Introduction

Since writing my last post about how DAOs form and utilize working groups for governance, I have expanded my active participation to more DAOs. These new experiences helped to broaden my understanding of how these working groups function, while simultaneously deepening my exposure to DAO governance.

I have participated both in social DAOs and protocol DAOs. The former had structureless governance; the latter had structured governance. In my experience, the latter was better, less susceptible to capture by individuals with loud voices, but little substance, who inadvertently (or advertently) use crypto’s permissionless and universal accessibility to their personal advantage.

My experience in these DAOs led me to the question: why are some DAOs unproductive, flailing until they ultimately sink, while other DAOs are productive and lift all boats?

I took to crypto Twitter for my early research and stumbled upon the below tweet by Kevin Owocki from Gitcoin, which led me to read The Tyranny of Structurelessness,  a prescient essay, originally published in 1972, by the political scientist and writer Jo Freeman.

Vitalik Buterin, one of the founders of Ethereum, references the essay as well in his post Notes on Blockchain Governance.

After reading Jo’s essay, the answer to my question started to unfold.

Informal governance and structurelessness

The Tyranny of Structurelessness is about the women’s liberation movement. But the lessons ring true for DAOs, too.

Jo writes, “Structurelessness" is organizationally impossible. We cannot decide whether to have a structured or structureless group, only whether or not to have a formally structured one. A Structured group always has formal structure, and may also have an informal, or covert, structure. It is this informal structure, particularly in Unstructured groups, which forms the basis for elites.”

She continues,“Elites refers to a small group of people who have power over a larger group of which they are part, usually without direct responsibility to that larger group, and often without their knowledge or consent. Informal structures function like a sorority – people listen to others because they like them not because they say significant things.”

A visual is helpful here to demonstrate the difference between structured and structureless groups, or as commonly referred to in business operations management, formal and informal groups.

Informal structures in DAOs are all too common. DAOs with informal structures tend to break down with toxic bickering, when members have nothing better to do with their time than finger point and blame one another for problems. Jo describes this phenomenon as follows: “Able people with time on their hands and a need to justify their coming together put their efforts into personal control, and spend their time criticizing the personalities of the other members in the group.”

The DAOs that flail and sink are the ones that focus on building an ultra inclusive community. By attempting to make everyone’s voice heard, they stagnate in indecision and a lack of focus. The leaders who emerge, a.k.a the spokespeople, as Jo would call them, are the people who get power because they are well-liked, not because they say and do things of substance.

Note: Although it is tempting for me to shine the spotlight on specific DAOs and say ‘hey, look, these DAOs should be avoided’, I will refrain from doing so. The purpose of this post is not to point fingers, but rather to provide insights, so that you, on your own, feel more equipped to evaluate the quality of a DAO.

The DAOs that are productive and lift all boats are the ones that seed a community only after they built a business model, a product, and/or a protocol. Their community is not necessarily ultra inclusive - rather it is meritocratic, with a formal governance structure to ensure a diversity of perspectives in the governing body.

The leading DAOs, as measured by treasury size, are loosely centralized. They are more pragmatic than ideological. They find balance between paradigms of the old world and the new world that they are creating.

In this post, I will be focusing on three leading DAOs: Optimism, Uniswap, and Arbitrum. Each of these DAOs manages a multi-billion dollar treasury and has had to make important decisions about how to structure governance to ensure voting power is not concentrated in the hands of a few, while also preserving crypto’s important principles of permissionless and global accessibility.

Each of these three DAOs is working with a different degree of governance centralization and grapples with a unique set of real-world governance challenges. This makes them all great case studies for examining governance within DAOs that are managing to avoid the tyranny of structurelessness.

DAOs and the evolution of governance

Before diving into the specifics of Optimism, Uniswap, and Arbirtrum, let’s align on what governance is and where it can be found in traditional systems.

Governance is simply the process of making and enforcing decisions. It serves the overarching purpose of creating legitimacy and accountability in systems and ensuring the proper functioning of institutions.

In political systems, governments use governance to create rules and make binding decisions in a particular geo-political jurisdiction. In corporate systems, governance creates rules and processes overseen by a board of directors who direct a company’s resources. In DAO systems, a group of token holders makes process, policy, and program decisions that impact the allocation of funds from the treasury.

DAOs represent a new paradigm in governance because, unlike their centralized counterparts, the role of governance in DAOs is to enable equitable and efficient decentralized decision making among its members.  Ideally, over time, the DAO takes the reins from the core team. The process, however, does not happen overnight and it requires careful thought and design. When done right, progressively decentralizing the decision making process by relinquishing authority from the core to the DAO allows the protocol (the infrastructure) to remain open, neutral, and fair. This ensures credible neutrality, an important property of crypto and the Internet.

