Vitalik: Decentralization of DAOs not corporate autonomous organizations is important

Recently, there has been a lot of discussion about the idea that highly decentralized DAOs will not work, and that DAO governance should start to be closer to traditional corporate governance in order to remain competitive. The arguments are always the same: Highly fragmented governance is inefficient, while traditional corporate governance structures consisting of boards, CEOs, etc. have evolved over hundreds of years to optimize making the right decisions and creating shareholder value in a changing world. value goal. The idealists of DAOs naively assume that the egalitarian ideal of decentralization can go beyond this, and attempts to do so in the traditional corporate sector have met with marginal success at best.

This post will discuss why this position is often wrong, and provide a different, more detailed view of where different types of decentralization are important. In particular, I’ll focus on three situations where decentralization is important:

  • Decentralization facilitates better decision-making in concave environments where diversity and even naive forms of compromise may on average outperform the consistency and focus that centralization brings.
  • Censorship-resistant decentralization: Applications that need to continue to function while resisting attacks from powerful external actors.
  • Decentralization is trusted fairness : DAOs take on nation-state-like functions in applications, such as providing basic infrastructure, so features like predictability, robustness, and neutrality are valued over efficiency.

Centralization is convex, decentralization is concave

One way to categorize the decisions that need to be made is to look at whether they are convex or concave . When choosing between A and B, we don’t first consider the question of A and B itself, but a higher-order question: would you rather compromise between A and B or flip a coin? In terms of expected utility, we can express this distinction using a graph:

If a decision is concave, we’d rather compromise, if it’s convex, we’d rather flip a coin. Often, we can answer the higher-order question of whether a compromise or a coin toss is better than if we answer the first-order question of A vs. B itself.

Examples of convex decisions include:

  • Pandemic Response : 100% travel ban may help keep the virus at bay, 0% travel ban will not stop the virus but at least not inconvenience people, but 50% or 90% travel ban It’s the best of both worlds.
  • Military Strategy : Attacking Line A may make sense, and attacking Line B may make sense, but splitting your army in half and attacking just means the enemy can easily deal with both sides 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 of the two often just leads to unnecessary complexity and even increases the risk of the two interfering with each other.

Examples of concave decisions include:

  • Judicial Decisions : The average between two independently chosen decisions may be more likely to be fair than a random choice of one of the two decisions, and less likely to be completely absurd.
  • Public Goods Funding : Generally, it is more efficient to give X dollars to each of two promising projects than to give one 2X dollars and not the other. Having any funding gives a bigger boost to a project’s ability to achieve its mission than going from $X to $2X.
  • Tax rate : Due to the quadratic deadweight loss mechanism, a tax rate of X% is usually only a quarter as harmful as a tax rate of 2X%, while also being more than half as effective in increasing income. So a modest tax is better than a coin flip between low/no tax and high tax.

When decisions are convex, decentralizing the decision-making process can easily lead to confusion and low-quality compromises. On the other hand, when decisions are unclear, relying on the wisdom of the crowd can give better answers. In these cases, a DAO-like structure that uses a large number of different inputs for decision making may make sense. In fact, people who see the world as a more concave place are more likely to see the need for decentralization in a wider context.

Should VitaDAO and Ukrainian DAO become DAOs?

Many recent DAOs differ from earlier DAOs (like MakerDAO) in that earlier DAOs were organized around providing infrastructure, while newer DAOs are organized around performing various tasks around specific topics. VitaDAO is a DAO that funds early longevity research, and UkraineDAO is a DAO that organizes and funds work related to helping victims of the Ukrainian war and supporting Ukrainian defense efforts. Does it make sense for these to be DAOs?

This is a delicate question, and we can get a possible answer by understanding the inner workings of the Ukrainian DAO itself. A typical DAO tends to be “decentralized” by aggregating large amounts of funds into a pool and using token holder votes to fund each distribution. On the other hand, UkraineDAO works by splitting its functionality into many pods, each working as independently as possible. Top-level governance can create new pods (in principle, governance can also fund pods, although so far funding has only gone to external organizations related to Ukraine), but once a pod is created and resources are given, its functionality Mainly depends on its own. Internally, individual pods do have leaders and operate in a more centralized fashion, although they still try to respect the spirit of individual autonomy.

JZKHPZfc99NmeJgmZlp1irjfojAwrFDipxIhsFGi.png

A natural question might be: Is n’t this “DAO” a renaming of the traditional concept of multi-level hierarchy? I’d say it depends on the implementation: it’s certainly possible to take this template and turn it into something authoritative, like a typical big company, but it’s also possible to use templates in very different ways.

