly focuses on philanthropy, politics and public goods and provides fund matching, similar to traditional organizations such as charities, lobbying groups and grant programs.

  • Gitcoin, users can provide co financing for Ethereum and other open source blockchain projects through the secondary voting model.
  • Big green, which aims to help schools, communities and families learn how to grow their own food and make charitable grants.

Social Dao, manage the shared social space, jointly own things with artistic value, or provide cultural training and related activities for its members. Social Dao mainly focuses on social aspects such as entertainment, art, games and life, which is similar to social clubs in traditional society.

  • Bored ape Yacht Club (bayc) is a limited NFT series, in which NFT holders are also members of the Dao club and provide special allowances to the holders.
  • Krause house is a social Dao composed of basketball fans. Their goal is to have an NBA team one day. At present, they have ball houses, a team in the big3 Basketball League.

Data DaoTo develop and manage data through the control of Dao. Data Dao aims to collect user data or develop unique data products for sale to other third parties (such as creating AI algorithms or Market Research).

  • Dclimate is a market for climate data, forecasts and models, serving users who want to sell new data sets and institutions who want to buy them. The Dao evaluates the publisher's data to help maintain high quality and appropriate network incentives.
  • Delphia, a robot consultant, will collect the user's personal data and use it to design investment strategies, and the native token will give the user access to the strategy.
Network states is a term coined by Balaji Srinivasan. It is similar to the structure of Dao and represents those network states used to create new legal recognition. As Balaji defined in his book network state: how to start a new country:
"The network country is a social network. It has moral innovation, national consciousness, recognized founder, collective action ability, personal civilization, complete cryptocurrency, consensus government restricted by social smart contract, and islands, virtual capital and chain population composed of a crowdfunding physical territory. It can obtain diplomatic recognition to a certain extent if it proves that it has enough population, income and real estate footprint. ”

Responsibilities of the Dao
Dao can be designed to perform different types of tasks, but some of the most common responsibilities include:

  • Approve the upgrade of open source agreementFor example, vote to decide whether the contract of the agreement can be upgraded, or approve the release of a new version of the agreement. Once deployed, users can migrate to this version.
  • Adjust parameters in DAPPFor example, change the interest rate of decentralized stable currency or decide whether to support new collateral in the lending market.
  • Submit improvement proposal and discuss its advantagesFor example, create a formal proposal to change some content of the agreement and Dao, or challenge other proposals before voting.
  • Transfer the funds owned by the agreement to the investment or external accountFor example, granting grants from the Dao Treasury to recipients or deciding whether the Dao should invest in limited edition NFT.
  • Management leadership positionFor example, voting for someone to enter or leave a management position, opposing leadership decisions, or changing the underlying organizational structure of the Dao.
  • Arbitrate disputes arising from the use of the agreement, DAPP or Dao managed infrastructureFor example, determine whether the user is compensated for an unexpected hacker or error in the protocol.
  • Define the long-term roadmap and vision of the agreementFor example, discuss whether Dao should extend existing vertical use cases or decide which L1 blockchains or layer2 networks it should support.
  • Value capture mechanism of modified agreementFor example, how many user fees are charged, whether tokens are burned, or whether Dao members should receive dividends.

Dao tools
Dao often uses a set of standardized tools to demonstrate its functions, mainly by combining the following tools to form a multi-layer Dao structure.

  • Governance token: cryptocurrency tokens issued by the Dao, granting the holder specific rights within the Dao. Most notably, Dao members usually need governance tokens to vote (for example, 1 token = 1 vote).
  • Multi signature wallet.A smart contract needs M-of-N predefined addresses to sign a message in order to change the protocol. Multi signing is often used by Dao to implement on chain changes to the protocol according to off chain snapshots, or as a security measure to mitigate the impact of attacks in emergency situations.
  • Voting contract: a smart contract that coordinates weighted voting of tokens on the chain. The contract must meet the predetermined threshold (e.g. 66% yes) of Dao members or Dao representatives and the quorum (e.g. 2% token holders) before it can be approved. This can be achieved through multiple signatures or through proposals submitted as executable code, such as compound's governance alpha voting contract.
  • Commission system: a mechanism that allows the holders of governance tokens to delegate their voting rights to other parties to vote on their behalf.
  • Off chain snapshot: a platform for weighted voting of tokens on the chain through off chain signature. First, a snapshot of the balance and address on the chain is obtained to determine the voting rights, and then the proposal of the Dao is voted. This method increases the participation of community members because it does not need to pay the transaction fees on the chain.
  • Discussion Forum: at present, almost all Daos have a social layer that brings members together to show and debate ideas in an open manner. The most popular platforms include dedicated Governance Forum websites, such as discourse, discord and telegram groups.
  • Reputation system: although it is still in the early stage, the reputation on the chain is developing rapidly. The reputation system mainly gives more value weights to individuals who regularly participate in or provide valuable insights for Dao. One of them is "soul tokens", which assigns non-financial tokens to user addresses and gives them some form of reputation or "soul" on the chain.

