Recently, there has been a lot of discussion focusing on the view that a highly decentralized DAO cannot operate, and that DAO governance should gradually become more traditional corporate governance in order to remain competitive. The arguments are largely the same: highly decentralized governance is inefficient, and traditional corporate governance structures with boards of directors, CEOs, etc., or similar structures, have evolved over hundreds of years in an effort to adapt to a changing world. Make good decisions and create value for shareholders. DAO idealists naively believe that egalitarian ideals of decentralization can perform better, yet attempts to do so in the traditional corporate sector have had little success at best.
This post will argue why this position is often wrong and discuss in detail the importance of different kinds of decentralization in different situations. I will specifically focus on three cases of decentralization:
- Decentralization is about making better decisions in a concave environment: an environment in which pluralism and even naive compromises are, on average, likely to outperform the consistency that centralization brings.
- Censorship-resistant decentralization: The application needs to be resistant to attacks by powerful external actors while it operates.
- Decentralization is trusted fairness: DAOs undertake state-like functions such as basic infrastructure provision, so features like predictability, robustness, and neutrality are more important than efficiency.
Centralization is convex, decentralization is concave
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One way to categorize the decisions that need to be made is whether they are convex or concave. In choosing between A and B, we first look not at the A and B problem itself, but at a higher-order problem: are you willing to take a compromise between A and B, or are you willing to flip a coin to decide? In terms of expected utility, we can express this distinction with a graph:
If a decision is concave, we choose to compromise, if it is convex, we choose to flip a coin to decide. Often, we can more easily answer higher-order questions: “compromise” or “flip a coin” than answer first-order questions that focus on A and B themselves.
Examples of convex decisions include:
- Responding to epidemics: 100% travel bans may work to stop the virus, 0% travel bans cannot stop the virus, but at least not inconvenience people, but 50% or 90% travel bans This can lead to bad results on both counts.
- Military strategy: It might make sense to attack on line A, and it might make sense to attack on line B. But dividing the army in half and attacking on both sides means that the enemy can easily deal with two armies one by one.
- Technology choices in encryption protocols: It may make sense to use technology A, and it may make sense to use technology B, but some mix between the two often leads to unnecessary complexity and even increases the risk of the two interfering with each other.
Examples of concave decisions include:
- Judicial Decisions: The median of two independent decisions may be fairer and more rational than picking one at random.
- Public Goods Investment: Usually, it is more efficient to give $X to each of two promising projects than to give $2X to one without giving any funding to the other project.
- Tax rate: Due to quadratic deadweight loss mechanics, a tax rate of X% tends to be only one-fourth as harmful as a tax rate of 2X%, but increases revenue by one-half more than the latter. So a modest tax is better than a random choice between low/no tax and high tax.
When decisions are convex, the process of decentralizing decision-making can easily lead to confusion and ineffective compromises. When decisions are concave, relying on the wisdom of the crowd can lead to better answers. In these cases, a DAO-like structure, capable of feeding a large number of different decisions, makes a lot of sense. In fact, those who see the world as more concave in general are more likely to see the need for decentralization in a broader context.
Should VitaDAO and UkraineDAO be DAOs?
Many relatively new DAOs differ from earlier DAOs (such as MakerDAO), which focused on providing infrastructure organization, while relatively new DAOs perform various tasks around specific topics. VitaDAO is a DAO that funds early longevity research, while UkraineDAO funds and organizes activities to help victims of the Ukrainian war, while supporting Ukrainian defense activities. Do they need to be DAOs?
This is a nuanced question, and we can get a possible answer by understanding the inner workings of UkraineDAO itself. A typical DAO tends to be “decentralized,” pooling large amounts of capital into a pool, and token holders vote to fund each distribution. On the other hand, UkraineDAO divides its functions into many units ( pods ), and each unit works as independently as possible. The top management body can create new cells (in principle, the management agency can also fund cells, although so far funding has only been given to external organizations related to Ukraine), but once a cell is created and given resources , it operates largely independently. Internally, individual units do have leadership and operate in a more centralized fashion, although they still strive to follow the spirit of individual autonomy.
A natural question one might ask is: isn’t this “DAO” actually a traditional multi-layered hierarchy? Just a different way of packaging. What I would say is that it depends on the implementation: taking this model can of course morph into the stereotyped tyranny of big corporations, but it’s also possible to adopt it in very different ways.
There are two things that can help ensure that organizations built in this way can form meaningful decentralization:
- A real high degree of autonomy of the unit. Units receive resources from the core, and if the unit wants to continue to acquire these resources, it is occasionally required to be checked to see if its requirements and capabilities meet the requirements. But otherwise, the units act completely independently and do not “listen to” the core.
