Balancing Tyranny In DAOs

In the last year the rise of Decentralized Autonomous Organizations (more commonly referred to as DAOs) have gone parabolic. What was once a method of democratizing in the most technologically savvy circles of individuals has rapidly become a popular phenomena on the entire cryptocurrency sector. It is even in some cases hailed as the future of democracy; a way to securely vote and have a record of that vote and the result forever immortalized on a blockchain. However, DAOs are still in their infancy and as a result are having to confront many issues related to the reality of democracy. Some of those problems stem from the technology being what it is, while others are as old as the concept of governance itself.

DAOs are great in the sense that they take a collective of like minded people with a common goal and distribute power in a psudo-anonymous or completely anonymous manor. The initial problem with this is one of concentrating power. Say you want to start a DAO with a bunch of strangers because you all love a work of art. How do you, the founder or founders, create a system that has strong resistance to power concentration?

Your first idea was probably “Democratize it! One person, one vote!” This is easier said then done. As with any DAO the basis of your voting mechanism will have to be the venerable token. You already have a problem to face now: how do you distribute those tokens to your constituents? Do you attempt to distribute them one token to one person? Or do you instead opt to sell them at a floor price and people can buy any set amount? The first one is difficult to do and in many cases is ditched in favor of the second option. After all, how do you ensure one token issued per person? Only one wallet per token? That makes the project vulnerable to bots snatching them up. Only issue to active members via targeted airdrop? That only concentrates power in a select few in many cases forms an Oligarchy within the DAO. Verifying proof of humanity somehow before issue? You lose of all benefits of privacy and still potentially can be exploited (though this method has more potential to explore than the last two that I may explore in a future post). It’s important to note that many DAOs opt for the method of simply selling a token to anyone who is interested to buy for the simple reason that it serves two goals: to get interested people to vote and participate on the governance, while also providing a cash infusion to jump start the DAO with. It’s more economic driven then governance driven. It is this path that is most taken that leads us down farther into our next conundrum of DAO building.

Regardless, even with fair launches, airdrops, and other precautions to the problems listed above power in most modern DAOs tends to concentrate in the hands of a single or a few dozen wallets/owners. The actual repercussions of this are major, with the main one being it becomes hard to influence the DAO in any meaningful way as a minority holder of the governance token. In effect owning a few tokens is the same as owning none. You are a second class of citizen. Your voice will never be heard even though you technically are “represented” and there is nothing nonfunctional about the system. You are doomed to lose a vote to major holders disagree with because even if wallets that agree with you abound very few if any will have the same total tokens, meaning you will need to find around a million people to vote with you. It just becomes impractical. This is tyranny of the minority (majority holder). Equality of opportunity not equity of opportunity. So now our problem, or rather our question, is how do we ensure equity in our voting system not just equality? How can we reward our biggest supporters without sacrificing the decentralized aspect of DAO?

For our first choice, we have compartmentalization. The President of a nation cannot manually read all the paperwork to draft useful regulation by themselves. That’s why in governments usually divide into many departments, each one handling the regulation and management of a specific field (say infrastructure or economics). While many proposals have to be approved by said President, they are researched and drafted by the department that specializes in that field. In a DAO this would look something like the following. The main part of the DAO serves the function of the President in our example; to delegate authority to committees that specialize in a particular field. The committees, which would be called sub-DAOs, are issue their own governance token, set field of operation, and are issued tasks to come up with and propose solutions to. Once a proposal has been created and ratified through the voting in the sub-DAO it is forwarded to the DAO proper to be voted on by the collective. These committees can be standing (permanent parts of the DAO) or temporary (created to solve a single problem then dissolved).

Covering the benefits of this approach first, it does help to balance free market token issuance. By dividing power up, maintaining the primary DAO, and setting a reasonably high floor price for all tokens and sub-DAO tokens the laws of economics come in to help balance power. Paired with the prevention of a single wallet owning more than x number of tokens and it becomes a lot of trouble to attempt to game the system. It becomes expensive, multi-faceted, and impractical which all are great for lowering whale ownership status in a gentle way. In addition, it also helps improve equity in the sense that there are many smaller playing fields. People can buy into the sub-DAO and voice their opinions and be heard better than the main DAO.

