Golden Observation | V Theological DAO: DAO is not a company and its decentralization is important

This article Vitalik's blog post on DAO on September 20

Recently, there has been a lot of discussion about the view that highly decentralized DAO will not work. In order to maintain competitiveness, DAO governance should initially be closer to traditional corporate governance. The arguments are always similar: highly decentralized governance is inefficient, while the traditional corporate governance structure composed of the board of directors and chief executive officer has continuously optimized the goal of making correct decisions and creating value for shareholders in the changing world after hundreds of years of evolution. The idealists of DAO naively assume that the decentralized egalitarian ideal can go beyond this, while attempts to do so in the traditional enterprise sector can only achieve negligible success at best.

This article will discuss why this position is often wrong, and provide a different and more detailed view to explain what different types of decentralization are important in. In particular, I will focus on three important situations of decentralization:

  • Decentralization can make better decisions in concave environments, where the average of diversified and even naive compromise forms may be better than the consistency and focus brought by centralization.

  • Decentralization can resist censorship: applications that need to continue to run while resisting attacks from powerful external actors.

  • Decentralization can be trusted and fair: DAO plays a role similar to nation state in applications, such as providing basic infrastructure, so predictability, robustness, neutrality and other characteristics are more valuable than efficiency.

Centralization is convex, decentralization is concave

See the original post: https://vitalik.ca/general/2020/11/08/concave.html

One way to categorize the decisions you need to make is to see if they are convex or concave. When making a choice between A and B, we will not consider the problem of A and B itself first, but a higher question: are you more willing to compromise between A and B or toss a coin to choose one? In terms of expected utility, we can use charts to express this difference:

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If a decision is concave, we would rather compromise; if it is convex, we would rather toss a coin. Generally, we can more easily answer the high-level question of whether compromise or coin toss is better than answering the first order questions of A and B themselves.

Examples of convex decisions include:

  • Pandemic response measures: A 100% travel ban may help to keep the virus out of the door. A 0% travel ban will not stop the virus, but at least it will not cause inconvenience to people. But 50% or 90% of the travel ban is the best of both worlds.

  • Military strategy: It may be reasonable to attack Line A and Line B, but dividing your army into two parts and attacking means that the enemy can easily deal with two parts one by one

  • Technology selection in encryption protocol: It may be meaningful to use technology A and technology B, but some mixing between them will only lead to unnecessary complexity, and even increase the risk of mutual interference between them.

Examples of concave decisions include:

  • Judicial decision: The average value between two independently selected decisions may be more likely to be fair than the random selection of one of the two decisions, but not completely absurd.

  • Public goods funding: In general, it is more effective to provide $X to each of two promising projects than to give $2X to one without giving the other. Compared with that from X to 2X, having any funds has a greater role in promoting the ability of the project to achieve its mission.

  • Tax rate: Due to the secondary deadweight loss mechanism, the tax rate of X% is usually only a quarter of the tax rate of 2X%, which is harmful, and has more than half the effect in increasing income. Therefore, a moderate tax is better than a choice between low/no tax and high tax.

When the decision is convex, the decentralized decision-making process is easy to lead to confusion and low-quality compromise. On the other hand, when the decision is not clear, relying on the wisdom of the masses can give a better answer. In these cases, a DAO like structure with a large number of different inputs for decision making makes sense. In fact, people who view the world as a more concave place are more likely to see the need for decentralization in a broader environment.

Should VitaDAO and UkraineDAO become DAOs?

Many recent DAOs are different from earlier DAOs (such as MakerDAO), because earlier DAOs were organized around providing infrastructure, while newer DAOs were organized around performing various tasks around specific topics. VitaDAO is a DAO that supports early longevity research, and Ukraine DAO is an organization and funding DAO that is related to helping Ukrainian war victims and supporting Ukraine's national defense. Does it make sense for these to become DAOs?

