a16z: DAO governance dilemma and Machiavellianism
Original author: Miles Jennings, General Counsel of a16z crypto
Original compilation: Luffy, Foresight News
Whatever you think of the Renaissance Italian philosopher and statesman Niccolò Machiavelli, many of the principles he discussed in his writings about leadership and the maintenance of political freedom are still relevant today. Echoes of these principles can be found inFederalist Papers” and the design of the U.S. Constitution as well as recent scholarship on the creation of political institutions. As someone who closely tracks decentralized governance practices in Web3, I believe some Machiavellian principles can also be applied to fixing decentralized governance in Web3.
Currently, most decentralized governance models in Web3 employ DAOs (Decentralized Autonomous Organizations), which use simplified models of direct or indirect democracy, as well as models derived from the field of corporate governance. While these systems are effective first steps, most DAOs fail to overcome the complexities and sociopolitical realities involved in decentralized governance, and their legitimacy and utility are compromised as a result. Machiavellis philosophy was developed based on a pragmatic understanding of power struggles in society, based on the premise that there are no mechanisms to guarantee virtuous behavior. This makes Machiavellian principles a useful guide for designing effective decentralized governance.
In this article, I examine the problems faced by DAOs and discuss why many current solutions have not yet addressed them. I then share how to apply Machiavellian principles to DAOs and propose four design guidelines for creating a “Machiavelli DAO”: (1) Embrace governance minimization; (2) Establish a balanced, always-opposed leadership hierarchy; (3) Provide a way for continuous changes in leadership; (4) Strengthen the leadership team’s sense of responsibility. existSecond companion article, I share how to implement these Machiavellian design principles in practice.
Current issues with decentralized governance
Decentralized governance enables the Web3 protocol to be decentralized and achieve trusted neutrality. Therefore, ensuring that the protocol has effective decentralized governance is critical to the success of Web3. This is especially true for Web3 systems that rely on clients/applications running on top of a shared blockchain infrastructure, as such systems will involve many actors with different motivations.
However, like many other experiments in decentralized organizations, the Web3 protocol faces significant obstacles, and current solutions have not proven to be effective. The most common issues currently faced by DAOs and decentralized governance can be summarized as follows:
Lack of coordination. To promote decentralization, most DAOs have neither leaders nor complete development roadmaps. Centralized and highly coordinated projects may involve regulatory requirements if the value of the token depends on the efforts of others. While the path to decentralization is critical to most Web3 projects, it creates barriers to continued coordination and development. Without a hierarchical structure, DAOs face significant challenges that traditional hierarchical organizations avoid.
Misaligned interests. The interests of DAO members and token holders do not always align, which is a challenge for an ecosystem that relies entirely on token voting. Power imbalances between different stakeholder groups may hinder the protocols trustworthy neutrality, thereby limiting its development. In addition, off-chain negotiations and economic interests may cause conflicts of interest for some DAO members, affecting their votes.
Lack of responsibility. The DAO governance mechanism currently fails to hold token holders accountable for poor decisions they make in governing the protocol. Another problem is that the lack of leadership hierarchy within the DAO, combined with the limitations of direct democracy, makes it difficult for the DAO to hold its contributors accountable. The lack of accountability increases the risk of rent-seeking or insider trading by DAO contributors.
Vulnerable. Token-based voting could leave the DAO vulnerable to vote-buying and other manipulation. As Ethereum co-founder Vitalik Buterin said, separating the economic interests of tokens from the rights of token holders to participate in governance can easily lead to governance attacks.
Participation is low. Direct democracy often results in low voter participation, which in turn makes DAOs susceptible to manipulation by better-organized and more active groups. Even if the DAO could increase participation in some way (for example, by paying users to vote), there is no guarantee that the DAO would benefit from this increase in participation (the quality of the votes may not be high). Ultimately, informed voters are necessary to make informed decisions, and given the relative complexity of DAO governance and the time constraints of participants, it is unrealistic to expect efficient direct democracy in Web3.
Taken together, all of the above issues pose significant obstacles to the success of decentralized governance and DAOs in Web3. The opacity of current practices further exacerbates the problem, making DAOs vehicles for “decentralized performance” – protocols that only pretend to be decentralized.
Many models and strategies have been proposed to address the above challenges. One of the advantages of Web3 is the continuous rapid experimentation and iteration in DAO governance - a kind of lightspeed democracy. It is a public laboratory where democratic experiments can be completed in just a few months.
solution
Below, I summarize some strategies and methods that can help solve the decentralized governance issues mentioned above. Then Ill come back to these by applying Machiavellian principles to DAOs.