Two things that help ensure that organizations built in this way will actually become meaningfully decentralized include:

  1. Really highly autonomous pods , where pods accept resources from the core and occasionally check for alignment and capability if they want to keep getting those resources, but otherwise act entirely on their own and don’t “take orders” from the core.
  2. Highly decentralized and diverse core governance . This does not require a “governance token”, but does require broader and more diverse core participation. Often, broad and diverse participation is a huge burden on efficiency. But if (1) is satisfied, then the pods are highly autonomous and the core needs to make fewer decisions, then the impact of inefficient top-level governance becomes smaller.

Now, how does this fit into the “convex vs. concave” framework? Here, the answer goes roughly as follows: the (more dispersed) top layer is concave, and the (more concentrated within each pod) bottom layer is convex . Giving a pod X is usually better than giving it a coin flip between $0 and giving it $2X, and doesn’t cost much for a compromise or “inconsistent” philosophy guiding a different decision. But within each individual pod, it’s more important to have a clear, opinionated point of view to guide decision-making, and to be able to stick to many synergistic choices.

Decentralization and censorship resistance

The most commonly cited reason for cryptocurrency decentralization is censorship resistance: a DAO or protocol needs to be able to function and protect itself from external attacks, including from large corporations or even state actors. This has been discussed in detail publicly, so it doesn’t need to be repeated, but there are some important nuances.

Two of the most successful censorship-resistant services used by many people today are The Pirate Bay and Sci-Hub. Pirate Bay is a hybrid system: it’s BitTorrent’s search engine, it’s a highly decentralized network, but the search engine itself is centralized. It has a small core team dedicated to keeping it running and defending itself with the mole’s whack-a-mole strategy: when the hammer falls, get out of the way and reappear elsewhere. Both Pirate Bay and Sci-Hub change domains frequently, rely on arbitrage between different jurisdictions, and use a variety of other techniques. This strategy was focused, but it made them both successful in defense and product improvement agility.

DAOs are not like The Pirate Bay and Sci-Hub; DAOs behave like BitTorrent. There’s a reason BitTorrent really needs to be decentralized : it needs not only censorship resistance, but long-term investment and reliability . If BitTorrent were to shut down once a year and require all its seeders and users to switch to a new provider, network quality would degrade rapidly. DAOs that claim to be censorship-resistant should also fall into the same category: they should provide services that avoid not only permanent censorship, but mere instability and disruption. MakerDAO (and Reflexer DAO to manage RAI) is a good example. A DAO running a decentralized search engine probably won’t: you could build a regular search engine and use Sci-Hub-style techniques to ensure its survival.

Decentralization is credible fairness

Sometimes the main concern of a DAO is not to resist the needs of the nation-state, but rather to assume some of the functions of the nation-state. This usually involves tasks that can be described as “maintaining basic infrastructure.” Since the government’s ability to oversee the DAO is weak, the DAO’s structure needs to have greater self-oversight capabilities. This requires decentralization.

Consider three incentive examples: algorithmic stablecoins, Kleros courts, and Optimism retroactive funding mechanisms.

  • An algorithmic stablecoin DAO is a system that uses 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  : a DAO whose function is to adjudicate on arbitration issues such as “Has this Github made an acceptable commit for this on-chain bounty?”
  • Optimism’s retroactive funding mechanism is an integral part of the Optimism DAO, which retroactively rewards projects that provide value to Ethereum and the Optimism ecosystem.

In all three cases, subjective judgment is required, and this cannot be done automatically with a piece of on-chain code. In the first case, the goal is simply a reasonably accurate measurement of some price index. If the stablecoin tracks the US dollar, then all you need is the ETH/USD price. In the event of hyperinflation or other reasons for abandoning the dollar, stablecoin DAOs may need to manage trusted on-chain CPI calculations. Kleros is all about making the unavoidable subjective judgments of any arbitrary question submitted to it, including whether the submitted question should be rejected for being “unethical.” Optimism’s mission of retroactive funding is one of the most open-ended subjective questions: which projects Finished the most useful work for the Ethereum and Optimism ecosystem?

All three cases inevitably require “governance,” and governance is fairly robust. In all cases, both externally and internally, governance is attackable and can easily lead to very large problems. Finally, governance needs not only to be robust, but also to convincingly convince a broad and distrusting public that it is robust.

The Achilles heel of algorithmic stablecoins: Oracles

Algorithmic stablecoins rely on oracles. In order for the on-chain smart contract to know whether to position the value of DAI as 0.005 ETH or 0.0005 ETH, it needs some mechanism to learn what the (off-chain) information price of ETH/USD is. 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 and therefore cannot issue more units than the market cap of their speculative tokens (e.g. MKR, FLX…) because If it does, then it becomes buying half of speculative tokens, using those tokens to control oracles, and stealing funds from users by providing bad oracle value and liquidating them is profitable.

