DAOs Don't Have to Be Completely Decentralized

Sometimes hierarchies have a place. Complete organizational "flatness" is not always the most effective path for Web3 communities.

AccessTimeIconFeb 23, 2023 at 10:47 p.m. UTC
Updated Jun 14, 2024 at 5:52 p.m. UTC

Decentralized autonomous organizations (DAO) are emerging as a new tool for organizing, managing and scaling Web3 projects.

This article is part of CoinDesk’s “BUIDL Week.” James Young is the co-founder of Abridged, the makers of Collab.Land.

Broadly speaking, the value of DAOs is rooted in the idea of the “global village,” i.e., the capacity to coordinate trustlessly at a global scale. At the highest level, we see three types of DAOs emerging in today’s landscape:

Capital allocation DAOs bring groups of people together to provide liquidity, vote on the allocation of that liquidity and (ideally) distribute rewards back to the community.

Social DAOs are typically organized around a token and promise companionship, networking, learning and collaboration for the community.

Governance DAOs are typically organized around major financial applications in which token ownership automatically grants “membership” (i.e., voting rights) in the DAO and the right to influence the direction of the protocol.

Baked into the name itself, many DAOs position themselves as decentralized – or at least plan to become completely decentralized. However, just because the technology underlying a DAO is decentralized doesn’t mean the organizational structure of a DAO should be as well.

In this hyper-prioritization of complete decentralization, many DAOs are, in fact, “DAOing” it wrong.

Decentralization is the starting point

Traditional organizations are limited in their ability to effectively distribute leadership. The concentration of power and lack of transparency limits innovation, creativity and diversity of thought.

In contrast, DAOs have the capacity to leverage decentralized networks and distribute leadership openly, dynamically and quickly as needs emerge. Members who make significant contributions to the organization are rewarded with influence and voting power, leading to a flexible system of leadership that scales as the organization does.

This model scales leadership, but it does not necessarily decentralize it completely.

Many DAOs say that decentralization, broadly, is the end goal and, as a result, conflates “system decentralization” with “organizational decentralization.” The former refers to the technological systems DAOs are built on and use, and the latter would include the DAO’s social and cultural attributes. System decentralization should be relentlessly pursued while organizational decentralization should be approached with caution.

Organizational decentralization at the wrong time or for the wrong DAO risks miring an organization in chaos and inefficiency — hampering innovation similar to centralized entities.

Rather than decentralizing organization for the sake of decentralization, DAOs should ensure the decentralized architecture of their token and voting enables efficient decision making and scalable leadership. It requires a revision in mindset — decentralization as the starting point, not the end goal.

DAOing it right

In the DAO landscape today there are already examples of how to organize and operate DAOs efficiently. We’re seeing a number of emerging “best practices” that demonstrate just how powerful decentralized technology can be when applied towards efficient management and scaled leadership.

Progressive decentralization is the process of rolling out more and more decision-making power to the community over time, ensuring oversight can still remain with key contributors in critical phases of early growth.

Organizations like Tribute Labs have pioneered legal clarity around DAOs, helping provide pathways forward for DAOs to be built off of decentralized technology with the benefits of traditional organizations.

Innovations in voting like the strong token delegation seen at Ethereum Naming Service and quadratic voting employed by Gitcoin have empowered communities to be more nuanced with their governance. The reality is complete organizational decentralization isn’t always the most effective path forward.

Meanwhile, the rapid adoption of artificial intelligence (AI) is already affecting how some DAOs make or inform decisions. Developers will use AI to help DAOs make better and faster decisions by analyzing data, identifying patterns and making predictions. Since DAOs are online native organizations with the entire governance process tracked on-chain, interactions can be programmatically analyzed.

Hierarchy rules

Companies move fastest with firm, recognizable leadership but companies last longest with a thriving community, engaged contributors and expansive opportunity. DAOs provide the opportunity for both: Decentralized technology can still be overseen by defined hierarchies while also providing permissionless opportunity for others to contribute, grow and scale.

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James Young

James Young is the co-founder of Abridged, the makers of Collab.Land.