- Highly decentralized and diverse core governance. This does not require a “governance token”, but it does require broader and more diverse core participation. Often, broad and diverse participation leads to inefficiencies. However, if (1) is satisfied, the cells are highly autonomous, and the core has to make fewer decisions, then the impact of the inefficiency of high-level governance will be smaller.
Now, how does this fit into the “convex versus concave” framework? The answer is roughly the following: The (more decentralized) top layer is concave, the (more centralized in the cell) bottom layer is convex. Giving a unit $X is usually better than giving it a random choice between $0 and $2X. Compromising, or using “inconsistent” principles to guide different decisions won’t hurt too much. But within each individual unit, it is more important to have a clear perspective to guide decision-making and to adhere to many choices that work together.
Decentralization and Censorship Resistance
In cryptocurrencies, decentralization is often thought of as censorship-resistant: a DAO or protocol that needs to continue to function and protect itself in the face of external attacks, including those from large corporations or even governments. This has been talked about publicly for a long time, so I won’t repeat it, but there are some important nuances.
Two of the most successful anti-censorship services currently in use are The Pirate Bay and Sci-Hub. The Pirate Bay is a hybrid system: it is a search engine for BitTorrent, a highly decentralized network. But the search engine itself is centralized, with a small core team dedicated to keeping it running. It defends itself with a whack-a-mole strategy: when the hammer falls, get out of the way and reappear elsewhere. Both The Pirate Bay and Sci-Hub frequently change domain names, take advantage of different jurisdictions, and use a variety of other technologies. This strategy is centralized, but it allows them to succeed in defense and agility in product improvement.
DAO is not like The Pirate Bay and Sci-Hub; DAO is more like BitTorrent. And BitTorrent needs to be decentralized: it needs not only to be censorship-resistant, but also long-term investment and reliability. If BitTorrent was shut down once a year and all its seeders and users were required to switch to a new provider, the network would quickly degrade. Censorship-resistant DAOs should also fall into the same category: they should not only provide services that evade permanent censorship, but also avoid mere instability and disruption. MakerDAO (and the Reflexer DAO that manages RAI) is a good example of this. You can build a normal search engine and use Sci-Hub-style technology to keep it alive.
Decentralization is Trusted Fairness
Sometimes, DAOs also need to take on some of the functions of a nation-state. This often involves tasks that can be described as “maintaining basic infrastructure.” Because governments have less ability to oversee DAOs, DAOs need to be structurally more self-monitoring, which requires decentralization.
Consider three examples of incentives: algorithmic stablecoins, the Kleros court, and the Optimism retroactive funding mechanism.
- Algorithmic stablecoins, DAOs , are systems that use on-chain financial contracts to create cryptoassets whose prices track some stable index, usually (but not necessarily) the U.S. dollar.
- Kleros is a “decentralized court” : as a DAO, its function is to adjudicate on arbitration issues such as “Is this Github submission acceptable for this on-chain bounty?”
- Optimism’s retroactive funding mechanism , part of the Optimism DAO, retroactively rewards projects that have provided value to the Ethereum and Optimism ecosystems.
In all three cases, subjective judgment is required and cannot be done automatically through a piece of on-chain code. In the first case, the goal is to obtain some reasonable measure of the price index. If the stablecoin tracks the USD, then you only need the price of ETH/USD. In the event of hyperinflation or some other reason to abandon the dollar, the stablecoin DAO may need to manage a trusted on-chain CPI calculation.
Kleros will inevitably make subjective judgments about any question submitted, including whether a submitted question should be rejected as “immoral.” Optimism’s retrospective funding mandate is one of the most open subjective questions of all: which projects make the greatest contribution to Ethereum and the Optimism ecosystem?
All three of these situations inevitably require “governance,” and pretty strong governance. In all cases, governance is subject to internal and external attacks that can easily lead to major problems. So governance needs not only to be strong, but also to convince the multitude of publics who distrust it that it is strong.
The Achilles Heel of Algorithmic Stablecoins: Oracles
Algorithmic stablecoins rely on oracles. In order for the on-chain smart contract to know whether to lock the value of DAI at 0.005ETH or 0.0005ETH, it needs some mechanism to know (off-chain) information about the ETH/USD price. In fact, this “oracle” is the main place where algorithmic stablecoins can be attacked.
This leads to a security conundrum: algorithmic stablecoins cannot safely hold more collateral than their speculative tokens (like MKR, FLX…) market cap, and therefore cannot issue more units. Because if it were allowed to do so, it could buy half of the speculative tokens, use those tokens to control oracles, and steal user funds by providing bad/wrong oracle values, liquidating them.
