Vithian DAO: DAO is not a company, its decentralization is very important

This article is an article about DAO published by Vitalik on his blog on September 20

Recently, there has been a lot of discussion about the idea that highly decentralized DAOs will not work, and in order to remain competitive, DAO governance should initially be closer to traditional corporate governance. The arguments are always the same: highly decentralized governance is inefficient, while traditional corporate governance structures, consisting of boards of directors, CEOs, etc., have evolved over hundreds of years to continuously optimize making the right decisions and making the right decisions in a changing world. The goal of creating value for shareholders. 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 enables 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.
  • Decentralization is censorship-resistant: applications that need to continue to function while resisting attacks from powerful external actors.
  • Decentralization enables trustworthy fairness: DAOs assume nation-state-like functions in applications, such as providing basic infrastructure, so features such as predictability, robustness, and neutrality are valued over efficiency.

Centralization is convex, decentralization is concave (Centralization is convex, decentralization is concave)

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

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 will not first consider the problem of A and B itself, but consider a higher-order question: would you prefer to compromise between A and B or flip a coin to choose one? In terms of expected utility, we can express this distinction using a graph:

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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: A 100% travel ban may help keep the virus at bay, a 0% travel ban will not stop the virus but at least not inconvenience people, but a 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 two and attacking means the enemy can easily deal with both halves one-on-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: In general, it is more efficient to give $X to each of two promising projects than to give $2X to one and not the other. Having any funding is 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 one-fourth as harmful as a tax rate of 2X%, while also being more than half as effective in increasing income. So a moderate tax is better than a choice 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 makes a lot of 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 UkraineDAO become DAOs?

Many recent DAOs differ from earlier DAOs (like MakerDAO) in that earlier DAOs were organized around providing infrastructure, whereas 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 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.

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A natural question might be: Isn’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:

Really highly autonomous pods, where pods accept resources from the core, and if they want to keep getting those resources, they occasionally check for mission compliance and capability issues, otherwise they act entirely on their own and don’t “take orders” from the core.

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 choice between $0 and $2X, and doesn’t cost much for compromising or “inconsistency” guiding different decisions. But within each individual pod, it is more important to have a clear, firm view to guide decision-making and to be able to stick to many mutually 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, 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 defending itself with a whack-a-mole strategy: when the hammer falls, dodge and reappear elsewhere. Both Pirate Bay and Sci-Hub frequently change domain names, rely on arbitrage between different jurisdictions, and use a variety of other techniques. This strategy is centralized, but they are successful in both defense and product improvement agility.

The DAO is not like The Pirate Bay and Sci-Hub; the DAO behaves 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 shut down once a year and required all its seeders and users to switch to a new provider, the network quality would drop rapidly. DAOs that require censorship resistance should also fall into the same category: they should provide services that avoid not only permanent censorship, but mere instability and disruption. MakerDAO (and the Reflexer DAO that manages RAI) are good examples. A DAO running a decentralized search engine might not be: you could build a regular search engine and use Sci-Hub style technology to ensure its survival.

Decentralization is credible fairness

Sometimes the main focus of a DAO is not to resist the needs of the nation-state, but rather the need to assume some of the 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 oversee the DAO, the structure of the DAO needs to have greater self-oversight capabilities. This requires decentralization.

Of course, it is actually impossible to completely eliminate information asymmetry and inequality and the resulting decision-making problems, etc., but what if we could achieve 30%?

Consider three incentive examples: algorithmic stablecoins, Kleros courts, and Optimism retrospective 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 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 unavoidable subjective judgments about any question submitted to it, including whether the submitted question should be rejected as “immoral”. Optimism’s retrospective funding mandate is one of the most open-ended subjective questions: which projects get done Most useful work for Ethereum and the 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 0.005ETH or 0.0005ETH, it needs some mechanism to learn what the (off-chain) price information is for ETH/USD. 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 tokens (e.g. MKR, FLX…) because if so Do, then it becomes buying half of the 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 a post from ethresear.ch:

We set up a contract with 13 “suppliers”; the answer to the query is the median of the answers returned by these suppliers. 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 vendor may deliberately delay publishing to allow individuals to profit from liquidation (in a multi-vendor system, if one vendor does not publish immediately, the others will soon) .

Kleros fair

The “decentralized court” system Kleros is a very valuable and important infrastructure of the Ethereum ecosystem: it is used by the Proof of Humanity, used by various “smart contract error insurance” products, and used by many other projects as a Some kind of “final verdict”.

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 aspect of an issue in a wider debate, and it is 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 such a center manipulation. For something like Kleros to be trusted, it seems necessary that there shouldn’t be one person in the high court with a 25% stake. 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 Retroactive Funding

Optimism’s first round of retroactive funding results 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? Significant participation 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 integrate 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 with large retroactive funds at a later date. 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 attack examples:

  • 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 vote 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, using financial oversight and sensible penalties for the first and in-person interviews and background checks for the second. The decentralized world has fewer opportunities to use such tools: project tokens may be traded anonymously, DAOs have limited recourse to external judicial systems, the remote and online nature of projects, and the desire for global inclusivity make it more Difficult 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 politics?

The main “innovation” 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, away from democracy and closer to monarchy). He 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:

The basic design of the Anglo-American LLC has remained largely unchanged since the beginning of the Industrial Revolution—historians of the opposite view 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 there are very effective second-order organizations in today’s society, but no 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 article quite rightly identifies the key distinction between “first-order” (sovereign) and “second-order” (contractual) organizations. In fact, the exact distinction is part of the topic of trusted fairness above in my article. However, Yarvin’s article 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 sovereign above them, and typically provide services explicitly reserved for sovereigns (like money and arbitration), this is exactly the design of sovereigns (political science), not the design of corporate governance. DAOs have more to learn from political science.

To his credit, the second part of his article does advocate an “hourglass” model that combines a decentralized layer of assignment and accountability with a centralized layer of management and execution, but this already acknowledges that DAO design requires at least Learn as much from a first-order organization as a second-order organization.

Sovereign states 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 for 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 giant ready to back it.

Perhaps the biggest problem in designing successful governance systems for sovereign states is what Samo Burja calls the “succession problem”: how to ensure the continuity of the system as it moves from being run by one group of people, retiring, and moving to another. Companies often don’t address this issue 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 succession issues (in fact, some DAOs already have to deal with succession issues, 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 tightly tied to the habits of a particular person that it is either difficult to hand over or high stakes arguing over who to give it to. More decentralized forms of politics such as democracy have at least one theory of 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 these 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 the dollar crash: what happens when a stablecoin DAO evolves around the assumption that it is 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?

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If the U.S. dollar is no longer a viable reference asset, the stylized charts experienced within the RAI ecosystem will unexpectedly transition to a CPI-based regime.

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 well suited to the situation, and covers the question of how to return to a decentralized model after a crisis: the Roman Republic’s electoral habit of temporarily appointing dictators in response to a crisis.

In fact, we may only need a handful of DAOs that look more like political science than corporate governance structures. But what really matters. 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 – be it Optimism retroactive funding, VitaDAO, UkraineDAO or others – is being optimised for a more complex purpose than profit maximisation and thus requires a coordinated solution beyond shareholder profit to Make sure it keeps the funds for its intended purpose.

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

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/vithian-dao-dao-is-not-a-company-its-decentralization-is-very-important/
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