Are DAOs “Fake” Democracies?
Why “collective decisions” in DAOs aren’t as collective as we think & how to change that.
I’m weird. I was that kid in middle school who cared way too much about futile situations. When my 7th-grade math teacher asked the class if we preferred weekend homework or a test, I passionately argued for my preference. I would often end up frustrated, not because I didn’t get what I wanted, but because I’d observe that only half the class even bothered to raise their hand for either side.
Seriously? You might as well vote if you have the opportunity.
Democracies, both in math class and in real life, are a remarkable concept. The population has the power to guide decisions and policies that can better the lives of themselves and those around them. Throughout the world, democracies have fostered immense positive change, like empowering marginalized groups or abating ideological extremism.
It may come as a shock to you, then, as it did for 12-year-old me, that 35% of the world’s eligible voters in democracies choose not to vote. In the U.S. this number is even larger. Why this transpires is a longer piece for my political science class, yet consensus points to general indifference, futility, or the friction and discrimination involved in registering to vote.
What if I told you that a nearly identical dilemma is taking place….again….right now…..but in private markets. It’s true: a new technology has the potential to democratize not the political world, but the economic one. There’s just one problem: no one is showing up to vote.
You’re right if your deductive skills have led you to believe that I’m talking about DAOs, or decentralized autonomous organizations. If you aren’t already familiar with DAOs, check out this awesome YouTube video or this article explaining governance tokens in DAOs.
Long-story-short: DAOs are democratic organizations where governance-token-holders (i.e. registered voters) vote on “policies” like new products or budget planning. It would be like if Apple employees had a say in the next iPhone design. DAOs align the interests of a contributor and company like a citizen and their country: you have the power to vote on what matters to you.
Adapted from https://leverageedu.com/blog/difference-between-democracy-and-dictatorship/
While brand new, DAOs have already enabled some incredibly impactful projects:
- VitaDAO has deployed over $2M into early-stage longevity research. Scientists and researchers who own VITA tokens can participate in the allocation of funds.
- ClimateDAO has pooled capital from investors to pressure public companies like Exxon Mobil to take more significant action in mitigating climate change.
- MakerDAO is an > $6B financial platform that lets anyone lend or borrow cryptocurrencies
Okay, so DAOs can achieve awesome things. Imagine a world where universities or hospitals let professors or constituents make key decisions. That is, of course, if people want to make key decisions. They do, right? Right??
Well, think back to my math class when my peers threw away their votes. Or when 33% of eligible U.S. voters ignored the ballot box in 2020. In DAOs, voter turnout is essentially nonexistent.
No One Is Voting
If you browse Tally, a DAO operations platform, you can see this dilemma playing out in real-time:
Compound is an automated interest rate protocol with over $5B in assets that lets consumers lend or borrow cryptocurrencies. It’s also a DAO, so community members who own the COMP governance token can vote on proposals for the protocol. Tally shows that there are 2,526 eligible voters in the community.
When you take a look at how many people are turning out to vote, however, it’s a turnout more depressing than attendance at my high school tennis matches:
In the last seven proposals, the average voter turnout was a mere 3.34%. This is shocking: even though Compound, a billion-dollar protocol, is building the future of financial infrastructure, the great majority of voters aren’t leveraging their say in the future of the DAO.
If you’re crypto-native, this reality may fail to surprise you. Before it imploded due to a hack, the first-ever DAO experiment in 2016 was unable to pass any proposals in the beginning because the voting threshold wasn’t ever met. Ironically, even the DAO’s “urgent” moratorium to pause new proposals until governance issues were fixed couldn’t garner enough votes:
For an industry that has raised hundreds of millions of dollars in capital from investors and internet users alike, it seems like some questions should be urgently addressed:
- How democratizing are DAOs?
- When a small majority dominates every big decision, is it appropriate to claim that community members have ownership over the organization’s mission?
- Are DAOs just oligarchies? If you look at Compound’s largest voters (in terms of voting power), VC behemoths like Polychain Capital, a16z, and Paradigm dominate the list.