Pillars of DAO Governance

There are three core pillars of DAO governance to dodge the Tyranny of Structurelessness: (1) formal structure, (2) strategy, and (3) meritocracy and diversity.

Note: These three pillars are not prescriptive truths. Rather, they are supporting structures, subject to interpretation and change, as DAO governance evolves.

Core Pillar #1: Formal structure

Although DAO governance creates tremendous opportunities for a new and diverse group of stakeholders to leave their mark on the next evolution of the Internet, a formal and loosely centralized structure is imperative to the healthy functioning of a DAO.

It is a false belief that all degrees of centralization are to be avoided in a DAO. Especially at the onset, a DAO needs support from a centralized entity such as a Foundation or a Core Team. These are groups whose incentives are aligned from the get-go because they have been recruited through a traditional centralized hiring system and are therefore fully vetted, qualified, and, very importantly, typically compensated competitively.

It is the responsibility of this initially centralized entity to create formally structured governance, with explicit rules and processes. Theoretically, the absence of a formal structure could result in the emergence of informal structures, which could result in the formation of covert groups of elites, toxicity on discussion forums, “bread and circuses”  type patterns of rewarding low-value work, and so on and so forth until the DAO completely breaks down.

In my experience as a delegate who has participated in multiple complex and accomplished governance systems, Optimism has built one of, if not the most, formally structured governance systems that exists today. The Optimism Foundation plays a central role in creating and enforcing this structure. As written in Optimism’s Constitution, “the Foundation’s board can allocate treasury assets, amend the constitution, or “take other actions” that are conducive to its stewardship role.” Over time, The Foundation will theoretically decentralize its role.

The Optimism DAO has achieved success by implementing a bicameral governance system, collective intents, and missions and alliances.

Note:  ‘Optimism’ refers to the network, a Layer 2  blockchain on Ethereum. ‘Optimism Labs’ is the for-profit entity that builds the Optimism Protocol and does business development. ‘Optimism Foundation’ is a non-profit organization dedicated to growing the Optimism Collective.

Optimism’s bicameral governance system

In April 2022, Optimism created a governance system that borrows concepts from America’s bicameral Congress. Members of the Optimism DAO, also known as The Optimism Collective, are Internet citizens of a digital democratic government. 

Reminiscent of a constitutional government with checks and balances, The Optimism Collective consists of a bicameral system made up of two houses: Citizens House and Token House.

The bicameral structure went into effect after the first OP token airdrop, where community members who previously used the Optimism protocol, received tokens as a reward, based on their usage. The tokens were encoded with governance rights that enabled holders to vote on proposals, create proposals, and, more recently, delegate their voting power to an individual or to an entity. The governance scope of Token House extends to protocol upgrades, project incentives, and treasury funds (e.g, setting budgets).

The Citizens’ House governs retroactive public goods funding, a grants program that retroactively rewards teams who build and add value to the Optimism ecosystem. Citizens House is funded with revenue collected by the Optimism protocol. Unlike Token House where governance power is tied to the number of OP tokens that a member house, Citizens’ House governance power does not come from the OP token. Instead, authority is granted through a non-transferable soulbound NFT, with the intention of  preempting a possible future plutocracy (where the wealthy control governance by exerting financial pressure and aggressively acquiring tokens). Important to note that the Citizen’s House is a future concept that has not yet been implemented.

Optimism writes, “Together, the two houses of the collective will drive a powerful flywheel, funding public goods that make Optimism blockspace more valuable, leading to more revenue for public goods, and so on.”

Collective Intents

Collective Intents are “directional goals that allow the Collective to align and focus.” In other words, they are strategic goals set by the foundation.

OP is transparent about centralization, writing, “Most Season 4 Intents will be set by the Foundation. Future Intents will incorporate more and more input from the community, until these Intents are set collectively.”

Each Intent (strategic goal) has a budget from the governance fund. Token House votes to approve the budget. In Season 4, the Foundation has suggested Intent Budgets.

“The Token House will vote to approve each Intent Budget. Prospective Council Leads will put forward an Intent Budget Proposal for the Intent overseen by the Grants Council (Intent 2). Over time, budgeting will become increasingly community-led.”

Missions & Alliances

Missions are strategic goals executed by Alliances. An alliance is essentially a working group, which I wrote about in a previous post. As Optimism points out, the way that most DAOs use working groups has pitfalls. Alliances will operate differently than working groups in most DAOs to avoid these pitfalls.

