Can DAOs Become Operationally Efficient While Remaining Decentralized?

While it might seem like a contradiction, there’s been more and more discussions about whether or not the level of decentralization for DAOs is, in fact, optimal, and if there’s a better way to structure them. We’ve already offered our opinion on one perspective of DAOs and centralization, but in reflection upon that piece, there is another angle that should be explored.

The development of DAOs, Web3 tooling, and the blockchain have been described as something akin to the Big Bang - the beginning of a new universe. Aragon called it a Cambrian explosion of activity - an era where huge leaps in the evolution of the web, how we work and how we self-organize are going to happen. And to a certain extent, it has. 

The impact of DAOs is similar to how the internet impacted communication, but on a larger scale. There were iterations, incremental improvements, and sweeping changes and adjustments. The world wide web has made the planet smaller, Web3 and the blockchain have made the internet more transparent, and DAO’s aimed to make Web3 and organizations democratic.

And to an extent, they have - DAOs at the moment manage over $10B in their treasuries, with over 5 Million participants. It has made trustless coordination possible.

But it seems that the promise of DAOs, and how they’re decentralized and governed, has led to the explosion referenced above to slow down, if not temporarily halt.

Who’s Driving the DAO?

If you were to ask anyone why DAOs are the next evolution in the organizational design of work, they’d tell you that decentralized organizations are democratic and more resilient to outside forces and can be operated more efficiently due to the elimination of central points of control.

By doing away with the traditional hierarchy, the possibilities for innovation and inclusion are endless. Nothing is lost in the sea of middle-management and bureaucracy, or to the whims of a power-mad CEO. No one is forced to have their voice left unheard. This is the power of an idea meritocracy - fostering all of the talent available, and relying on the wisdom of the crowd.  

In this manner, an organization is able to structure itself in any way they see fit, and the general format is one of simplicity. Any member can make a proposal, and everyone can vote democratically. 

That’s a great boilerplate description of a DAO. But is it practical? Is decentralization without any ownership or leadership the right way to do it? Shouldn’t someone be in charge? 

Centralization Has Its Advantages. 

For a more in-depth exploration of centralization, you can check out our previous blog on the topic. But suffice to say, there are three key benefits of centralization:

1. It allows for better control over an organization. A centralized organization can more easily implement policies and procedures that everyone must follow. This can help to keep everyone on the same page and moving in the same direction. 

2. Centralization often leads to economies of scale, as there is less duplication of effort and resources when everything is centrally managed. 

3. Centralization can lead to faster decision-making as there are fewer people involved in the decision-making process. 

Again, we’re not advocating that centralization is the answer, but, DAOs in their current decentralized format, are facing several challenges. 

Everything’s a Pyramid Scheme

One of the most attractive features of web3 and the blockchain is that it’s built in public. It’s open, democratic, collaborative; built for everyone, and benefits no one specific entity. Which is why, as DAO’s have emerged and evolved, they’ve been considered to be superior to centralized organizations. If you’ve been fortunate enough to not have the pleasure of having to work in a corporation with a CEO, shareholders, and a board; navigate financial regulations and compliance, and use your labor to make someone else far richer than you, then you’ve been lucky. But, are DAOs in their current form any different? Have we idealized DAOs to a point that the actual execution of what we want them to be, doesn’t work at all? 

The Principal-Agent Problem

A centralized organization implies there’s a center point; a bottleneck subject to dependencies. It’s the Principal-Agent Problem. There’s a conflict of priorities between a group or an individual and the representative that’s been elected/authorized to act on their behalf. Once ownership and profits enter the equation, shareholders can be disincentivized to intervene on behalf of what’s best for their principals. Think of Bezos vs. the rest of the people who work at Amazon.

Most traditional organizations are structured like a pyramid, the person at the top holds all the power and defines the hierarchy. Regardless of what level you’re at (other than the point of the pyramid), they’re always following the directions of the person above them. Both the agent and the principal are working for their own self-interest, and they are miles apart. There is no transparency, and too many stories of inequity then it comes to compensation and participation. This model seldom, if ever, results in an ideal organization. 