The Dao must decide how to combine these tools to create an overall governance process to meet the balance between efficiency, cost, and trust minimization among its members. Each Dao will be optimized according to its members' ideas, values and the vision of the Dao.

Dao governance architecture
Reaching consensus is the most important and challenging thing for all Daos. The following are some governance structures currently used to reach consensus, involving the combination of the above tools.
Direct chain Democracy:When members vote on a proposal directly on the chain, they must reach the threshold before approving the proposal. Most Daos that adopt direct chain democracy use token weighted voting. The more tokens users hold, the greater their weight in voting (usually 1 token = 1 vote). This method has the characteristics of the lowest complexity and resistance to witches. It is also the most common and simplest method to reach consensus in Dao.
Democracy under the direct chain: After the Dao uses the snapshot, it votes off the chain. The proposal must meet some voting thresholds before it can be approved. Most direct offline democracy projects also use token weighted voting, but multiple signatures of trusted entities are required to promote the proposed online changes. Therefore, democracy under the chain needs an element of trust,That is, the multi signer will vote according to the snapshot results of the Dao.
Representative democracy: refers to the Dao using the representatives voting on the chain to approve the submitted proposal. Generally speaking, representatives are elected by the Dao, and can use off chain snapshots to measure the interests of the wider Dao community members before part or all of the votes are cast. If their decisions are seriously lack of support or controversial, the Dao will also include methods to revoke their representative qualifications or change other representatives.
Quadratic democracy(Quadratic democracy )This is a governance structure based on quadratic voting, which can be expressed by this equation: number of votes required for voting = (number of voting targets) ^ 2. For example, one vote for a proposal may require members to have one governance token, but five votes may require 25 governance tokens. The second-order voting is a mechanism to prevent Dao voting from being manipulated by a few big whale members, which can make individuals become equal or more influential in voting. At the same time, in order to prevent big whales from dispersing tokens in different wallets to achieve voting results, A mechanism against witches is also needed to make quadratic voting practical.

Vitalik buterin's proposal on the differences between 1token / vote, quadratic voting and 1 person / vote mechanism

Benefits of Dao

It is difficult to really understand the long-term benefits of Dao before large-scale application for a long time. However, some potential benefits of Dao mainly include:
The rules of Dao (open source code) and the activities of its participants (chain operations, forum posts) are usually transparent to all, and can be viewed and audited by all, so that people can fully understand the changes in decision-making at different times and the distribution of power among members. This is in sharp contrast to traditional organizations. In traditional organizations, information is usually opaque, and users can only unilaterally trust that the organization has recorded its decisions completely and accurately, but can not verify the information.
The Dao authorizes any member to submit proposals and vote to decide whether other proposals are accepted or rejected, thus forming a more democratic process. Members can gather together to influence the direction of the Dao. This is different from traditional organizations, which tend to have a multi-level structure. In this structure, the CEO, the owner or the board of directors have the ownership to execute most decisions, while other stakeholders have very limited ability to express their opinions.
Trust minimization
In Dao, its structure, how to form consensus, and how to turn consensus into action are usually hard coded and deployed into open-source smart contracts of the public chain, which makes it difficult for any single entity or small group to tamper with the governance process. This is different from traditional organizations, where the management process is usually promoted and executed by a centralized entity. The rules of these processes are fuzzy and complex, Sometimes it is a private legal contract. The dispute cost of these contracts is high, the implementation is slow, and it is difficult to obtain certain results from the implementation.
Dao allows anyone connected to the Internet in the world to participate without disclosing their identity and other information. As a result, the social structure can essentially eliminate gender, race, socio-economic status, sexual orientation, nationality and other potential prejudices. This is in sharp contrast to the traditional organization whose members are usually public celebrities, so it is difficult to have a more pure form of elite management.

