Scaling DAOs; The unsolved problem that has led DAOs to hit their ceiling
DAOs started gaining the attention of many crypto native folks around this time of the last year and by the last half of the year, it was declared by many DAOists as the next big thing i.e 2022 will be the year of DAOs. Around 5 months of 2022 have passed and it seems that DAOs have hit their ceilings. On top of that, the market seems a bit bearish and if a recession hits then for sure many DAOs will be wiped out.
The full form of DAOs is Decentralized Autonomous Organization. Let’s see each term one by one.
Decentralized: Everyone defines Decentralization in their own way and over the last few months DAO operators have got a sense that complete Decentralization is neither possible nor feasible as some sort of structure is required for the betterment of DAOs otherwise it’s complete chaos.
Autonomous: DAOs can’t be autonomous as the world isn’t a neutral place. There are good as well as bad actors and checks & balances are necessary. From a talent perspective if a DAO is doing a project it only requires a limited amount of talent and a small-scale project by no means needs 100 contributors and if they onboard 100 contributors it just makes completing a project much more difficult. The harsh reality is just because someone wants to do some work doesn’t mean they can do it for example someone who just knows a bit of UI Design ends up making a UI for a big project in the DAO without him/her having those skills will just waste their time as well as that project will not get a good UI.
Organization- DAOs aren’t organized this becomes pretty clear whenever you join any DAO.
One more issue with DAOs is as they scale it starts making less and less sense for the community members and even many active contributors don’t know the state of the DAO. The voting percentage of Snapshot in most DAOs is less than 1 percent and often there are conversations about how to increase the voting percentage so that more people are involved. The thing is people are busy and they don’t have time to figure out what’s happening in the DAO. I have written this even in my previous Substack article that ownership is important but it’s not sufficient.
This might be got you thinking well I have heard of a term called SubDAO.The SubDAO model is not working very well, it ends up getting too much divergent from the parent DAO and the parent DAO’s core team fails to converge it most of the time. I have myself felt this intense heat in Steward calls and Discourse forums. Just a tip, the real alpha about the state of DAOs lies in Discourse forums. The other thing that can come to your mind is Pods(Orca Protocol has popularized this). I think It can help in scaling DAOs to some extent but in no way, is it’s a one-word answer to scale DAOs indefinitely. More people means more bureaucracy and conflict of interest that’s why startups win most of the time whenever there is a paradigm shift over bigger companies.
To solve voting issues many DAOs are trying the delegation route and the problem with this is that if there is a delegation feature in a community the vote of an individual community member becomes irrelevant, whether they vote or not they can’t change the outcome. If you are not one of the Top 20 delegated people your vote doesn’t mattress much in the context of getting the proposal passed in most of the DAOs who have a delegation system.
A Screenshot of votes on a proposal in Gitcoin DAO
In the back of your mind, you might be thinking well this reminds me of something and if you are thinking politics it’s exactly right.
Not taking just Gitcoin as an example but even for other DAOs the Stewards have different ideologies for different proposals and it’s not that everyone has a unique perspective. If you want you can group them into some subgroups just like the current political system is grouped under Right and Left. I think we might see political parties in DAOs as well as groups like the Five Eyes and G20 in DAOs in the coming time. If you think well how can a group be so powerful. I think it certainly can, some groups only focus on governance and aim at being Steward for various DAOs to help them figure out scaling but in this process, they also end up gaining immense power. A counterargument can be well people can redelegate the votes whenever they want in theory it’s good but practically people don’t have time for all these some might redelegate if extreme stuff happens but normal misuse of power people just don’t have time. The most concerning thing isn’t one proposal that will severely affect the DAO but slower and targeted attacks on the DAOs.
The biggest fundamental issue with most of the DAOs is that they don’t have any business model and many of them even don’t even want to make a profit. The problem with not making a profit is that a DAO has limited funds which might work for many months if the DAO is as it is but as it scales these funds starts falling short.