This is a delicate question. We can get a possible answer by understanding the internal operation of the Ukrainian DAO itself. A typical DAO tends to "decentralize" by aggregating large amounts of money into a pool and using token holders to vote to fund each distribution. On the other hand, UkraineDAO works by splitting its functions into many pods, each of which works independently as much as possible. Top level governance can create new pods (in principle, governance can also provide funds for pods, although so far, funds only flow to external organizations related to Ukraine), but once a pod is created and resources are given, its functions mainly depend on its own. Internally, each pod does have leaders and operates in a more centralized manner, although they still try to respect the spirit of individual autonomy.

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A natural question may be: Isn't this "DAO" a renaming of the traditional concept of multi tier hierarchy? I would say it depends on the implementation: of course, you can adopt this template and turn it into something with authority, just like a typical large company, but you can also use the template in a very different way.

Two things that help ensure that organizations built in this way will actually become meaningful decentralization include:

A truly highly autonomous pod, in which the pod receives resources from the core. If they want to continue to obtain these resources, they will occasionally check whether they meet the task and whether they are incompetent. Otherwise, they will completely act on their own and will not "accept orders" from the core.

Highly decentralized and diversified core governance. This does not require a "governance token", but it does require more extensive and diversified core participation. Generally, extensive and diversified participation is a huge burden on efficiency. However, if (1) is met, then the pod is highly autonomous, and the core needs to make fewer decisions, then the impact of lower top governance efficiency will become smaller.

Now, how does this fit into the "convex and concave" frame? Here, the answer is roughly as follows: the (more dispersed) top layer is concave, and the (more concentrated in each pod) bottom layer is convex. It is usually better to give a pod X than to give it $0 or $2X, and it will not cause great losses due to compromise or "inconsistency" in guiding different decisions. However, in each individual pod, it is more important to have a clear and firm point of view to guide decision-making and to be able to adhere to many synergistic choices.

Decentralization and resistance to review

The reason why the decentralization of cryptocurrencies is most often cited publicly is anti censorship: DAO or protocols need to be able to operate and protect themselves against external attacks (including from large companies or even state actors). This has been discussed publicly and in detail, so there is no need to repeat it, but there are still some important nuances.

The two most successful anti censorship services used by many people today are The Pirate Bay and Sci Hub. Pirate Bay is a hybrid system: it is BitTorrent's search engine, which is a highly decentralized network, but the search engine itself is centralized. It has a small core team, dedicated to keeping it running, and uses the mole strategy to protect itself: when the hammer falls, it hides and reappears elsewhere. Pirate Bay and Sci Hub often change their domain names, rely on arbitrage between different jurisdictions, and use various other technologies. These strategies are centralized, but they have both succeeded in defense and product improvement agility.

DAO is not like The Pirate Bay and Sci Hub; DAO behaves like BitTorrent. BitTorrent really needs to be decentralized for a reason: it needs not only anti censorship, but also long-term investment and reliability. If BitTorrent is shut down once a year and all its seeders and users are required to switch to a new provider, the network quality will rapidly decline. DAOs that require anti censorship should also belong to the same category: the services they should provide should not only avoid permanent censorship, but also avoid simple instability and destruction. MakerDAO (and Reflexer DAO that manages RAI) is a good example. The DAO running a decentralized search engine may not be: you can build a regular search engine and use Sci Hub style technology to ensure its survival.

Decentralization is credible and fair

Sometimes, the main concern of the DAO is not to resist the needs of the nation-state, but to assume certain functions of the nation-state. This usually involves tasks that can be described as "maintaining basic infrastructure". Due to the weak ability of the government to supervise the DAO, the structure of the DAO needs to have greater self supervision ability. This requires decentralization.

Of course, in fact, it is impossible to completely eliminate the information asymmetry and inequality and the resulting decision-making problems, but what if we can achieve 30%?

Consider three incentive examples: algorithmic stable currency, Kleros court and Optimism retroactive fund mechanism.