But, to be fair, traditional corporate governance structures have had the benefit of evolving over hundreds of years to optimize the goal of making good decisions and offering value to stakeholders. You can’t say that they’re not effective when it comes to setting objectives, and delivering on them. 

DAOs should be no different from corporations. And, if you look closely enough, you’ll see that they’re not all that dissimilar.

The Ideal DAO Never Existed

The conflict between the idealized image of DAOs, the reality of DAOs, and traditional centralized organizations is simply demonstrated by this chart shared by Ethereum:

Of course, not every corporate organization is completely driven by profits for those at the top, just like not every DAO is completely flat and democratic. Both still can suffer from the bottleneck of opinions, regulations, politics, and structure/hierarchy requirements. And right now, DAOs are finding themselves struggling to operate by their core web3 principles, without one figure to steer the ship. 

The OAO - The Optimal Autonomous Organization

Coined by Curtis Yarvin, the idea is that the hope of DAOs replacing corporations as the dominant organizational structure is a pipe dream. To date, DAOs rely on governance by committee, or rely too heavily on democracy, and suffer from informal power structures, tokenomics, and the occasional hack. If DAOs can’t make decisions efficiently, or find themselves relying on a pay to play philosophy where the more tokens you possess, the more weight your vote holds for governance, then they don’t seem close to being ready to take over anything.

Curtis suggests that the OAO should take a cue from corporate governance and rely on a structure that has governors that oversee the organization that is built of trustees, an executive officer appointed by the trustees, and then everyone else. It’s essentially an hourglass figure, with the trustees at the top, the community at the bottom, and the CEO in the middle. It’s then supervised by the governors. He feels that such a structure would be more efficient and secure because the processes and the OAO run on the blockchain, and the trustees remain anonymous, even among each other. 

If there is any hint of outside coercion or attempts at control, or the CEO does something that isn’t in the best interests of the OAO, then they can update the constitutional smart contract, elect a new CEO, remove members from the OAO, and move forward. They’re centralized, but remain autonomous, anonymous, and working in the best interests of the OAO. Positions are democratically elected, and the CEO only functions as the leader/prime mover of the organization. 

Except, the fundamental ideals of crypto and DAOs as we know are permissionless participation, transparency, decentralization, etc. If anyone can become a trustee in an OAO (subject to some hard-codeable, open conditions), and if the trustees have control over the CEO and then, by extension, the decision making, then is the OAO really centralized? It doesn’t sound like it. Conversely, if not anyone can become a trustee and the vast majority of the community has no decision making power- then there is no doubt that the OAO isn’t the next iteration of the DAO. It is a completely different organization structure. It seems like a more efficient structure on paper, but a different one.

There are, however, definitely finer details that need to be explored, and Yarvin does a good job of explaining them in his blog. Whether or not the OAO can effectively exist and govern, remains to be determined. Right now, it’s just one theory among many.

Is this the answer? Maybe, or maybe not. There really is no easy answer when it comes to whether DAOs should be centralized or decentralized. In fact, that’s not even the right question we should be asking. 

The right question is, in fact: “What is the most efficient organizational structure to effectively operate in Web3?”

The reason an operationally efficient DAO is difficult to create is because it is difficult to keep it decentralized as it becomes more operationally efficient (with the technology we have at present). If we were to ditch this premise of decentralization and say "here is a more efficient structure," we’re reframing our perspective on organizational design. We shouldn’t be discussing whether or not DAOs should be decentralized or not, because DAOs should be decentralized, that's what makes it a DAO. Instead, taking a page from Yarvin’s suggested theory, an OAO seems like a better structure than a purely centralized one or a DAO. Someone should be marginally in charge to ensure efficiency.

The debate here is not on the ethos of the DAO philosophy, but the organizational design. There is a lot that can be learned from corporate structures that can make organizations operating on the blockchain more resilient, efficient, and prepared for what comes next.