Decentralized Autonomous Organizations (DAO) are the preferred organizational structure for Decentralized Finance (DEFI) and web3 projects. DAOs are decent when they are used to govern DEFI, but for web3 projects, I think there are a number of issues with current DAOs that detract from the efficiency of this space. I think that we should consider a rebrand of the term DAO to mean Decentralized Autocratic Organization.

In this article, I find myself favoring autocracy over democracy, as an organizational structure.

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What is a DAO?

Technically, a DAO is the smart contract that is responsible for the operation of a function. That is the autonomous part of DAO. This part is often forgotten because of technical difficulty. Decentralized means that the smart contract can be changed as the result of a vote amongst members. Most DAOs are not DAOs.

DAOs in web3

For this article, web3 is used to describe all of the NFT projects and Metaverse projects that are being worked on in the space. Web3 is much larger than that, but for now, I’m just focused on NFTs and Metaverses.

In web3, many organizations have set themselves up as DAOs. These DAOs exist along dual spectrums of decentralization and automation. Decentralization is generally low, represented by an oligarchy of core developers, whales, and discord mods. Automation is also generally nonexistent, because of the complexity of smart contract design.

Problems with web3 DAOs

The primary issue with web3 DAOs is that they are not really DAOs. They should really be called ‘weak attempts at direct democracy’ because it is modeled after an idealized view of democratic systems. Upon closer inspection, they reflect the shortcomings of our existing global political systems.

I love the idea of democracy. I believe that a population should be free to govern themselves in the way they choose. But the reality is that direct democracies are probably not right for web3.

Three Issues with Direct Democracies

1. The belief that one NFT (or token) should be equivalent to one vote gives tremendous power to whales and teams. This at first, is rational. Whales and teams who have the most interest should have more voting power. But this creates the issue of oligarchy — where decisions are made by the collusion of key players. Another model is one wallet one vote, but this ignores how much interest teams and whales have — and is again, not ideal. A third voting model is a sort of, weighted, voting scheme — where whales have extra voting power up to a point. This seems more fair, but whales will be upset at diminishing returns. Another problem with oligarchies is that if there is a figurehead or cult leader, the majority will often side with this individual, negating any real democratic choice. The distribution of voting power is difficult, because depending on how the voting power is distributed, very different outcomes can arise.
2. Voter knowledge is another problem. In modern politics, the use of a knowledge test to gain a vote is a form of voter disenfranchisement. It used to prevent access to voting polls for those who fail to meet a certain level of knowledge. Again on the surface, everyone who has a token should be able to vote. But can we be sure that the voter is able to make an informed decision? Can the voter make an informed decision and vote in multiple web3 democracies? I don’t want to disenfranchise voters, but it would appear that an information amateur vote is not the same caliber as an information expert vote. One way around this issue is through the use of delegated votes — which would be a representational democracy. Participants allow experts to vote and act in their name. This is closer to what the USA uses for their elections, but relies upon the represented individuals to act ethically and stay knowledgeable. I don’t know — I worry that DAO voters are often short sighted.
3. The final issue I have today, is that democracies are inherently resistant to change. Web3 DAO (or democracies) absolutely slog through governance decisions. The amount of delay can be so long, that most web3 organizations inevitably are run by councils who have more unilateral control over the assets. They are accountable to the voters, but again, stray from being a democracy to an autocracy. But perhaps an autocracy is the ideal form of governance for these new organizations.

Autocracy or traditional hierarchy for web3

Call me old fashioned, but I like when web3 projects adopt a more traditional hierarchy for what is ultimately their business. It is ideal when there is a regular CEO, CFO, and COO. It is great to have departments with department heads and managers, especially as the organization scales. A true decentralized organization would have so much bloat and sprawl, that I suspect very little would actually get done.

The power of the autocracy is that one individual has the power to make decisions, or else delegate it downwards. This makes businesses extremely agile as opposed to democratic systems.

Decentralized Autocratic Organizations

A better DAO structure where organization participants can vote for autocratic leaders that are given tremendous control. Voters and leaders have a shared incentive for profit. While a decentralized autocratic organization has its own limitations, I believe that it is a more natural form of governance for business.