  • The algorithm stable currency DAO is a system that uses financial contracts on the chain to create encrypted assets. Its price tracks some stable indexes, usually not dollars.

  • Kleros is a "decentralized court": a DAO whose function is to make an award on arbitration issues, such as "Has Github submitted an acceptable submission for the reward on the chain?"

  • Optimism's retroactive funding mechanism is an integral part of Optimism DAO. It retroactively rewards projects that provide value to Ethereum and Optimism ecosystems.

In these three cases, subjective judgment is required, which cannot be automatically completed by a piece of on chain code. In the first case, the goal is to measure some price indexes reasonably and accurately. If the stable currency tracks USD, you only need ETH/USD price. In the event of hyperinflation or other reasons for giving up the US dollar, the stable currency DAO may need to manage reliable online CPI calculations. Kleros makes an inevitable subjective judgment on any question submitted to it, including whether the submitted question should be rejected because of "immorality" Optimism's task of tracing funds is one of the most open subjective questions: which projects have completed the most useful work for Ethereum and Optimism's ecosystem?

These three cases inevitably need "governance", and governance is also quite stable. In all cases, whether from the outside or inside, governance can be attacked, which can easily lead to very big problems. Finally, governance not only needs to be robust, but also needs to convincingly convince the vast and distrustful public that it is robust.

The Achilles' heel of algorithm to stabilize currency: oracle

The stability of the algorithm depends on the oracle. In order for the smart contract on the chain to know whether the value of DAI is 0.005ETH or 0.0005ETH, it needs some mechanisms to learn the (off chain) price information of ETH/USD. In fact, this "oracle" is the main place where the algorithm stable currency can be attacked.

This leads to a security problem: the algorithmic stable coin cannot safely hold more collateral, so it cannot issue more units than the market value of its tokens (such as MKR, FLX...), because if it does, it will become a token to buy half of the tokens, use these tokens to control the oracle, and it is profitable to steal funds from users by providing bad oracle values and clearing them.

This is a possible alternative design for the stable coin oracle: add an indirect layer. Posts referencing ethreasear.ch:

We have established a contract with 13 "suppliers"; The answer to the query is the median of the answers returned by these suppliers. Vote once a week, and the oracle token holder can change one of the providers

The security model is simple: if you trust the voting mechanism, you can trust the output of the oracle unless seven suppliers are destroyed at the same time. If you trust the current set of oracle providers, even if you do not trust the voting mechanism at all, you can trust the output for at least the next six weeks. Therefore, if the voting mechanism is broken, the participants of any application that relies on the oracle will have time to exit in an orderly manner.

Please note the non corporate nature of the proposal. It involves depriving governance of the ability to act quickly, and intentionally spreading the responsibility of prophecy to a large number of participants. This is valuable for two reasons. First of all, it makes it harder for outsiders to attack the oracle, and it also makes it harder for new coin holders to quickly take over the control of the oracle. Secondly, it makes it more difficult for oracle participants themselves to collude to attack the system. It also reduces the oracle extractable value, where a single supplier may deliberately delay publishing to make personal profits from clearing (in a multi vendor system, if one supplier does not publish immediately, other suppliers will publish soon).

The fairness of Kleros

The "decentralized court" system Kleros is a very valuable and important infrastructure of the Ethereum ecosystem: Proof of Humanity uses it, various "smart contract error insurance" products use it, and many other projects regard it as a "final decision".

Recently, whether the decision-making of the platform is fair has aroused some public concerns. Some participants put forward cases to try to claim from the decentralized smart contract insurance platform that they think they deserve. Perhaps the most famous of these cases is Mizu's report on Case # 1170. The case evolved from a slight verbal interpretation dispute to a broader scandal, because some people accused Kleros's own insiders of coordinating efforts and investing a lot of tokens to promote the decision in the direction they want. Participants in the debate wrote:

The court's decision making process based on incentives... was, on all appearances, undermined by a developer who owned a very large (25%) stake in the court.

