The Democratic Myth of DAOs: The road to autocracy.
Decentralised Autonomous Organisations (DAOs) are entities that employ blockchain technology and smart contracts to govern and manage digital assets. In principle, DAOs can embody any political theory, but the prevailing narrative often aligns them with democratic ideals. Through voting-based models, DAOs are seen as pathways to decentralise power, disrupting traditional organisational structures and embodying Web3’s ethos of participant empowerment and self-governance.
As DAOs evolve and proliferate, there’s an emerging disconnect between these democratic principles and their reality. DAOs, under current models and behaviours, may unintentionally foster autocracy, or at least oligarchy, rather than enable true decentralisation and democratisation.
They merely give the illusion of democracy.
Thesis
Decentralised Autonomous Organisations (DAOs), despite their promise of radical decentralisation and democratic ethos, are not immune to the inadvertent slide towards autocracy.
The crux of the problem lies not in the DAOs’ intent, but in what they are not. While they streamline operations and reduce friction as tools, they don’t inherently transform human behaviour or effect systemic or paradigmatic changes.
Consequently, they may inadvertently hasten the reenactment of historical political patterns within their own microcosms, leading to the centralisation they seek to resist. This environment is ripe for political players who, posing as ‘protectors of the people’, can exploit the system for personal gain, leading to an unintended concentration of power.
The Road To Autocracy
I. DAOs: Initial Stages as Aristocracy or Democracy
DAOs usually adopt an aristocratic or democratic model at inception.
In an aristocratic model, the founders maintain significant control, which is evident in the early stages of Uniswap, a prominent decentralised exchange. The founders initially held sway over the treasury, reflecting their vested interests and expertise.
Conversely, a democratic model emphasises equal power distribution among all members.
Nevertheless, these initial states are not static. Influenced by token economics, market forces, and community dynamics, DAOs often transition towards oligarchy.
This shift, exemplified by Uniswap’s decision to change tacts and distribute UNI tokens to the community, highlights the complex interplay of DAO governance, shaped by internal objectives as well as internal and external pressures.
II. DAOs and the Shift Towards Oligarchy
DAOs, despite being designed to promote equitable wealth and governance distribution, can inadvertently give rise to oligarchies.
This phenomenon predominantly occurs when DAOs are susceptible to token concentration and lack Sybil resistance.
Consequently, a small number of token whales can wield disproportionate influence through the power of their wallet. The inherent instability in this oligarchic setup, characterised by the reckless pursuit of wealth by a few, is always frowned upon by the community and necessitates a revolution to redress the balance.
An example of the shift towards oligarchy is the case of YFI, the governance token of Yearn Finance.
Initially distributed to users who provided liquidity to the protocol, YFI tokens were quickly bought up by large investors, leading to a significant portion of voting power being consolidated within a small group of token holders.
III. Revolution and the Transition to Democracy
Discontent caused by oligarchic DAO governance can instigate a revolution, often taking shape as a hard fork or other similar mechanisms. In the aftermath of such a revolution, the ideal transition for the DAO is towards a democratic model, which equally distributes power among all members. This transition symbolises the collective decision-making triumph over power concentration.
An example of this revolutionary shift is the hard fork of Steem into Hive. This was caused by community dissent against the perceived centralisation of power when Justin Sun, founder of Tron, purchased Steemit Inc., which held a significant amount of pre-mined Steem tokens. In response, a considerable part of the community created Hive, a new blockchain that was an almost identical copy of the Steem blockchain but excluded the controversial “ninja-mined stake” of Justin Sun and a few other accounts seen as allied with him.
This was effectively a “revolution” by a part of the community to redistribute power and associated wealth that had been consolidated by Justin Sun’s acquisition. Hive, in its aftermath, aimed to operate under a more democratic and decentralised governance model. This instance illustrates how community dissatisfaction can catalyse significant governance changes and redistribution of power and wealth.
IV. The Perils of Excessive Democracy
Though appealing, the concept of a democratic DAO presents significant challenges.
When each member holds equal office and policy-determining power — an excessive democracy — it can result in less than optimal decision-making.
