When DAOs are a good governance model and when not
There's a micro-debate on Twitter about whether DAOs (decentralised autonomous organisation) are a good way to govern a Web3 project. For example, this is a tweet about the pros:
But whether every Web3 project should be governed by a DAO is not a simple yes/no question.
Projects like Uniswap, Ethereum Name Service, ThorChain all have some form of on-chain governance, but they don’t characterise themselves as DAOs.
Lido DAO, which runs the Ethereum proof-of-stake liquid staking service, does term itself a DAO but moves like a centralised startup.
Flamingo DAO, the investment collective, is a DAO in asmuch as its members have the same (token-gated) rights to participate in investment deals.
So here is how FNDX thinks about this, in the form of a Twitter thread.👇
I think it makes sense for more mature projects, not in the early move-fast-break-things stage.
1/
Consensys is looking to decentralise its blockchain-access tool Infura, which is baked into its Metamask wallet and more.
It's mature enough that it's desirable for >1 entity to take it forward.
2/
Early stage projects in new Web3 niches are startups.
Managing tokens distribution, the real effects of price speculation, and the overhead of governance will diminish their changes of success.
3/
It also distracts the team from building to managing
- token incentives,
- the usual 'treasury' and 'grants' and 'ecosystem development' wallets and
- investor token handouts
before they find real product-market-fit and traction.
4/
When a project/protocol decides to tokenise incentives among network participants only after it has real adoption, it can also make token distribution less speculative than just a random public sale at the start.
5/
For instance Consensys can first get 3rd party nodes to run Infura s/w and airdrop most tokens to these nodes to stake.
There can be a smaller public sale to bootstrap liquidity for Infura tokens.
6/
If Consensys had done this at the start, there would be large allocations to itself, to VCs, to sundry 'grants' and 'funds' controlled by it to fund development. VCs & team would be incentived to sell asap.
Hopefully now they've already recouped costs and are profitable.
7/
This way the initial DAO participants are the nodes themselves, who are incentivised to build a network that attracts the most users from competitors like Alchemy, Quicknodes and Ankr.
8/
And instead of an initial sweetheart allocation to themselves, the Infura team could earn revenue from tokens used for to pay for usage of the protocol and from slashing. They could earn its way to being a DAO participant.
9/
So. In Conclusion. Twitter debate on DAOs for web3 projects:
- DAOs good for mature projects, not early startups.
- E.g. Consensys decentralizing Infura makes sense.
- Early startups' success hindered by token management.
- Tokenize incentives after adoption => less speculation.
- N/W participants = initial DAO participants. Incentives aligned.
- Protocol earns DAO votes via revenue from protocol usage and slashing.
10/10
★
Featured Image by Hannah Busing on Unsplash
Interested in knowing more?
No material on this site or made available via this website or otherwise is a solicitation of investment. Performance numbers are not an indication of future results. Key facts are subject to change and will be displayed on the FNDX website.
Your use of FNDX's website and/or all associated material and/or services is subject to the rules of the jurisdiction applicable to you.