This is a possible alternative design of stablecoin oracles: adding a layer of indirection. Quoting ethresear.ch’s post:

We set up a contract with 13 “providers”; the answer to the query is the median of the answers returned by these providers. There is a weekly vote where oracle token holders 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 7 providers are compromised at the same time. If you trust the current set of oracle providers, even if you don’t 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, participants in any oracle-dependent application have time to exit in an orderly manner.

Note the unincorporated nature of this proposal. It involves depriving governance of the ability to act quickly and intentionally spread oracle responsibility among a large number of participants. This is valuable for two reasons. First, it makes it harder for outsiders to attack oracles, and it makes it harder for new token holders to quickly take over control of oracles. Second, it makes it harder for oracle participants themselves to collude to attack the system. It also mitigates oracle extractable value, where a single provider may deliberately delay publishing to allow individuals to profit from liquidation (in a multi-provider system, if one provider does not publish immediately, the others will soon) .

Fairness in Kleros

The “decentralized court” system Kleros is a very valuable and important piece of infrastructure for the Ethereum ecosystem: human proofs use it, various “smart contract error insurance” products use it, and many other projects use it as some kind of “last” ruling”.

Recently, whether the platform’s decision is fair has caused some public concerns. Some players have made cases trying to claim claims from the decentralized smart contract insurance platform they feel they deserve. Perhaps the most famous of these cases is Mizu’s report on case #1170. The case went from a minor language interpretation dispute to a wider scandal, as it was accused that insiders at Kleros itself were coordinating efforts to invest large sums of tokens to drive decisions in the direction they wanted. A participant in the debate wrote:

The court’s incentive-based decision-making process… by all appearances, is undermined by a developer with a very large (25%) stake in the court.

Of course, this is only one side of an issue in a wider debate, and it’s up to the Kleros community to decide who is right and who is wrong and how to respond. But, from the question of this individual case, what’s important here is how much the whole value proposition of something like Kleros depends on it being able to convince the public that it’s strongly protected from this kind of concentration manipulation. For something like Kleros to be trusted, it seems necessary that no one should own 25% in the high court. Whether through a more widely distributed token supply or through greater use of non-token-driven governance, a more trusted form of decentralized governance could help Kleros avoid such concerns entirely.

Optimism Traceability Fundraising

The results of the first round of Optimism’s retroactive fundraising round were selected by 24 “badge holders” through secondary voting. Round 2 will likely use more badge holders, with the eventual goal of moving to a system where more citizens control the distribution of funds retroactively, possibly through some multi-layered mechanism involving lottery, subcommittee, and/or delegation.

There is some internal debate about whether to have more vs. fewer citizens: whether “citizen” really means closer to “senator”, an expert contributor with deep knowledge of the Optimism ecosystem, should it be a pretty much anyone position? Are you significantly involved in the Optimism ecosystem, or somewhere in between? My personal stance on this issue has always been towards more citizens, addressing governance inefficiencies through Layer 2 delegation, rather than adding sacred centralization to governance protocols. A key reason for my position is the possibility of insider trading and self-dealing issues .

The Optimism retrospective funding mechanism has always been designed to work in conjunction with the anticipated speculative ecosystem: nonprofit projects in need of funding now can sell “project tokens,” and anyone who buys project tokens is eligible to be compensated for large retroactive funding later on. But the normal operation of this mechanism depends critically on whether the retroactive funding part works normally, and is vulnerable to the disruption of the retroactive funding mechanism. Some example attacks:

  • If someone has already decided how they will vote on a project, they can buy (or short if overpriced) 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 from projects.

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

  • Retroactively punish malicious decision makers.
  • Proactively filter higher quality decision makers.
  • Add more decision makers.

The corporate world typically focuses on the first two, the first using financial oversight and sensible penalties, and the second using face-to-face interviews and background checks. Decentralized worlds have less access to such tools: project tokens may be traded anonymously, DAO’s recourse to external judicial systems is limited at best, the remote and online nature of projects and desire for global inclusivity make it It’s harder to do background checks and informal field “smell tests” of personality. Therefore, the decentralized world needs to pay more attention to a third technique: distributing decision-making power to more decision-makers, so that each decision-maker has less power, so collusion is more easily reported and exposed.

Should DAOs learn more from corporate governance or political science?

The main “big idea” of the American philosopher Curtis Yarvin is that corporations are more efficient and optimized than governments, so we should improve government by making it look more like corporations (eg, moving away from democracy and closer to monarchy) system), recently wrote an article expressing his thoughts on how to design DAO governance. Not surprisingly, his answer involved borrowing ideas from traditional corporate governance. From his introduction:

Instead, the basic design of the Anglo-American LLC has remained largely unchanged since the beginning of the Industrial Revolution—contrarian historians might argue that the Industrial Revolution may actually have been a corporate revolution. If the shareholding design is not completely optimal, we can expect it to be nearly optimal.