Trade off of Dao

Rather than discussing the disadvantages of Dao, it would be more enlightening to look at the trade-offs that Dao currently faces from a dichotomy perspective. For different Daos, this dichotomy does not have completely correct or wrong implementation strategies, but there are separate trade-offs between advantages and disadvantages. Moreover, all traditional governance structures are also subject to similar trade-offs and constraints. Therefore, Dao is not unique when facing these challenges.

Early member vs late member
The power in Dao can often be controlled by a few whale holders, especially when implementing token weighted voting, which often happens because the founder or early investors of Dao can obtain a higher proportion of governance tokens.
Although this introduces the issue of centralization, the more difficult question is whether early founders and investors have the reason to have the largest voting rights and influence, because they have created Dao and invested the most time and resources in incubation. If so, what is the reasonable percentage? Community members who join in the middle and late stage may feel that their voices are drowned by a few members, thus questioning the value of their participation.
In the final analysis, this opposition revolves around how to reward and empower early participants who have taken on greater risks and provided more resources, while at the same time not restricting the development of later participants, so that they can rise in the organization and make their own voices heard. This is not different from the traditional social form. They do not want to punish investment and success, but they do need to maintain a certain degree of upward flow channels.

Decentralization vs efficiency
In order to minimize the Dao's trust, power must be checked and balanced to reduce emotional or hasty decisions, and protect the Dao from governance attacks and bad infiltrators. Check and balance is a key design decision of modern democratic countries. It is mainly used to prevent the excessive concentration of power. It defines the scope and responsibility of each part by dispersing power and defining the boundary, and has achieved the check and balance of power.
The challenge for Daos is that decentralization often leads to inefficiency, which hinders the timely execution of Daos, for example, limiting their ability to quickly repair unexpected vulnerabilities. Failure to make quick decisions will make it more difficult for Dao to compete with centralized mode, especially in the new and rapidly changing open source technology market
The above dichotomy focuses on the core value of how to minimize trust, which makes it unnecessary for the Dao to make lengthy processes for each decision. It raises a broader question, that is, whether the Dao protocol can transition from the traditional centralized governance structure to a more decentralized Dao structure over time. If so, when will it be realized? Which components should be prioritized?

Stable vs growth
When talking about decentralization and trust minimization, some people may say that "no governance is the best governance". The reason is that human beings have a poor historical record in maintaining a fair, safe and stable governance system, which makes any form of governance often turn into internal and external corruption. This statement may have some truth, but the reality is that almost all social structures are dynamic in nature, This means that they meet the needs of their members in the process of continuous development.
The difficulty of Dao lies in how to strike a proper balance between these two contradictory viewpoints: whether to give priority to the fixation of the agreement rules and slowly remove the Dao related functions over time to achieve the effect of "no governance is the best governance", or continue to develop the agreement and endure the "new corruption" brought by governance. This is a challenge. At present, many Daos are conducting internal debates, and the root of their differences lies in what the Dao vision should be: on the one hand, those who uphold the original vision, and on the other hand, those who want to go beyond the existing agreements and vision.
In a word, the goal of the Dao is to allow the values of its members to change over time while maintaining the consistency of the basic vision. In fact, this dynamic has always appeared in the history of mankind. For example, changes in population and environment sometimes lead to differences in the collective vision of a society.

Leaderless vs leaderless
Due to the decentralized form of Dao, many people think that Dao should be leaderless. Although a leaderless society can play a role in some specific situations, historically, social structures lacking high-quality leadership have not functioned as effectively as those with clear leaders. A leaderless society is vulnerable to many impacts, such as the tragedy of the commons, because no one bears the responsibility of managing the public interest, and thus neglects the public interest; Power vacuum, the lack of power leads to internal conflicts eager to fill the gap; Due to the lack of long-term thinking, the realization of discipline and vision is stagnated.
The disadvantage of having leaders is that when they are given too much power, they may become "Dragons", which precisely denies the benefits of decentralized autonomous organizations. This is why some Daos have begun to try the organizational structure of representative democracy. For example, synthetix uses the "Spartan Council" - a seven member group selected by the Dao to make decisions on Suggestions Submitted by users. Synthetix supplements the Spartan committee by conducting snapshot voting under the chain to measure the views of synthetix token holders on community development before voting.
The trade-off mentioned here refers to how to attract and protect leaders with real vision and values while providing sufficient power and autonomy, and how to control their power when they deviate from the Dao consensus. This is an interesting polarization phenomenon.

