6 min

DAOs don’t work

Joost Schouten
Published on
July 4, 2023

DAOs are hot! It seems a few trends are colliding to create the perfect fertile soil for Decentralised Autonomous Organisations to take off and for their numbers to grow exponentially.

  1. COVID showed us that working from home (for professions where that is possible) did not cause organisations to collapse and actually allowed most people to manage their time and priorities better than before. Thus increasing the awareness that claiming and honoring autonomy serves both people and organisations.
  2. Crypto has attracted and accumulated a tremendous amount of investment, held in large part by early adopters that are deeply committed to the concept of decentralisation. To a large degree, these early builders and contributors are funding projects inside the world of crypto, many of which are organising as DAOs.
  3. The self-organisation practices that have been around for a while (eg. Sociocracy, Holacracy, Teal), in some cases for decades, have slowly been gaining traction, bringing attention to alternatives to the predominant management hierarchy. Different ways of organising is thus not as exotic or novel as it once used to be.

As a result there are many well funded DAOs sprouting up attracting a lot of motivated people wanting to build wonderful products, communities, investment/finance vehicles, UBI structures and DAO infrastructure solutions amongst other things.

After having been part of a few of these experiments and observing a few others I concluded that DAOs don’t work. Hence the title of this article. I mean that literally. As in: DAOs don’t do the work, people do.

I think DAOs have tremendous potential and have a very important role to play. I think however that in many experiments today they are being overused or under defined. To explore this let’s take a moment to explore what makes up a DAO.

What makes up a DAO

There are many different DAOs out there but roughly all of them share a few characteristics:

  1. A shared treasury of the digital assets of the DAO, made up of crypto currencies, tokens and/or NFTs. These are controlled by a smart contract or multisig, ensuring that spending or transacting these assets is never controlled by one or a few individuals.
  2. A public record of membership on who contributed work to the DAO and what they have received or will receive in compensation for that effort.
  3. Some form of voting for collective decision making to control the use of the treasury and add or remove members.
  4. A governance token distributed amongst members allowing them to partake in decentralised decision making.

That’s roughly all there is to a DAO. In that sense a DAO might be the wrong name as the ‘O’, Organisation, is overpromising. The sum of these 4 characteristics do not make up an organisation. It does not answer how to organise your culture, your onboarding, your operational decision making, strategy and priority setting, conflict resolution or feedback mechanisms (to name a few).

Many DAOs are using their own voting tools to answer these questions as well. They are simply not the right tool for the job. Where voting can be a great tool to surface a collective perspective on asset allocation or correct abusive members by evicting them, it is a poor tool to get work done. When we want to get something done we should rely on experts in their field to autonomously and transparently decide and act. Voting suggests that everyone knows everything about everything, which we don’t. We could however, use voting as a back-stop in case someone abuses their autonomy in a way that does not serve the DAO.

The innovation of DAOs

Conventional organisations rely on hierarchies that are enforced through shareholders, boards, executives and managers with power 'over’ those lower in the hierarchy. This power is wielded through the tools of shareholdership, employment and compensation.

DAOs offer us the tools to eliminate all three of these tools that so often lead to power abuse. With that we ‘could’ create a safe environment where we are all invited to show up and lead our work in pursuit of the DAOs purpose.

  • ‘Could’ because many DAOs conflate their equity token with their governance token in effect reinstating the tool of shareholder power abuse.
  • ‘Could’ because many DAOs use majority voting for governance decisions meaning the oligarchy of majority governance token holders get to call the shots irrespective of expertise.
  • ‘Could’ because many DAOs don’t have a system for operational decision making meaning louder, more senior, more extroverted people call the shots.

Merging DAOs with distributed authority

The good news is that there have been people experimenting with the decentralisation of organisations for decades. There are some ready made solutions out there (eg. Sociocracy and Holacracy) that you can simply plug into your DAO and adapt to your specific needs. This will instantly give your DAO a couple of features that today are missing from most:

  1. Distribution of operational decision making through the use of roles and circles with explicit accountabilities so that experts can thrive and autonomously do their work. (These systems also offer ways to deal with situations where people misuse their role authority)
  2. Consent decisions rather than consensus. Though this is slightly different between different systems, in short it comes down to asking if there is harm in taking an initiative rather than asking if we all (or a majority) agree. This drastically increases the operational effectiveness (not to be confused with efficiency), innovation and experimentation.
  3. Explicit facilitators for each group/circle that will guide the process and apply the agreements equally to all members. This will allow all to show up as they are. Extrovert or introvert, we will play by the same agreements and our character trades will no longer drive the operation.
  4. An explicit role or process that is accountable for setting strategy, priorities and metrics for the organisation and potential sub-circles.

Currently I see many DAOs struggling as they either stick to a decentralised operation resulting in frustratingly slow progress or they revert to an implicit or explicit hierarchy inviting back all the challenges of our current day painful organisations.

Let us use DAOs for what they are good at: new ways of accounting for equity and compensation and membership back-stops in case of power abuse, and lean on self-organisation systems to allow for effective purpose manifestation. Together these two can flourish and allow us decentralised coordination without power abuse while serving our collective good.

Joost Schouten - is partner at Nestr.io — Decentralised collaboration & recruitment. Try it out for free.

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