While there are taxonomic differences between these two types of organizations – we might call them first-order (sovereign) and second-order (contractual) organizations – it seems that society has very effective second-order organizations this year, but not very effective first-order organizations. tier 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 identifies the key difference between “first-order” (sovereign) and “second-order” (contractual) organizations – in fact, the exact distinction is the subject of the section above in my post on credible fair. However, Yarvin’s post quickly made a big and surprising mistake, and he immediately moved on to saying that corporate governance is a better starting point for how a DAO should work. This error is surprising because the logic of this situation seems to suggest the exact opposite conclusion almost directly. Because DAOs have no sovereignty above them, and are usually in the business of providing services normally reserved for sovereigns (such as money and arbitration), this is exactly the design of the sovereign (political science), not the design of the sovereign. Corporate governance, DAO has more to learn.

To his credit, the second part of his post does advocate an “hourglass” model that combines decentralized layers of alignment and accountability with centralized layers of management and execution, but this already acknowledges that DAO design needs to start from at least one first-order and second-order organizations.

Sovereigns are inefficient and corporations are efficient for the same reasons that number theory can prove a lot but abstract group theory can prove a lot less: corporations fail less and accomplish more because they can make more assumptions and have more powerful tools to use . If needed, companies can count on local sovereign states to stand up to them and provide an external legal system they can rely on to stabilize their incentive structures. In sovereign states, on the other hand, the biggest challenge is often what to do when the incentive structure is attacked and/or at risk of total collapse, with no external behemoth ready to back it up.

Perhaps the biggest problem in designing successful governance systems for sovereign states is what Samo Burja calls the “succession problem”: how to ensure the system’s continuity. Companies often don’t solve problems at all, Burja writes:

Silicon Valley is keen on “disruption” because we are used to unresolved succession issues in discrete institutions such as corporations.

DAOs will eventually need to address inheritance (in fact, some DAOs already have to deal with inheritance, given the high frequency of the “get rich and retire” model among crypto early adopters). Monarchies and corporate-like forms often struggle with succession because the institutional structure is so tied to the habits of a particular person that it is either difficult to hand over or risky arguing over who to give it to. More decentralized forms of politics, such as democracy, have at least one theory about how to transition smoothly. So, I think, for this reason, DAOs need to learn more from the more liberal and democratic school of political science than from corporate governance.

Of course, in some cases, the DAO has to accomplish specific complex tasks, and it might be a good idea to use a company-like form to accomplish those tasks. Additionally, DAOs need to deal with unexpected uncertainty. A system designed to operate in a stable and unchanging fashion around a set of assumptions does require some sort of brave leader to coordinate responses when faced with extreme and unexpected changes in these situations. A classic example of the latter is stablecoins dealing with a dollar crash: what happens when a stablecoin DAO evolves around the assumption that it’s just trying to track the dollar, and suddenly faces a world where the dollar is no longer viable to track, and needs to quickly switch to Some kind of CPI?

VoKFQWPkK3K7Rwb7c3tQCE28B7lr1pMVaHEmp9X1.pngStylized charts of experiences within the RAI ecosystem will unexpectedly transition to a CPI-based regime if the U.S. dollar is no longer a viable reference asset.

Here, approaches inspired by corporate governance may look better, as they provide a ready-made model for dealing with such a problem: the founders organize a pivot. But it turns out that the history of the political system also provides a model that is well suited to the situation, and covers the question of how to return to a decentralized model after a crisis: the Roman Republic elects a dictator who was temporarily appointed in response to the crisis.

In fact, we may only need a handful of DAOs that look more like political science than corporate governance structures. But these are the things that really matter. A stablecoin does not need to be efficient; it must first be stable and decentralized. A decentralized court is similar. A system that directs funding for a specific cause—whether optimistic retrospective funding, VitaDAO, UkraineDAO, or others—is being optimized for a more complex purpose than profit maximization, so a coordinated solution beyond shareholder profit is needed to Make sure it keeps the funds for its intended purpose.

Even in the cryptocurrency world, by far the most organizations will be “contract” second-order organizations, ultimately relying on these first-order giants for support, for which simpler and leader-driven forms emphasize agility Sexual governance usually makes sense. But this should not distract from the fact that the ecosystem cannot survive without some non-corporate decentralized form of keeping the whole thing stable.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/vitalik-decentralization-of-daos-not-corporate-autonomous-organizations-is-important/
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