Of course, this is only one aspect of an issue in the wider debate, where the Kleros community decides who is right and who is wrong and how to respond. However, from the point of view of this individual case, what is important here is that the whole value proposition of something like Kleros depends on its ability to convince the public that it is strongly protected from such centralized manipulation. For something like Kleros to be trusted, it seems necessary that no one should own 25% of the shares in the High Court. Whether through more widely distributed token supply or more use of non token driven governance, a more credible form of decentralized governance can help Kleros completely avoid such concerns.

Optimism retroactive funds

Optimism's first round of retroactive funding results were selected by 24 "badge holders" through a second vote. In the second round, more badge holders may be used, and the ultimate goal is to transfer to a system where more citizens control the retroactive allocation of funds, possibly through some multi-layer mechanisms involving lotteries, subcommittees and/or authorizations.

There is some internal debate about whether there are more and fewer citizens: does "citizen" really mean closer to "senator", an expert contributor who has a deep understanding of Optimism ecosystem, and whether it should be a position for almost anyone? Are you significantly involved in the Optimism ecosystem, or in between? On this issue, my personal position has always been to develop towards more citizens, and solve the problem of low governance efficiency through the second layer of authorization, rather than adding sacred centralization to the governance agreement. A key reason for my position is the possibility of insider trading and self trading.

Optimism retroactive funding mechanism has always been aimed at combining with the expected speculative ecosystem: public welfare projects that need funds now can sell "project tokens", and anyone who buys project tokens is entitled to receive compensation for huge retroactive funds in the future. However, whether this mechanism can operate normally depends on whether the retroactive fund part works normally and is easily affected by the destruction of the retroactive fund mechanism. Some attack examples:

  • If some people have decided how they will vote on an item, they can buy (or short if the price is too high) their item tokens before issuing a decision.

  • If some people know that they will vote on a particular project later, they can buy project tokens in advance and then deliberately vote for it, even if the project is not actually worth funding.

  • The fund decision-maker can accept bribes from the project.

There are usually three ways to deal with these types of corruption and insider trading:

  • Retroactively punish malicious decision makers.

  • Actively filter higher quality decision makers.

  • Add more decision makers.

Enterprises usually focus on the first two, using financial supervision and wise punishment for the first, and conducting face-to-face interviews and background checks for the second. The decentralized world has few opportunities to use such tools: project tokens may be traded anonymously, the recourse of the DAO to the external judicial system is limited, and the remote and online nature of the project and the desire for global inclusiveness make it more difficult for it to do background research and informal on-site "olfactory testing" of personality. Therefore, the decentralized world needs to pay more attention to the third technology: allocate decision-making power to more decision-makers, so that each decision-maker will have less power, so collusion is easier to report and expose.

Should DAOs learn more from corporate governance or politics?

The main "innovation" of Curtis Yarvin, an American philosopher, is that companies are more efficient and optimized than governments. Therefore, we should improve governments by making them look more like companies (for example, far from democracy and closer to monarchy). He recently wrote an article expressing his ideas on how to design DAO governance. Not surprisingly, his answer involves drawing on the concept of traditional corporate governance. From his introduction:

Since the beginning of the industrial revolution, the basic design of British and American limited liability companies has remained basically unchanged - historians with opposite views may argue that the industrial revolution may actually be an enterprise revolution. If the shareholding system design is not completely optimal, we can expect it to be almost optimal.

Although there are classification differences between these two types of organizations - we can call them first order (sovereign) and second order (contractual) organizations - it seems that there are very effective second order organizations in today's society, but there is no very effective first order organization.

Therefore, we may know more about the secondary organization. Therefore, when designing DAO, we should start from corporate governance, not politics.