Value creation and value capture are different things and people often live in a false sense that just because they create value in any form they will be also able to capture it.
Not every sportsperson in every sport is paid the same. A soccer pro-athlete is paid much more than a rugby pro-athlete not because one works less in comparison to the other but because both sports generate different amounts of revenue because of their popularity and many other factors. Just like that, not every DAO can pay contributors heavily and the situation becomes much worse when your treasury is shrinking and Stewards have no intention of making the DAO sustainable as they are caught up in handling working groups and focusing too much on short term stuff. DAOs attracted some of the brightest minds initially, but most of these people have started spending less and less time. contributing to DAOs. If the DAO doesn’t pay well it can’t retain contributors because vibes don’t pay the bills.
Many folks relied on DAOs to cover their expenses through selling DAO tokens but it seems they just keep on crashing and crashing lol and most of the time it’s the only core contributors who have a stable salary.
If a DAO scales from 50 to 500 contributors and doesn’t generate any revenue then it just creates more burden on the treasury and a sense of dissatisfaction between the contributors as now they will have to compete with other people within working groups to get work, as well as more people in a Coordinape circle, leads to more dynamic compensation problems. Many smaller DAOs completely rely on Grants to get the capital for compensating their core contributors.
Many bigger Grant programs are now focusing mostly on funding the grants that add value to their protocol, and if a recession hits then accept that getting a grant will be much more difficult. I have been in some DAOs that initially thought that they can operate solely on grants but as they scaled all of these DAOs came to an understanding that grants are unsustainable. The part of the problem is that most of the bigger grant programs are run by protocols and they want that every grantee should add value to the protocol directly. When it comes to Public Goods, event Gitcoin grants have a cap of $30,000 and the public goods infrastructure isn’t so good that it can fund every other DAO that is building public goods.
Many DAOs also suffer from a leadership crisis. In absence of leadership, the story of Everybody, Somebody, Anybody & Nobody occurs.
Some DAOs have a unique problem that is they start with a tweet the person tweeting it generally has a good following and is already busy with his/her stuff in Web3. So after fundraising and all. he/she tells the community to decide what they want to do next or appoints someone trusted from the community or outside and slowly the person who founded the DAO becomes inactive. Most of the time these transitions don’t go very well as the new person doesn’t have a founder’s mentality and even if he/she has that, incentives aren’t aligned so that person also slowly fades away stating that he/she got busy with something else.
Building a DAO is tough because of various reasons and as per my understanding DAOs will become more and more centralized as the market conditions become worse and the best DAOs will be more like heavily community-focused startups, maybe something like Web3 Notion, Web3 Duolingo, or Web3 Figma. Interestingly many DAOs have already started working like startups where the core team builds stuff and community member do things around what’s getting built without being directly involved with it and they have also gated contribution in the DAO based on requirements and skills of a person.
I have been in many DAO meetings where there are 30 people in a working group with all of them being part-time except 1-2. Everyone is giving their own opinions in a meeting and when it comes to getting the work done hardly 4-5 do and the other people just join meetings every once in a while. One other problem is that if there are too many people in a meeting then it means there can be too many conversations and it doesn’t scale linearly. For example, if there are two folks they can interact in one pair if there are 4 then they can interact in 6 pairs and if there are 30 then they can interact in 435 pairs.
DAOs are trying to do the undoable that is solve coordination at scale and this is very complex not because we can’t build tech for it but because humans are pretty dynamic and complex. If we look historically humans have always operated effectively in small groups and it is the individuals working with a small group who changed things not insanely big groups.
The Jeff Bezos Two Pizza rule explains this very well. It doesn’t seem like DAOs will become the next trillion dollar companies but they will just be like organizations and interesting groups that have been there for years but in better valuations and will be using Web3 rails more and more instead of Web2. If you want to chat more about this topic feel free to DM me on Twitter.