#88: A Summary and My Thoughts on "Protocol-first DAO Strategy"
A commentary on Justice Conder's thoughtful piece about DAOs
The DAO discussion should center on token engineering, incentives, and organizational design and less on the evils of capitalism and traditional corporations. How do we get there?
This week, I came across a fascinating article on DAOs, titled Protocol-first DAO Strategy. The author is Justice Conder, an Ecosystem Developer at Polygon Labs, who writes under the pseudonym 0xJustice.
This post is part summary, part commentary of 0xJustice’s article. In a space that is flooded with ideological narratives and calls to action about reinventing society, this article is refreshingly not that.
I encourage you to read the original article, to let the ideas percolate in your mind, and then to participate in the conversation on Twitter here.
Justice describes DAOs using a systematic design-centric approach. Using seminal source material from Vitalik and Szabo, he guides readers through a history and evolution of DAOs. He explains a common pattern in DAOs, with an analogy to a Latin figure of speech: “bread and circuses” — to deconstruct DAO shortcomings, which include an excessive focus on community and governance, dogmatic beliefs, and lack of a business model. He proposes for DAOs to start operating more like protocols and platforms to innovate on existing Web2 business models.
Protocol-first DAO Strategy
The unstructured community-first experiment has failed…This assumption encourages a "bread and circuses" pattern of paying people for low-value activities. It also conflates those with a founder mentality with contributors seeking paid work.
What is the “bread and circuses” pattern?
The “bread and circuses” pattern is superficial appeasement.
Justice applies the “bread and circuses” pattern to DAOs, arguing that DAOs have taken community-involvement to the the extreme. In an effort to make every contributor feel valued, all activities, even low-value ones, are financially incentivized. Rather than offering contributors bread as a palliative, DAOs offer them tokens.
This creates a circus out of the contributor experience.
Why do DAOs do this?
I think because it’s fairly easy. DAOs, in theory, have “infinite” resources: a global contributor pool and relatively frictionless onboarding. They also tend to not have roles that focus on strategy and prioritization.
Community-first must give way to protocol-first
Startups are not communities; the DAO ecosystem is destroying itself by acting like they are.
The next generation of DAOs will be protocols with limited governance. This approach was always the way. It's just taken some time to get back to it.
If you have ever contributed to DAOs, you know how wildly inefficient governance can be. The need to have members vote on every single decision is exhausting! It’s also a distraction from contributors doing their actual work, as it forces people to politick for their individual interests. (Similar to traditional centralized organizations where people spend their careers politicking).
Justice writes that the best path forward for DAOs is to become protocols with limited governance. It’s a really interesting idea that builds on Fred Ehrsam’s (co-founder of Paradigm and Coinbase) prediction from 2020, in a blog post titled Governance Minimization, that “the most widely used protocols will trend towards governance minimization.”
Why is governance minimization so important?
The answer is simple, Fred argues in his blog post: dependability.
If DAOs start to resemble centralized organizations that have groups of people with entrenched interests who can change up the rules at any time (e.g, Facebook and Twitter restricting their developer APIs), then contributors will lose trust and leave. DAOs will no longer be dependable.
When DAOs become protocols, as Justice suggests, they will return to their roots, as originally envisioned by Vitalik and Szabo.
These visionaries were not prescriptive about what a DAO should be, but rather they purposefully left the definition open to the interpretation and imagination of builders and operators.
Justice includes the following excerpt from Vitalik’s Terminology Guide on DAOs, etc.:
“The above definitions are still not close to complete; there will likely be gray areas and holes in them, and exactly what kind of automation a DO must have before it becomes a DAO is a very hard question to answer.”
- Vitalik Buterin (DAOs, DACs, DAs and More: An Incomplete Terminology Guide, emphasis added)
The individual concepts that make up the meaning of DAO are ambiguous. When people interpret them in different ways it creates confusion. In Disambiguating Autonomy, an article I wrote in collaboration with BlockScience, we try to break down the meaning of Autonomy, using ideas from cybernetics. We write:
The aim of this post is to clarify this important yet multifaceted concept, by breaking it down into two categories and four types of autonomy. Here, we examine these as relational concepts that have tensions and trade offs and their context in emergent, self-organizing systems such as Decentralized Autonomous Organizations (DAOs).
With that said, the definitions of Decentralization and Autonomy that Justice provides in his article are overly simplified.
