#27 Governance Series
In a perfect world, DAOs are decentralized. But we're not there yet. Today, DAOs exist in a phase known as progressive decentralization. In this phase, DAOs and their contributors work tirelessly to decentralize domains of the organization piece by piece, borrowing frameworks and best practices from others who’ve seen success. This is our current approach to decentralizing DAOs, but it’s not without its faults. In this post, we highlight one specific problem that's been created, to better understand its causes, consequences, and potential for future solutions.
One of the principal issues within DAOs today is their environment, evolution, and implementation makes it hard to measure how decentralized they are. To be more specific, there isn’t a reliable way to measure how decentralized or “mature” a DAO is. Ironically, blockchains promise us full transparency, and in many ways they do, but in the case of DAOs, we struggle to perceive their current decentralized nature for various reasons.
Why is this a problem?
Decentralization is a fundamental pillar of DAOs that is complex and misunderstood. Without reliable methods of measurement, we aren’t well-equipped to achieve our goal of building robust and sustainable decentralized systems. By verifying a DAO’s maturity, users and operators are empowered to reach their decentralized goals.
How mature is a DAO? How do we know when the organization has fully developed its decentralization? Is it maturing how users would like it to? Questions such as these are difficult to answer in any consistent way. Our main response to this is to point to structures within DAOs, such as on-chain governance, decentralized treasury, and a decentralized tech stack, as proof that a path to decentralization exists. But, this isn’t enough. If the goal of a DAO is to be decentralized, shouldn’t it be possible to measure this goal?
To understand the causes, let’s first dive deeper into the characteristics of decentralization. Decentralization, at least in the context of DAOs, has multiple definitions and characteristics, and to complicate things even further, it hasn’t stopped evolving. For the sake of simplicity let’s pick a popular definition. In his now-famous piece “Progressive Decentralization,” VC Jesse Walden characterizes decentralized organizations broadly as “a protocol owned and operated by a community of users.” This description (and the corresponding framework in the piece) has served and guided protocols in their path to decentralization since 2020 when the piece was first published. But now, as these same protocols have matured, the architectures underpinning them have developed, the contributor base has diversified, and the frameworks of DAOs have changed.
Evidently, DAOs are dynamic and evolving systems and their current state opens them up to unexpected problems. Let’s take a closer look at the causes.
Decentralization is a Spectrum
When we think of decentralization versus centralization we assume it's binary. But it's not, it's a spectrum. DAOs opting to decentralize begin their journey by plotting a point on the spectrum. This results in an ambiguity problem, producing hundreds if not thousands of protocols within various stages of decentralization. It’s important to note that even though the spectrum guides, it doesn't measure. It's useful, but only to a point.
In his essay “Spectrum of Decentralization,” Andrew Beal illustrates this spectrum as a simple line DAOs fall on.
If we attempt to plot protocols such as MakerDAO or Aave, which are generally considered the “mature” DAOs of today, it's not clear where they fall without predefined "standards." Another example is Optimism, where do they fall? Their community governance is now starting to come online.
Furthermore, it’s important to highlight that these maturity levels are relative to where we are today at this point in the adoption curve of decentralized organizations, meaning the points on the line will shift.
No One Size Fits All
There are countless approaches to building DAOs and by extension decentralization. What works for one organization may not work for another, there is “no one size fits all.” Every DAO has unique circumstances, mission, and perspective on decentralization frameworks.
In a recent piece, Marc Boiron, strategic advisor at famed web3 VC firm Variant Fund, offers the idea of a decentralized “threshold” DAOs must maintain to be considered decentralized.
While these different frameworks do offer help in approaching the complex and difficult task that is decentralizing, it leads DAOs to implement different frameworks further creating swaths of different systems.
For example, in April 2022 Optimism, a Layer 2 on Ethereum, set itself apart by introducing a revolutionary "Bicameral Structure" to begin decentralization efforts. In the roughly 10 months since its inception, the DAO has evolved and incorporated new structures and systems like Delegate Committees and a Constitution, which have resulted in an altered governance structure. In addition, the DAO has started the process of migrating its entire governance voting process from off-chain to on-chain, in an effort to strengthen decentralization. In theory, the framework starts the process, in practice, everything continuously evolves.
Lack of Standardization
Finally, one of the core reasons why there isn't a reliable way to measure decentralization is the lack of standardization. DAOs are diverse with different sets of parameters that play a role in how they may measure "success" and "maturity." This is compounded further when the DAO's designs and processes are neither uniform nor consistent. Without consensus on what measurement should be used, it's a challenge to make informed decisions.
A standardized decentralized scoring system can help solve the complexity of measuring decentralization in the same way, the aforementioned frameworks have. Doing this could provide organizations with a common language and metrics to measure, making it easier to compare themselves against one another and identify where their focus should be.
The lack of a reliable method to measure decentralization has dire consequences; if these consequences fail to be addressed, they may hinder the advancement of DAOs and their adoption as a whole.
Building in the Dark
How can we trust that a DAO is making progress toward its goal of becoming decentralized if there isn't a way to measure its progress? For users of, contributors to, and even investors in DAOs, having a clear understanding of what is happening within the organization is a priority. If we’re making decisions on the basis of inadequate or incomplete metrics, we’re building in the dark. When stakeholders don’t have a clear picture of the current state or future trajectory of the DAO, it can be hard to trust in its success. This, in turn, might lead to fewer contributors, fewer users, and diminished interest in the ecosystem.
Without a standardized process for gauging and supervising decentralization, DAOs are at risk of attack. Both internal and external actors can exploit weak systems--at the expense of the DAOs stakeholders. Therefore, it’s crucial for DAOs to be aware of their risk exposure, and having a standardized metric for decentralization could help to improve the security of the organization.
Take for example Smart Contract Security, facilitated by service providers like Certora and Open Zeppelin. Both of these companies offer security audits of smart contracts for decentralized applications, helping secure the platform and its users. Without a reliable measurement of decentralization, however, organizations aren’t able to secure themselves in the same manner.
As mentioned earlier, decentralization is a spectrum that is not only applicable to a single DAO, but to the industry as a whole. Centralization is an ever-evolving challenge that DAOs must fight on a constant basis, and having a way to measure decentralization—and benchmark progress against others—would allow DAOs to keep themselves honest and accountable and understand how their own progress compares to others in the space. By avoiding centralization DAOs protect from concentrations of power that produce corruption and collusion.
We would be remiss not to acknowledge the many breakthroughs DAOs have had. From the catalysts that were on-chain governance frameworks like Compound’s Governor Bravo to the out-of-the-box DAO treasury courtesy of Gnosis Safes, it’s hard to argue that progress hasn’t been made. Even with these successes, however, there is an ongoing need for measuring decentralization. It’s through the widespread adoption of sustainable frameworks, audits, and standards that DAOs inch closer to success. Without this, the accelerated adoption of these organizations runs the risk of stagnating. So, what's the solution?
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