An alternative design of a possible stablecoin oracle is to add a layer of indirection. To quote a post from ethresear.ch:
“We set up a contract with 13 ‘providers’; the answer to the query is the median of the answers returned by those providers. There will be a weekly vote where oracle token holders can replace one of the providers ……
The security model is simple: if you trust the voting mechanism, you can trust the output of the oracle unless 7 providers are corrupt at the same time. If you trust the current oracle provider, you can trust its output for at least the next six weeks, even if you don’t trust the voting mechanism at all. Therefore, if the voting mechanism is compromised, any application participant that relies on oracles has enough time for an orderly exit. “
Note that this proposal somewhat deprives the governor of the ability to act quickly, intentionally spreading the responsibility of the oracle over a large number of participants. This is valuable for two reasons. First, it makes it harder for outsiders to attack oracles, and it also makes it harder for new coin holders to quickly control oracles. Second, it makes it harder for oracle participants themselves to collude to attack the system. It also erodes the extractable value of oracles, in which case one vendor may deliberately delay release in order to profit from liquidation (in a multi-vendor system, if one vendor does not issue immediately, the other people will post soon).
Fairness in Kleros
The “decentralized court” system Kleros is a very valuable and important infrastructure for the Ethereum ecosystem.
Recently, some members of the public have expressed concerns about the fairness of the platform’s decision-making. Some players have launched cases in an attempt to claim compensation they feel they deserve from a decentralized smart contract insurance platform. The most famous of these cases should be Mizu’s report on Case No. 1170. The case went from a minor language dispute to a wide-ranging scandal as it was accused of insiders at Kleros itself collaborating, using large amounts of tokens, to make decisions go the way they wanted. One participant in the debate wrote:
“The court’s incentive-based decision-making process…so far, is being consumed by the devil with a strong (25%) interest in the court.”
Of course, this is just one side of a larger debate, and it will take the Kleros community to figure out what’s right and wrong, and how to deal with it. But, from a broader perspective, what matters is how well a value proposition like Kleros can convince the public that they are protected from such centralized manipulation. For a Kleros-like existence to be trusted, it seems necessary to bar individuals from owning 25 percent of the high court. Whether it’s a broader distribution of tokens, or using other non-token-driven governance, a more trusted form of decentralized governance could help Kleros avoid this concern entirely.
Optimism Retroactive Funding
The results of the first round of Optimism’s retroactive funding were selected by four votes of 24 “badge holders”. There may be more badge holders in the second round, with the eventual goal of transforming it into a retrospective funding distribution system controlled by a wider civic body, such as with some multi-tasking involving classification, subcommittees and/or mandates. Hierarchical mechanism.
There has been some internal debate about whether to have more or fewer citizens: whether “citizen” really means something closer to “senator”, should the citizen be an expert contributor with a deep understanding of the Optimism ecosystem, or Anyone clearly involved in the Optimism ecosystem? Or somewhere in between? My personal stance on this issue has always been to favor more citizens and address governance inefficiencies with a second layer of delegation, rather than adding centralization to the governance protocol. The key reason I hold this position is because of the potential for insider trading and self-dealing.
Optimism’s retrospective funding mechanism has always been designed to integrate with the speculative ecosystem of the future: nonprofit projects that currently need funding can sell “project tokens,” and anyone who buys project tokens is eligible for a lot of retroactiveness later on Funded. However, for this mechanism to work well, the key depends on the normal operation of retrospective funds, but this retrospective funding mechanism is easily damaged, such as:
- If some people have already decided how they will vote on a project, they can buy (or short if the price is too high) their project tokens before publishing their decision.
- If someone knows they will adjudicate on a particular project later, they can buy project tokens in advance and then deliberately vote for it, even if the project isn’t actually worth funding.
- Funding decision makers can accept bribes for projects.
There are generally three ways to deal with these types of corruption and insider trading issues:
- Retroactively punish malicious decision makers.
- Actively filter and seek high-quality decision makers.
- Add more decision makers.
The corporate world typically focuses on the first two, with financial oversight and clear penalties for the first and in-person interviews and background checks for the second. The decentralized world has less recourse to these tools: project tokens may be traded anonymously, and DAOs have extremely limited recourse to outside judicial systems. And the remote and online nature of the project, as well as the call for global inclusivity, make back-to-back and informal in-person “testing” more difficult. Therefore, the decentralized world needs to pay more attention to a third technique: distributing decision-making power to more decision-makers, so that each individual decision-maker has less power, so collusion is more likely to be reported and exposed.