The inefficiencies stem from members lacking either the necessary knowledge or time to make informed decisions. Memes in the crypto sphere, often guiding popular opinion, further distort this decision-making process. Thus, excessive democracy might hinder optimal DAO governance.
This predicament is evident in SushiSwap’s evolution. Following a contentious inception, SushiSwap gravitated towards a more democratic model, empowering token holders to make decisions on everything from treasury management to protocol parameters. However, this shift led to delays and inefficiencies due to the time required for consensus, negatively impacting the project’s ability to react swiftly to market changes.
V. The Transition Towards Autocracy
The failure of a democratic DAO to fulfil its intended mission can catalyse a transition towards autocracy.
Uninformed voting and meme-driven influences can lead to dysfunction in a DAO, pushing communities to reassign their voting power to individuals who pledge to protect their interests.
Such self-declared “protectors of the people” amass power, morphing the DAO from a decentralised democratic entity into an autocracy. The consequential concentration of power within the hands of the politically adept, rather than those dedicated to the DAO’s objectives, starkly contradicts the DAO’s foundational ethos.
The evolution of Steemit, a blockchain-based social media platform on top of Steem, exemplifies this shift towards autocracy. Following Steemit’s acquisition by Justin Sun and the Tron Foundation, a power struggle ensued. This struggle climaxed with Sun using exchanges’ STEEM tokens to impose his decisions, triggering significant controversy. This incident reveals how a figure purporting to protect community interests can instigate autocratic governance, straying from the initial democratic ethos.
Counter Arguments
There are notable arguments against the idea that DAOs inevitably devolve towards autocracy.
First, some might point out that many DAOs have mechanisms designed to prevent power concentration, such as governance token distribution schemes and quadratic voting. These measures aim to distribute power equitably, preventing token whales from exerting undue influence.
However, despite these mechanisms, power dynamics within DAOs can still shift. Quadratic voting, for instance, can be gamed by Sybil attacks unless applied at the delegate level. Moreover, wealth disparity within the crypto space can still lead to power consolidation, despite attempts at equitable token distribution.
Second, critics could argue that initiatives to increase voter participation, such as incentivised voting or delegation, can counterbalance the potential for mob rule and ensure a well-rounded decision-making process.
These initiatives have their shortcomings. Incentivised voting could encourage vote participation for rewards rather than careful consideration of decisions, undermining the quality of decision-making. Delegation or liquid democracy, while useful for those who lack time or expertise, can unintentionally centralise power in the hands of a few that are better at politics than being experts in the DAOs purpose, leading to a pseudo-autocracy.
While these counterarguments raise valid points, they do not invalidate the concerns about DAOs potentially devolving into autocracy given they present no systematic or paradigm changes.
DAOs must be aware of these risks and actively work to mitigate them, ensuring that the principles of decentralisation and democratic participation remain at the forefront of their governance structures.
Conclusion
This essay has explored potential pitfalls in the governance of Decentralised Autonomous Organisations (DAOs), primarily highlighting that, despite their revolutionary ethos and promise of decentralisation, they may inadvertently devolve into autocracy.
Remembering that DAOs are mere tools that don’t inherently change human behaviour or systemic structures is critical.
Despite streamlining operations and digitising governance, they risk accelerating the pace at which historical patterns repeat themselves within each DAO’s microcosm. Therefore, a more profound systemic or paradigm change needs to accompany the advent of DAOs.
We need to not only develop novel ways of structuring socio-political systems but also fundamentally rethink the concept of governance itself. Alternatively we must leverage DAOs as only an efficiency increase and lean on battle tested governance systems that are in use in the world today.
Education, transparency, and proactive measures against wealth concentration should be integral to this transformation. DAOs offer a unique opportunity to reshape our world, but they are not a panacea to governance.
The promise of DAOs can be significant, but their ultimate success hinges on our ability to understand human behaviour, not the technology.
About me: I’m Benedict Dixon, and I spend my time thinking about how new technologies can solve real-world problems. I help organisations understand and use these tools in ways that actually make sense for their needs.