Special thanks to @0xjfy and @0xfogducker for their contributions to this article.
What is a DAO?
This is a question that, especially in recent times, becomes more and more important in this everchanging space. With so many random projects branding themselves as a DAO simply for the namesake, a clear definition of a DAO is absent. They label themselves as a DAO purely for marketing regardless of their actual structure. Problems as trivial as “decentralized” space travel have a DAO; a group of simps can come together to form a DAO; your group chat of shitposters can become a DAO just by slapping the letters onto their name. Simply, DAOs have become saturated within the industry, becoming a necessary feature for marketing.
From our first article: The definition of a DAO has been extended to any nebulous structure that a protocol can slap on their organizational structure to appear decentralized.
The saying goes, “a few bad apples spoils the bunch,” but it’s important to remember and highlight the projects that are truly, by nature, DAOs and don’t use the title as just another marketing grab. We introduce our third and final analysis of DAOs: the coreDAO – the expected framework of a decentralized autonomous organization. In the coreDAO, control is truly decentralized with the founding team stepping back from governance. Control is given to the community in a system that can be likened to democracy. The archetype for this structure is none other than MakerDAO.
Within Maker, community governance requirements check the usual boxes: token holders can decide on DAO decisions; locked tokens grant a larger vote weight; proposals are finalized on-chain. Of course, there is much more to say regarding the intricacies of MakerDAO, but the most important part of this coreDAO is its governance structure. Everything is created, voted, and implemented through the community through MIPs (Maker Improvement Proposals) that are only set in stone after a long approval and deliberation process. Maker themselves say it best:
The Maker community is MakerDAO.
The unique governance structure allows the protocol to change as narratives in the space shift, ensuring that the goals and purposes of the DAO does not remain static like they are in pseudoDAOs.
Although we like to shit on TradFi or TardFi haha, Maker’s community took a page out of their governance playbook, adding their own little twist to it to make it unique. In TradFi, the division of responsibilities and the hierarchy of power is quite clear. A CEO spearheads the company, ensuring smooth operations and ensuring success. Of course, a CEO can’t do everything themselves, so specific responsibilities are then delegated to other individuals – CMOs responsible for marketing, CTOs responsible for technological operations, CFOs responsible for financial operations, CHRO for human resources, and so on. TradFi got it right to split these responsibilities up within their companies, but there is a clear downside.
These positions, integral to any organization's success, are held by a single individual, creating a single point of failure. Little to no checks and balances exist for the higher-ups – it’s why corruption runs rampant in TradFi and partially the reason we all dislike the industry.
Maker’s community saw the benefit of delegating responsibility but also the risk of giving an individual too much power. Instead of delegating a sole team member to fulfill these positions, MIP39 marked the epoch of Maker’s key attribute within their governance structure – Core Units. Facilitators act as the general for these small teams. Like their TradFi counterparts, core units are delegated with a specific responsibility similar to the responsibilities of the traditional structure: the TechOps Core Unit assumes responsibilities that CTOs have; the Strategic Finance Core Unit can be compared to CFOs; the Data Insights Core Unit replaces traditional CDOs. These community-proposed governance structures provide a key benefit – they are not limited to the cookie-cutter formulaic structures that exist in traditional corporations.
There is, of course, structure within core units as well. Just as a colonel commands over their squadron, a facilitator oversees their unit. MIP41 introduced the idea of facilitators to DAO governance. They are the ringleader of their group responsible for whatever mandates or questions arise. Facilitators require a lot of autonomy, responsibility, and trust – similar to the traditional higher positions held by a single person in traditional corporate structures. Even so, their positions are not guaranteed. If there is a major fuck up or mistake, a facilitator can be voted out easily. While special powers like budgetary administration are given to them, their power is nowhere near absolute. Facilitators aren’t just taken randomly from the community through a lottery system or something similar. Rather, they’re required to provide a detailed plan on how they want to improve a core unit. If their pitch is strong and the community agrees, they can be onboarded as a facilitator at least after a bit over a month of deliberation. Many of Maker’s governance qualities aren’t new or groundbreaking. The community has taken notes from traditional corporate governance for sure. But flexibility is what makes coreDAO protocols like Maker so special, taking what works in TradFi and adding their own flair at the same time.
Shifting the responsibility of the protocol completely to the community may seem like a cop-out of some sorts, but it is a true representation of a DAO where control is decentralized to its users around the world. The team creates the initial product with the final stage of governance given to the community. It is the logical final evolution of the DAO. While pseudoDAOs may fail without a team or not even need a team, they remain stagnant in this space, fulfilling their specific role like Liquity or slowly shrinking into the shadows like Temple. govDAOs revolutionized this space, creating a new token model imitated by many protocols who were incentivized by profit. The coreDAO can be understood as a mesh of the two, meeting ever-changing goals in a constantly-changing industry through their community governance, regardless of their incentives.
Good Governance and Institutional Completeness
In the long-run, we do expect Maker to outcompete many competitor DAOs due to its completeness and organizational structure. The task for late-comers now is not to retrace the same steps of early developers exactly; in fact, that is a dire mistake that takes away any first-mover advantage that may have been preserved. Rather, new projects must take the structure of a coreDAO canonized by MakerDAO, and improve upon that. There’s little need to dawdle before this.
Gerschenkron’s main point was in the fact that late-developers often caught up to earlier ones, for no discernible reason. Many analysts and researches disregard the inherent qualities of lateness, and the unique tools these developers have. We believe the same can be said of DAOs in this space, who must go through the same developmental steps as states in the real world. To learn is to grow, and the lessons of the already successful are immensely valuable.
Of course, all of this is with the assumption of longevity and sustainability. In the current model of going fast and breaking things, this may very much not be the case. In the long run though, pseudoDAOs and govDAOs ought to fall by the wayside.