Yarvin's article correctly identifies the key difference between "first order" (sovereignty) and "second order" (contract) organizations. In fact, the exact difference is just the part of the topic about credible fairness in my article above. However, Yarvin's article soon made a big and surprising mistake. He immediately turned to corporate governance as a better starting point for how DAO should operate. This error is surprising, because the logic of this situation seems to almost directly imply the opposite conclusion. Because DAO does not have higher sovereignty than them, and usually explicitly provides services reserved for sovereignty (such as currency and arbitration), this is the design of sovereignty (political science), not the design of corporate governance. DAO has more to learn from political science.

It is commendable that the second part of his article does advocate an "hourglass" model, which combines decentralized task allocation, accountability and centralized management and execution. However, it has been recognized that DAO design needs to learn at least as much from the first level organization as from the second level organization.

The reason why sovereign countries are inefficient and companies are efficient is the same as the reason why number theory can prove many things but abstract group theory can prove much less: companies fail less and accomplish more because they can make more assumptions and have more powerful tools to use. If necessary, the company can rely on local sovereign countries to defend them and provide external legal systems they can rely on to stabilize their incentive structure. On the other hand, in sovereign countries, the biggest challenge is usually what to do when the incentive structure is attacked and/or faced with the risk of total collapse. No external giant is ready to support it.

The biggest problem in designing a successful governance system for a sovereign state may be what Samo Burja calls the "succession problem": how to ensure the continuity of the system when it is managed, retired and transferred from one group to another. Burja wrote that companies usually do not solve this problem at all:

Silicon Valley is keen on "subversion", because we are used to the succession problems that remain unsolved in discrete institutions such as companies.

Finally, DAOs need to address the issue of succession (in fact, given the high frequency of "getting rich and retiring" among early adopters of encryption, some DAOs have had to deal with succession issues). The form of monarchy and similar companies is often difficult to solve the problem of succession, because the institutional structure is closely linked with the habits of specific people, which is either difficult to hand over, or the risk is high. Democracy and other more decentralized political forms have at least one theory on how to make a smooth transition. Therefore, I believe that for this reason, DAO needs to learn more from the more liberal and democratic political school, rather than from corporate governance.

Of course, in some cases, the DAO must complete specific complex tasks, and it may be a good idea to use a form similar to that of a company to complete these tasks. In addition, the DAO needs to deal with unexpected uncertainties. A system designed to operate in a stable and unchanging manner around a set of assumptions, when faced with extreme and unexpected changes in these situations, it really needs some brave leader to coordinate the response. A typical example of the latter is the stable currency dealing with the collapse of the US dollar: when a stable currency DAO evolves around the assumption that it is only trying to track the US dollar, what tracking will happen when suddenly faced with a world where the US dollar is no longer viable, and needs to quickly switch to a certain CPI?

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If the dollar is no longer a viable reference asset, the stylized chart of the internal experience of the RAI ecosystem will unexpectedly transition to a CPI based system.

Here, methods inspired by corporate governance may look better, because they provide a ready-made model to deal with the problem that the founders organize a fulcrum. But facts have proved that the history of the political system also provides a model that is very suitable for this situation, and covers the issue of how to return to the decentralization model after the crisis: the election habit of the Roman Republic to temporarily appoint dictators in response to the crisis.

In fact, we may only need a few DAOs that look more like political science than corporate governance. But what really matters. A stable currency does not need to be efficient; It must first be stable and decentralized. A decentralized court is similar. A system that guides funds for a specific cause - whether Optimism retroactive funds, VitaDAO, Ukraine DAO or others - is being optimized for a purpose that is more complex than profit maximization. Therefore, a coordination solution other than shareholder profits is needed to ensure that it keeps the funds used for the intended purpose.

So far, even in the cryptocurrency world, the organizations with the largest number will become the second level organizations of "contracts" and ultimately rely on the support of the first level giants. For these organizations, simpler, leader driven and agile governance is usually meaningful. But this should not disperse the fact that the ecosystem will not survive without some forms of non corporate decentralization to maintain the stability of the whole thing.