short-term Vs long term
Another outstanding Dao trade-off is how to balance the priorities of members. For example, some Dao members mainly focus on short-term growth, that is, sacrificing the long-term flexibility of treasury funds to pursue how to obtain more income and capital in the short term. However, other Dao members may focus on how to achieve long-term sustainability, which will not benefit Dao participants in the short to medium term.
This situation is intertwined with the above-mentioned problem of no leadership vs. leadership. It is worth noting that Dao leaders are often members who have participated in the project for a long time, or founders of the project. Therefore, they usually tend to develop in the long term, because they may have received good compensation benefits in the early stage and have more economic and reputation interests in the agreement. Because the new members have less interests, they will give priority to their immediate satisfaction. If their expectations are not realized within a certain time, they will leave.
The solution to this problem is often to propose a long-term plan oriented to success, that is, not to cater to every member, but also not to ignore the concerns of Dao members. This problem also occurs in the traditional governance system when major policy changes occur. On the one hand, when organizations change direction, they need to take into account the dissatisfaction of citizens. On the other hand, if they can not obtain sufficient support and bring practical results in the process, it will make it impossible to achieve policy changes and complete implementation.

Knowledge type vs non knowledge type
Based on the blockchain technology is the basic value proposition of Dao. However, after all, only a few people have enough knowledge to fully understand Dao related smart contracts and the technical complexity of their operation. In addition, in order to make wise decisions on some Dao proposals (such as new commercial enterprises), various legal and commercial factors need to be considered. Therefore, in the proposal analysis stage before the Dao votes, This creates a reliance on senior members - especially developers, lawyers, subject matter experts, and founders.
The challenge is that without the help of core members, most Dao members may not be able to properly balance risks and benefits. For example, experienced members are required to refine some terms or provide detailed analysis of the legal and economic issues involved. Considering the importance of these core members, the final question is whether they should have more weight in the decision-making, or get more Dao rewards.
This gives rise to a trade-off. Dao needs to motivate mature members to maintain the activity and quality of the organization, but can not rely on them excessively or authorize them excessively, which will drown the value of other members. In fact, the traditional government is also faced with similar problems, that is, how to correctly trust experts and exercise their powers without submerging the opinions of their organization members and experts.

Nothing at stake vs. hyper financing
A certain threshold is required to participate in the governance of Dao. If there is no threshold, the system will be vulnerable to witch attacks, resulting in some people who have no historical activities or economic interests in Dao can influence the final governance decisions. Most Daos have some criteria for participation threshold, such as holding a governance token. However, the problem is that some people may obtain a large number of governance tokens, or even temporarily borrow tokens to gain greater influence in governance voting, thus making Dao subject to so-called governance attacks.
This introduces a dynamic, that is, the Dao hopes to have a certain threshold to prevent Sybil attacks, but does not want to completely bind the entire organizational structure to financial capital. If there is no way to incorporate some non-financial advantages, Dao may be affected by the melting of super gold——All decisions come down to financial power。 Fortunately, vitalik buterin, the co-founder of Ethereum, is exploring this field. In a paper entitled decentralized Society: finding Web's soul, he proposed the idea of creating soul binding tokens to reward the non economic value of users on the chain.
The core of disinterested and super gold melting is how to ensure that the Dao members have certain rights and reputation without over financing the Dao. In fact, today's society also faces similar problems, such as how much role financial capital should play in collective decision-making.

The future of Dao

In the final analysis, Dao is just a new tool, a social structure designed in a way that minimizes trust. However, Dao is not the ultimate solution to all governance problems that have plagued Society for thousands of years.
The fact is that there is no perfect governance system. Web3 provides builders with the ability to experiment with the governance system more flexibly, and users have the opportunity to directly support the agreement of the governance system that conforms to their personal values and beliefs. Some people may prefer to have no governance, and some people may prefer to have complex systems and participate in more governance, which is all right. People's opinions will also evolve over time. Some Daos may fail, and some Daos may succeed and flourish.
This is an exciting field. We don't know how Dao will develop in the future, and Web3 builders don't need to rush to launch their own Dao. I hope that through sufficient experiments, a DAO design market that supports a wide range of values and diversification will emerge. At the same time, the governance transparency and trust minimization of the entire market will be further improved, and the market will show sufficient vitality to compete with web2 systems.