There are downsides to this method though. For one, you do not solve the main issue of equity. While many committees and smaller spaces allow for more voices to be heard and proposals to be raised without majority holder intervention, the proposal still has to be ratified by the main DAO token holders. You may get your issue to the ballot box, but only for it to die in the election.

The next option for our minority tyranny problem is multiple houses, or facets, or voting on issues. This may sound similar to the last option but there is a distinct difference. In this method, the DAO issues not one, but two governance tokens. The first batch is simple majority voting at play; a lower house. There is no limit on the number of tokens a single entity can buy, meaning our whales will be found here. This lower house has set, immutable rules on how few or many votes it takes to reach quorum, how many signaling wallets it takes for a proposal to get a vote, and so on. Then comes the second batch of tokens, our proverbial upper house. This batch is designed with single entity holding in mind, a one person one vote system. How does it do this with all the problems we covered before? Inconvenience for corruption.

As one example for how to implement this, a DAOs upper house could require being doxxed or showing proof of humanity to hold a token and vote. The limited quantity of tokens and robust methods of voting in members, term limits, and explicit power would all keep this part of the DAO grounded in reality and highly accountable to the rest of the constituent members. Tokens are issued to the winner of an election, stay in that wallet and cannot be moved to another, and return to the DAO automatically at the time of the next election. This method of the multiple houses’ implementation allows a check to the power of the minority (whales), while also ensuring that no single entity can easily push a proposal through the system. It is fair to both the minority and majority. However, there are certainly issues with this method. The most pronounced is gridlock. If quorum requires both houses to pass at a certain percent, some issues will end up locked in a voting war between both houses. There are plenty of examples of this in modern Democracies, and the result is nothing getting done while the members fight. If there is enough goodwill between members and houses this issue is mitigated if not removed entirely but the issue remains a probability nonetheless. A good read to start researching this type of governance would be none other than the United State’s Constitution. The original vision of that document lays out a lot of good groundwork, and we can see the modern day shortcomings to solve.

For our final example of a possible DAO, allow me to present Utilitarian governance. After being initially funded and a token issued, a DAO that uses this method of governance relies of proof of work towards the DAO goal. A task is created by usual tokenomics, and once said task is completed voting tokens are rewarded to the winner/winners and taken from the losers. The beauty of this system is if the person wishes to keep their stake of the voting tokens, they have to advance a goal laid out by the DAO. To prevent this system from being gamed the goals would have to be incredibly detailed and planned out before launch, but under the right conditions this system would always be progressing in a direction instead of stagnating. There are plenty of other issues as well so this is more of a broad stroke topic as less research has gone into it.

For all this talk of preventing tyranny of the minority aside, there is another issue to contend with: tyranny of the majority. While this problem is mitigated to certain degrees by some of the systems above it still warrants discussion. Most DAOs have very few requirements for a vote to be staged. While this can be useful for how quickly action can be taken, there are drawbacks to a less lawful (read bound by less red tape not actual lawlessness) approaches is that quick action can be used for bad as much as good. Consider our whale from earlier: if they are clever enough they can come up with a proposal that becomes a vote, which then they can win simply by their own massive token holdings. Things like time and due process are slow and feel cumbersome in DAOs, but they are an absolute necessity to allow a larger community to flourish. Due process ultimately is a protection of the individual from the mob, and a mob from an individual. This is an extensive topic to cover so I may revisit it in a future post.

Ultimately, any form of governance be it DAO or an entire country relies on the moral integrity and good will of its constituents. Corruption will never fully disappear even if measures are taken to mitigate it. The only difference between an authoritarian and democratic government is how many corrupt people there are in the process. Compounding that troubling fact, we also have to acknowledge that we by building DAOs are trying to create a new system that is a hybrid of a failing old one. It’s a shaky foundation yet we champion it. In the future for DAOs to truly reach their potential they must fix both the foundational issues of democracy as a concept.