Should DAOs learn more from corporate governance or politics?
Curtis Yarvin, an American philosopher who argues that corporations are more efficient and better than governments, so we should make governments look more like corporations to improve government (eg, away from democracy and closer to monarchy), he recently wrote published an article expressing how he thinks DAO governance should be designed:
“Instead, the basic design of the Anglo-American LLC has remained roughly the same since the beginning of the Industrial Revolution – which a dissenting historian might say may actually have been a corporate revolution. If the design of the AG Not perfect, we can expect it to be perfect.
Although there are taxonomic differences between these two types of organizations – we can call them first-order (sovereign) and second-order
(contract) organization – but it seems that the current society has very effective second-order organization, but not very effective first-order organization.
Therefore, we may know more about second-order organization. Therefore, when designing a DAO, we should start with corporate governance, not political science. “
Yarvin’s post quite rightly points out the key difference between “first-order” (sovereign) and “second-order” (contractual) organizations. But Yarvin’s post is followed by a surprising mistake, when he moves on to say that corporate governance is a better starting point for a DAO to operate. This error is surprising because the logic of this situation almost directly implies the exact opposite conclusion. Because there is no sovereign on top of a DAO, and usually explicitly engages in the business of providing services (such as currency and arbitration), those services are usually sovereignly owned. So what DAO is more worth learning is the design of sovereignty (politics), not the design of corporate governance.
To its credit, the second part of Yarvin’s post does advocate for an “hourglass” model, combining a decentralized layer of consistency and accountability with a centralized layer of management and execution, but that’s already consensus, and that’s how DAOs are designed At a minimum, learning from first- and second-order institutions is required.
Sovereign states are inefficient and corporations are efficient, in the same way that number theory can prove a lot, but abstract group theory can only prove a limited number of things: corporations face fewer failures and achieve more because they can do More settings, more powerful tools to operate. Businesses can rely on local sovereignty to be protected when needed, and rely on external legal systems to stabilize their incentive structures based on this. In sovereign states, however, the greatest challenge is often not having an external Leviathan ready to back them up when the incentive structures come under attack and/or risk total collapse.
When designing successful governance systems for sovereign states, the biggest problem is what Samo Burja calls the “succession problem”: how to ensure continuity when the first group of people retire and the system is taken over by a new group of people. Companies often don’t address this problem at all, Burja writes:
“Silicon Valley is keen on ‘disruption,’ because we’re so used to this inheritance problem that it’s never been addressed in independent institutions like corporations.”
DAOs will eventually need to address inheritance issues (in fact, some DAOs already have to deal with inheritance issues, given that many early adopters of cryptocurrencies are “make enough money and quit”). Monarchies and corporate-like forms often struggle with succession because the institutional structure is so tied to the habits of a particular person that either handover is difficult or there is a huge risk of handing over to whom. A more decentralized form of politics, like democracy, can at least provide theories on how to achieve a smooth transition. So I think DAOs have more to learn from the more liberal and democratic schools of political science than corporate governance.
Of course, DAOs have to accomplish specific complex tasks in some cases, and it would be wise to use some corporate-like form for those tasks. Also, DAOs need to deal with uncertainty from surprises. If a system is designed to operate in a stable and unchanging manner around a set of assumptions, it does require bold leaders to coordinate responses when faced with these extreme and unexpected changes. A classic example of the latter is stablecoins dealing with the collapse of the dollar: when a stablecoin DAO, which has always believed in and committed to tracking the dollar, suddenly finds that the dollar is no longer a viable tracking object, and needs to quickly switch to some kind of CPI, the How to do?
In this case, corporate governance may be an inspiration. Because they provide a ready-made model to deal with this problem: the founder is the fulcrum. But it turns out that political institutions have historically provided a model for dealing with the situation as well, and that model covers the question of how to return to a decentralized model after the crisis is over: the Roman Republic had a convention of electing dictators in Served on an interim term to deal with the crisis.
In fact, we may only need a handful of these DAOs—they look more like political science constructs than corporate governance. But they are what really matters. A stablecoin does not need to be efficient, it must first be stable and decentralized. The same goes for a decentralized court. The systems that fund a particular cause—whether it’s Optimism retroactive funding, VitaDAO, UkraineDAO, or other systems—are far from maximizing profits. A consistent approach beyond shareholder profit incentives is therefore needed to ensure that the system is always using funds for its intended purpose.
By now, most of the organizations, even in the crypto world, will be “contractual” second-order organizations, ultimately relying
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/buterin-its-important-that-daos-are-not-decentralized-in-corporate-autonomous-organizations/
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