The "decentralization" in DAO has to do with the geographical location of the code and its users, not a particular governance system. The "autonomous" in DAO has to do with the idea that agreements between participants are enforced by code and not by legal mandate.
For a more nuanced explanation of decentralization, I suggest reading this comprehensive post from DAO Research Collective
DAOs as Incentive Machines
In this section, Justice frames DAOs with a historical lens. He traces the origin of DAOs from the beginning, all the way to the present day, showing how each new generation of DAOs solved some problems, while creating new ones.
First, there was Bitcoin and Ethereum, protocols that effectively operated like a DAO in probably the purest sense of decentralization and autonomy: with no human interference. Transactions flow and are coordinated via encoded rules in the protocol. As Justice writes, “humans work for the protocol.” Miners, the computers that keep the protocol operational and secure, are incentivized by block rewards in the protocol’s native token (Bitcoin or Ethereum).
Then, in 2016, there was The DAO, and in 2019, the Moloch framework. This next generation of DAOs enabled coordination by crowdsourcing funds, giving people exposure to a project’s token. Regular people (not developers like in the first generation of DAOs) became owners in the project and, theoretically, had a financial incentive to stay engaged (although in practice this didn’t always happen).
Now, there is the third generation of DAOs: the community-first model. Meaning, users become owners in a project via token airdrops that give them access to join a Discord community. This has dramatically increased accessibility for both DAO creators and DAO contributors. Essentially, it is a new content marketing tactic that solves the cold-start problem faced by traditional startups. Justice writes tongue-in-cheek, “You could meme an economy into existence with magic internet money.
As any Product Manager will tell you, the problem with this latest generation of DAOs is that user acquisition does not automatically translate into user engagement. Simply having a Discord community of hundreds of people does not mean that people are actively engaging with your project i.e, value is not being created unless people are actively engaged.
Platform Business Model
Justice makes the argument (which I wholeheartedly agree with), that DAOs suffer from the lack of a business model. In other words, DAOs lack a product strategy and execution tactics.
But it doesn’t have to be this way.
DAOs can leverage the existing platform business model, which is the first step to becoming a protocol (more on this later). Justice writes:
The platform approach is the most effective coordinator when you look at the above classes of crypto incentive machines. The advantages of platform business models are not unique to crypto. It’s a business model designed for the information economy of the 21st century.
From eBay, Uber, Airbnb, Upwork, PayPal, and Google. The platform business model is everywhere. We can even frame social media as merely a platform for infinite content creation with advertising layered on top. Networks are not the goal. The network is simply an enabler for platform development.
In order to use a platform business model, DAOs will need to overcome their dogmas and stop reinventing the wheel —simply because they want to do things differently from traditional startups and corporations. In my opinion, this is a big and costly mistake for DAOs, and a big reason why many DAOs are ineffective.
Returning back to the topic of why DAOs need to use the platforms business model, Justice makes a fascinating thought leap. He writes:
We call DAOs coordination tools, but we can't talk about what that means without framing them in the context of platform business models. DAOs will protocolize and decentralize platform business models.
This makes me wonder if a decentralized Uber, one of the original visions of a DAO, is actually now on the horizon; is the timing now right to for a decentralized ride hailing platform to succeed?
Platform-first, not protocol-only
We’re getting to the end here. To the how.
How can DAOs operate more like platforms and protocols?
As you may have guessed, the how is rooted in a programmatic approach (minimizing governance).
Protocols are public building blocks that anyone can build on or use in combination with other protocols. They are unstoppable, immutable, and encourage compilation. These features and built-in financialization set them apart from previous web technologies. Any platform business model can be instantiated as a protocol and outperform legacy Web2 platforms.
In other words, DAOs need to think more like protocols and remix the components that they create. Similar to DeFi legos, where new projects can reuse existing open source code to innovate, DAOs need to do the same.
The time has come for DAOs, not only DeFi, to lead the way. Justice encourages DAOs by writing:
AMMs and Defi don't have a corner on the protocol game. It’s time to get more creative in what's possible.
Finally, once a DAO has built a protocol then it can seed a community.
This proposed model is the core application of the DAO construct: Translating platform design science into on-chain protocols and expanding them to encompass open-ended development. This is another reason it's essential to protocolize the Rendanheyi business model. Read more about that in Efficient DAO Design.
That’s all, folks!
Thanks for reading. I hope you found Justice’s article as illuminating as I did. You can join in on the conversation on Twitter here.