Representative Democracy and Representation
Given the practical challenges of direct democracy, many DAOs have turned to representative democracy to strengthen their decentralized governance. The representative democracy mechanism usually adopts the form of proxy voting. Token holders nominate and elect some representatives, and these representatives participate in various votes of the DAO.
The success of these DAOs will ultimately depend on the quality of the agents. So far, most such DAOs have defaulted to selecting industry best actors as representatives, which has raised questions about the long-term scalability and feasibility of such solutions. Professional representatives (whose only job is to participate in such DAOs) also start to become another type of representative.
SubDAO
SubDAO or sub-organizations within DAO can complete specified tasks on behalf of DAO: risk monitoring, network and protocol development, community management, business development, etc.
Compared to traditional companies, subDAOs aim to operate in a more open and decentralized manner, transparently collaborating and coordinating with other subDAOs. This structure is designed to reduce the risk of potentially significant information asymmetries among members. Therefore, if structured properly, a subDAO can effectively operate a DAO without endangering the DAO as a whole.
Tokenless governance
Vitalik Buterin and others (including some of my a16z associates) have called for the system to adopt mechanisms other than token voting to better represent the interests of all stakeholders. Vitalik proposes two alternatives to token-based voting: 1) Proof of Personhood (a system that verifies that an account corresponds to a unique human so that governance can achieve one vote per person); 2) Proof of Participation (“Proving that an account corresponds to a participant a system of persons who have engaged in certain activities, passed certain educational training, or performed certain useful work).
The DAO started implementing these ideas. For example, the governance of L2 Rollup protocol Optimism balances token holders and ecological participants (a citizen group composed of specific ecosystem members who obtain citizenship in the form of soul binding or non-transferable NFT). The recent launch of Worldcoin offers biometric-based identity proofs, which may lead to more adoption of identity governance. The community behind the liquid staking protocol Lido has discussed adopting dual governance, where LDO (Lido governance token) holders and stETH (liquid mortgage ETH issued by the Lido protocol) holders will collectively vote on certain matters to resolve LDO and potential conflicts of interest between stETH holders.
Ultimately, adoption of these solutions may depend on whether the project is commercial or public in nature. For commercial projects, separating economic benefits (measured in tokens) from governance power (measured in votes) can lead to suboptimal economic outcomes. But for public projects, character-proof voting options are more attractive because they better represent the overall interests of the community.
Strengthen sense of responsibility
Recommendations to make DAO contributors (including representatives and subDAOs) more accountable to token holders include: (1) increasing the compensation of DAO contributors to make these roles competitive with other roles in the industry, thereby avoiding adverse selection; (2) ) Establish objective criteria for token holders to evaluate performance.
To hold token holders accountable for their decisions regarding decentralized governance proposals, some have suggestedFrequent forks of DAO. This would enable good decision-makers to fork the protocol from bad decision-makers, so that the latter would only be left with a version of the protocol formed by their bad decisions.
Governance minimization
Minimal governance requires protocols to reduce their reliance on and power from decentralized governance. Reducing all but essential governance will enhance the trustworthy neutrality of the system. Considering the cost of unnecessary governance, protocols with frequent governance will eventually be at a disadvantage in the competition.
Limited governance has been advocated by industry leaders such as Vitalik, who believes that this approach reduces all non-automated parameter choices. Governance minimization is also implemented in many DeFi (decentralized finance) protocols, including Reflexer Labs and Liquidity, which take this concept to the extreme by eliminating all governance.
Applying Machiavellian principles to Web3
The writings of Machiavelli and his disciples (see James Burnham’s Machiavellians: Defenders of Liberty) provide a valuable perspective on decentralized governance. This kind of governance was born in the 15th and 16th centuries when Italian city-states were experiencing constant unrest and power struggles. The challenges faced in that era can be compared to the problems that DAOs must deal with today.
The Machiavellian principle begins with the belief that an objective science of politics and society is possible, and that the overarching subject is the struggle for social power. Machiavellian writings then explore a number of other principles that not only predict the struggles for decentralized governance in Web3, but also provide guidelines for resolving them: from accepting an organization’s authoritarian tendencies, to adopting a permanent from opposition and ongoing changes to balance leadership to increasing overall accountability among participants.
I will summarize these Machiavellian principles (as stated by Burnham in 1943) here and apply them in the context of a DAO:
Direct democracy is a myth
Machiavellians believe that the theory of autonomous democracy does not correspond to social reality. Take referendums, for example, which often produce regrettable outcomes (such as Brexit, which is now deeply unpopular in the UK). Reasons cited by Machiavellians include ignorance of the problem and an inability to attend to matters of governance.