Optimism has baked in three essential components into working groups: (1) strategy (missions), (2) accountability (tight scope & budget for fixed time) and (3) reputation (collective trust tiers).

Most DAOs treat working groups like business units. They are funded for an indefinite period of time, are given budgets from an unsustainable and un-scoped treasury, and they tend to overfund non-core work over core strategic work.

Missions are tightly scoped to be accomplished in one season and are executed by Alliances in pursuit of collective intents (strategic goals) until the budget of the Intent is fully allocated. Foundation Missions (RFPs) can also be published under an Intent. Only The Foundation can create RFPs and they aren’t budgeted from the Governance Fund.  Token House doesn’t vote on Foundation Mission RFPs.

This concludes the section on formal governance structure. The next section switches gears to discuss the second core pillar: strategy.

Core Pillar #2: Strategy

“Good strategy has three essential components: a diagnosis of the situation, the choice of an overall guiding policy, and the design of coherent action.”

- Richard Rumelt, Good Strategy/Bad Strategy

The above quote by Richard Rumelt, Professor at UCLA Anderson School of Management, identifies the components of good strategy. These components are predicated on careful thought, design, and execution.

On the flip side, bad strategy is not carefully thought out, designed, or executed. Rather, decisions are made on a whim, based on intuition and gut-feeling. On a false belief that one can predict the future.

Informally structured DAOs have bad strategy.

Bad strategy in a DAO is unfocused. Members do low-value work, creating a false sense of productivity. The problem is that the work is not directly tied to core initiatives nor is it bound by time or a budget. The DAO just spins like a hamster in a wheel until, eventually, “[The DAO] will either be attacked from within through entrenched power dynamics or from without via regulatory threats.”

Formally structured DAOs have good strategy. Good strategy is focused.

Justine  from The Optimism Foundation writes, “focused DAOs usually set strategy via prominent leadership with a high degree of influence. Influence is effective at the beginning of a DAO’s life, but as the initial leaders phase themselves out, the succession problem arises. Prioritization frameworks teach the community how to make strategic decisions themselves.”

Note: You can learn more about DAO governance policies, programs, and processes, in Justine’s comprehensive research initiative: The Collective DAO Archives and Searchable Library

Protocol-first DAO Strategy

A DAO with a focused and formal strategy thinks about DAO design like Protocol Design. It doesn’t matter if the DAO is a Protocol-DAO, where the product is a DeFi protocol, or if it is a Social DAO, where the product is the community. All DAOs can apply the mindset of a protocol-first DAO strategy.

A Protocol-first DAO strategy is predicated on a business model. The first step in creating a business model is to list out all of the users and their core interaction.

In a DeFi protocol DAO, this exercise is pretty simple.

The protocol creates a market using an automated market maker model. Liquidity providers bring the supply and traders create the demand. Thus, the core interaction is the asset transaction, typically a swap from one crypto asset to another. The business model of most DeFi protocols is to take a cut from each transaction. Uniswap, however, is an exception, as it directs 100% of fees to liquidity providers; the Uniswap treasury doesn’t generate income but only holds $UNI tokens.

In a Social DAO, the business model is not as simple. Social DAOs tend to do many activities (hence their lack of direction and focus!) –events, content creation, education, grants, etc. This makes it more difficult to identify the core interaction. But also that much more important to get it right. Because capturing value and charging money from the wrong activity will result in wasted time and resources.

Once a DAO, Protocol or Social, has identified its business model, then it can as 0XJustice calls it, “Crystallize into a Protocol.” This means codifying the core interactions into self-sustaining mechanisms, repeatable processes that generate value, bring in money, and can be remixed by others for further innovation. Another way to describe it is the Flywheel Effect.

Protocol-first DAO Strategy in Practice: Uniswap’s Business Source License

The protocol-first DAO strategy is theory heavy. However, as we know, theory and practice are not the same thing.

In theory, creating building blocks, money legos, or whatever other repeatable self-sustaining mechanism that a team identifies, is a useful exercise. But when it comes to implementing it in the real world, there need to be constraints.

Let’s take Uniswap’s business source license as an example of why and how to implement constraints to permissionless innovation.

When Uniswap released v3, Uniswap Labs introduced Business Source License (BSL) 1.1 to limit the use of the v3 source code for two years. When the $UNI token was launched, management of the Business Source License was transferred to the DAO.

Fast forward to June 2023 and Uniswap launches v4. Again, they use a business source license to limit the use of the v4 source code. This time, for four years. Ideological crypto natives have expressed negative criticism. But the critics are missing the point.

