DAOs: FTX Demise Is Win For Decentralization 

FTX failed, in part, because it was too centralized, according to DeFi adherents — with decentralized advocates now saying the debacle has unexpectedly given DAOs an opening.  

There was little to no transparency of where the crypto exchange custodied customer cryptocurrencies, industry participants told Blockworks. A purported lack of transparency in crypto — ironically, long considered the first open, traceable financial system — is nothing new, from Mount Gox onward. 

Decentralized autonomous organizations (DAOs), on the other hand, have mostly managed to stay out of trouble. And they argue an inherent openness to where their funds are kept and how they move is a key reason as to why. 

While decentralized protocols are still nascent — with infrastructure models and tokenomics setups still in their relative infancy — supporters argue there are lessons to be learned from DAOs in an effort to head off future digital asset blowups on the centralized side. 

DAOs have held their own in the latest market downturn. The stalwart performance, coupled with structural maturations, ought to lead to a “large exit out of centralized institutions into decentralized ones,” according to Nick Almond of FactoryDao, who goes by drnick on Twitter.

“Then, it begins to influence centralized governance,” Almond told Blockworks. 

Technology at the center

The rise of DAO governance functions — with parallels to activism in equities markets — have especially bolstered the legitimacy of such collectives, according to a DAO governance consultant who goes by the pseudonym mel.eth.

The outcome, so far: DAOs have made it possible to legitimize how decisions are made in a public, trackable manner via on-chain governance tokens, mel.eth told Blockworks. 

“DAO technology at the middle, people at the fringes — [this] is a good mental model for how a DAO is different to a company which tends to be more like a republic than a true person to person democracy,” mel.eth said.

The purpose of DAOs is to diffuse power among geographically distant people, but there is no cookie-cutter solution. Centralized exchanges, meanwhile, likewise diffuse trading and transaction power around the world. But key decisions are not in the hands of customers or other stakeholders. 

“In my mind, the best way to build a DAO is — the good, the bad, the ugly — you bake it into the process and you learn from it and you hopefully grow the technology,” he said. “If you think of atoms, very simple bacteria cells, mitochondria — it’s all just code. We are massively complex mechanisms, and DAOs are almost an extension of our desire to multiply and propagate and take our initiatives out of our bodies.”

Blockchain technology is now limited to enabling general financial transactions, according to mel.eth. The majority of powerhouse DAOS use the blockchain to enable token-swapping, lending and aggregating — similar to centralized exchanges. But what’s next for DAOs ought to become a real differentiator, he said. 

How do DAOs scale?

MakerDAO and dYdX recently proposed to switch up to governance by moving into a subDAO structure.

Unlike hierarchical organizations that require management structures and require coordination costs, the model shift totally eliminates the need for layers of management to function. 

“If you allow anyone to create a substructure about anything and integrate a funding mechanism in it, then anyone could build anything — that becomes a fractal organization structure,” Almond said. 

So, what’s stopped DAOS from implementing fractal systems, so far? A lack of clarity around how to track what everyone is working on, according to Almond. His proposition solution: impose a meta governance structure on top of individual subDAOs, tracking the organization’s progress as a whole via a consensus-driven sum of its disparate parts. 

“At the moment, DAOs are stuck in an 100% direct democracy which is entirely plutocratic…but by creating different structures, it allows you to find out the bits that people are actually good at and can contribute to — the game is about decentralizing that power down the long tails of participants,” Almond said.

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