It doesn’t make sense for individuals with low voting rights to devote a lot of time and energy to governance. In Web3, low participation rates are a direct reflection of this, especially on highly complex governance proposals. This ultimately hinders effective DAO governance.
Authoritarian tendencies are inherent in any organization
Once an organization has a large number of activities, Machiavellians believe that the workforce will naturally be allocated to those best suited to accomplish those tasks, including individuals who specialize in the operations of the organization. This inevitably creates an organizational leadership composed of a relatively small minority. It is only through its leaders that the organization can remain viable and functional.
All complex organizations naturally eventually move toward authoritarian leadership structures. This is what Machiavellians call The iron law of oligarchy” is a natural law that exists even if economic differences or the implementation of different political structures are excluded. For example, despite attempts by both the Soviet Union and China to eliminate economic inequality, hierarchies developed and ruling classes emerged. When applied to DAOs, the Iron Law of Oligarchy states that DAOs will naturally move toward dictatorship, and the people most likely to exercise dictatorial control are the original development teams of the DAO protocol.
Leaders want to maintain and expand their power
Machiavellians claim that “…in practice, the first aim of all rulers is to preserve their own interests, power and privileges, without exception. No theory, no commitment, no morality, no good will, no religion can limit Power.” Even in democracies, the masses often fail to hold their leaders accountable, and even democracies are particularly susceptible to powerful leaders imposing their will on the people—a phenomenon Machiavellians call Bonapartism.
If power is left unchecked, Bonapartist leaders are likely to emerge from democratic organizations claiming to be the most perfect expression of the will of the group, the people. Therefore, everything is allowed for him because he is the symbol of the entire group. Applied to DAOs, this principle suggests that DAO leaders may perpetuate their power, or token holders may have difficulty holding them accountable.
Only power can restrain power
Given the autocratic tendencies inherent in organizations, and the inability of the masses to hold leaders accountable, Machiavellians believe that the only check on a leaders power is the power held by those in opposition. In democracies, this manifests itself as opposition to the freedom of leaders—a key tool that enables decentralized governance to transcend centralized governance. In particular, the oppositions public criticism both exposes the errors of the ruling elite and often forces them to correct them. If these errors are stubbornly maintained over time, they can have fatal consequences.
While the right to publicly dissent exists in Web3, DAOs sometimes fail to foster healthy opposition when token holdings are not evenly distributed among opposing viewpoints. Due to U.S. securities law issues related to token distribution, token distribution typically takes the form of airdrops (distribution of tokens for free) or ecological incentives (distribution of tokens to users in exchange for certain user actions, such as providing liquidity). But none of this allows for the launch of decentralized governance with peer-to-peer competitors. As a result, many DAOs are particularly susceptible to Bonapartism, where an individual or group may wield unfettered power.
Opposition can also become entrenched in a democratic system by establishing appropriate checks and balances through a decentralized approach. As James Madison argued in The Federalist Papers, “Ambition must be counterbalanced by ambition.” Implementing decentralization is another way to achieve a balance of power when faced with problems caused by uneven distribution of tokens.
Solid leadership will eventually fail
Machiavellians believe that power should not only be constantly opposed, but should also allow new leaders to enter the leadership hierarchy to avoid the solidification of the power hierarchy. According to Machiavellians, this mobility must be forced because the existing leadership will always oppose it to preserve its position and privileges.
Achieving broad participation of community members has been a hallmark of the Web3 spirit, and often extends to DAO leadership, with community members often becoming formal DAO contributors. However, the ability of community members to gain real power in token-based voting systems is often limited, given the financial barriers associated with gaining such power.
Designing a Machiavellian DAO
The Machiavellian principles I share here can be distilled into four guidelines for designing more effective decentralized governance. A DAO wishing to adopt Machiavellian principles should:
Embrace governance minimization
Create a balanced leadership that will always face challenges from the opposition
Provide avenues for ongoing leadership changes
Strengthen leadership team’s sense of responsibility
But here’s the thing: Delegating authority to any party in a decentralized system could undermine the decentralization of such systems — which could lead to potentially severe information asymmetries and increase the vulnerability of these systems to governance attacks. Furthermore, these guidelines may reduce governance inefficiencies and introduce governance frictions, which may make them unsuitable for certain systems, such as highly dynamic systems or public goods systems.
Therefore, these guidelines must be enforced carefully, and there are ways Web3 builders can do this (please refer tothe second part）。