A business source license does more than just protect Uniswap’s moat, as critics express. A BSL is a mechanism to facilitate partnerships and accountability. It’s also a step towards governance minimization, legitimacy, and a future source of revenue for the treasury (once the DAO votes to turn on the fee switch which will retain a small portion of fees, as currently 100% of fees are directed to liquidity providers).

New protocols launch on a regular basis. These protocols want to deploy Uniswap on their network. In the world of permissionless innovation, a new protocol team can do this by forking Uniswap’s codebase. Sure, this is great for the new protocol team’s marketing and growth. It’s easy to imagine how that team can incentivize new users with the allure of Uniswap on their network. But is it safe for users? Can this new protocol team be trusted? Does the new protocol team have skilled developers who can properly deploy the codebase? Are the smart contracts audited?

If the answer to any of these questions is ‘no’ then Uniswap’s reputation is on the line.

That’s why a balance between decentralization and centralization, between the old world and the new world, must be created deliberately in DAO governance.

Core Pillar #3: Meritocracy and Diversity

Meritocracy strikes a balance between accessibility and capability. Meritocracy is the enemy of structurelessness.

DAOs with structured governance create bumpers to guard against a concentration of voting power. No one actor should be able to accumulate enough wealth to steer governance to their own self interest. The DAO should not become a rich kid club.

Instead, there should be many actors participating in governance. These members should represent the different stakeholders of the underlying protocol (remember, a Social DAO can also be thought of as a protocol). And, very importantly, the members should be diverse. As the forward-thinking systems theorist Donnella Meadows wrote in 1993:

“Insistence on a single culture shuts down learning. Cuts back resilience. Any system, biological, economic, or social, that gets so encrusted that it cannot self-evolve, a system that systematically scorns experimentation and wipes out the raw material of innovation, is doomed over the long term on this highly variable planet.”

In the same way that a protocol-first DAO strategy requires deliberate effort, creating an environment of meritocracy and diversity  requires intentional execution. The Venture Capital fund A16Z and the Arbitrum Foundation have started to take strides in the right direction.

a16z Token Delegation program

a16z has one of the most reputable cryptocurrency funds. It is also a major stakeholder in the biggest DeFi protocols including Uniswap, Arbitrum, Optimism, Celo, amonst many others. A16z has a lot of tokens and a lot of voting power. However, as a reputable actor in the space who is playing the long game, a16z wants to minimize community backlash.

Creating a delegate program is a great way for a16z to uphold its reputation while also doing good for the crypto ecosystem and fostering new DAO leaders. In a blog post, a16z writes:

“A “strong” form of delegation is needed. One that not only reduces surface-level concentration, but that also enhances the quality and diversity of the governing body. And perhaps most important of all, one that empowers each delegate to vote independently from the token holder, in whatever way they see fit.”

Arbitrum’s ambassador program

Arbitrum Foundation’s Ambassador Program is similar to a16Z’s token delegate program in that it initially targets university blockchain clubs. It also has the potential to create a new wave of DAO leaders.

Students who are accepted into the Ambassador program enter a “University Fleet,” a group that is focused on building, learning, and educating. Ambassadors create content, host in-person events, propose funding initiatives for the Foundation, and represent Arbitrum on their campus. Phase 2 will open the program up to people who are not affiliated with a University.

Of course, the Ambassador Program is a marketing and growth tactic for Arbitrum. But like a16z’s token delegate program, it also does good for the crypto ecosystem by providing a training ground for a capable group of people to learn, to grow their professional network, and to make meaningful contributions to Arbitrum and Ethereum.

Conclusion

This post describes the Tyranny of Structurelessness in DAOs. It takes inspiration from Jo Freeman’s prescient 1972 essay by the same name.

The core idea is that DAOs without a formal and deliberate governance structure fail because a covert structure takes hold that results in elites: a small group of people who have power over a larger group but without accountability to that group.

The DAOs who dodge the Tyranny of Structurelessness are ones that find balance between centralization and decentralization. Between paradigms of the old world and paradigms of the new world. These DAOs are not ideological and they follow three core pillars: (1) formal structure, (2) protocol-first strategy, and (3) meritocracy and diversity.

Uniswap, Arbitrum, and Optimism, are leading protocol DAOs, as measured by treasury size, which frequently embody and utilize these three core pillars to solve real-world governance challenges. This creates accountability, legitimacy, and capture resistance.

Acknowledgements

Thank you to Shingai Thornton and Kyler Wandler for sharpening this post with your thoughtful feedback and edits.