Perhaps we should turn our attention towards flaws in real-world democracies, as many of the same issues have spilled over into the world of DAOs.
“History doesn’t repeat itself, but it often rhymes”:
- True democracies are hard to build. Global politics Professor Brian Klass describes many of the world’s democracies as “fake democracies” because while elections are held in these countries, they lack “the rule of law, a free press, and accountability for elected officials”. It took the founding fathers of the United States years to plan and write the Constitution. Meanwhile, a group of internet friends created a DAO to buy a version of the Constitution in a few weeks. What could go wrong? Well, a few things.
- Everyone can’t vote on everything. Most DAOs follow a system called quorum voting, which refers to direct democracy. This means that every proposal requires a threshold of votes to pass. Sounds nice, but imagine if every American citizen voted on every Congressional policy. This would be impossible. It’s hard enough to educate people on political candidates, better yet synthesize thousands of pieces of hyper-specific legislation.
If you take a look at one of Compound’s latest suggestions called “Update High-TVL cToken Implementations”, it’s no wonder ordinary token-holders aren’t voting on most proposals:
I mean, seriously, is this even English? How can you expect every voter to understand hundreds of proposals well enough to vote on them?
3. People just don’t care. Not every American is invested in political processes. Likewise, many token-holders in DAOs are in it for investment, prestige, or fun.
Can We Fix This?
So, while DAOs have already passed remarkable milestones within five years of inception, their general democratizing ability is exaggerated.
It might be wise to cut DAOs some slack, though. American democracy was built over 250 years, not 5. Perhaps DAO founders should turn their attention to America’s founding fathers, who discussed ad nausea what the optimal design of a democratic institution was.
After revising my U.S. History memory lane, I discovered that the root of our dilemma might lie in using the word “democracy” itself. James Madison wrote in “The Federalist Papers №14” that “In a democracy, the people meet and exercise the government in person; in a republic, they assemble and administer it by their representatives and agents.”
Most DAOs today are democracies in the traditional sense: a direct voting system (one person = one vote). Yet, this type of direct democracy is hardly scalable, as evidenced by flaw #2 in the section above. Over time, American officials acknowledged this shortcoming and morphed American democracy into a republic, or representative democracy.
For DAOs to increase involvement in larger decision-making, this transition may too be required.
American citizens elect representatives to act on behalf of their interests. This is possible in DAOs through what is known as a Liquid Democracy, where token-holders delegate their votes to representatives who vote for them. There are a number of unique advantages to taking this approach:
- Not every token holder has to educate themselves on every issue.
- Delegates have greater knowledge about what is being voted upon.
- More people can have a say in policies.
This is exactly what Ethereum Name Services did when it released the $ENS token to its community. Most token-holders like myself weren’t going to have the time or knowledge necessary to vote on every proposal, so when it came time to claim tokens, community members were required to delegate tokens to a representative. It looked like this:
As we know from experience, representative democracies can become corruptible. When votes are delegated, they become concentrated. This might result in a concentration of power among people who are more wealthy, well-connected, or even manipulative in some cases. Yet, liquid democracies have the greatest potential to empower regular voices in important decisions.
If you’re interested in learning more about the different voting forces at play in DAOs, Accelerated Capital wrote a fantastic piece on the main voting mechanisms in Web3 here:
https://acceleratedcapital.substack.com/p/daos-and-democracy-voting-mechanisms?s=r
In sum, DAOs can be a great force for good, but they’re trending in the same direction as most traditional organizations: concentration of control and decision-making by a few voices, not many. Acknowledging these flaws, combined with careful implementation of a representative system of voting, will allow the Web3 community to build a more democratic system of work across the world.
Noah Edelman is a student at Northwestern and the founder of WTFcrypto, a media publication that teaches nearly 1,300 beginners about crypto so they don’t fall behind. Subscribe to his newsletter here and follow him on Twitter here.
