{"id":6504,"date":"2020-12-17T15:07:08","date_gmt":"2020-12-17T20:07:08","guid":{"rendered":"https:\/\/cointelegraph.com\/magazine\/?p=6504"},"modified":"2020-12-17T15:07:08","modified_gmt":"2020-12-17T20:07:08","slug":"dictators-turn-delegates-former-ceos-grapple-with-dao-governance","status":"publish","type":"post","link":"https:\/\/cointelegraph.com\/magazine\/2020\/12\/17\/dictators-turn-delegates-former-ceos-grapple-with-dao-governance","title":{"rendered":"Dictators turn delegates: Former CEOs grapple with DAO governance"},"content":{"rendered":"

One morning in July of 2019, Kain Warwick awoke at 6:30 to a grim phone call from his co-founder and CTO, Justin Moses.<\/strong><\/p>\n

\u201cWe have a problem,\u201d said Moses.<\/span><\/p>\n

Synthetix, the synthetic asset protocol that Warwick, Moses, and their team had been building for over two years, had fallen victim to a crippling exploit: an attacker with the pseudonym \u201cOnyx\u201d had created $11 billion of synthetic asset debt \u2014 over 275 times what Synthetix was worth \u2014 and was taunting team members and sowing chaos in public channels.\u00a0\u00a0<\/span><\/p>\n

These days, time and success seem to have tempered what Warwick freely admits is a fiery disposition. Still witty and pugnacious, he\u2019s prone to ribbing his competitors and critics on Twitter, but otherwise presents as affable and charming; sometimes even wise.\u00a0<\/span><\/p>\n

In the Australian winter of 2019, however, he was raging.\u00a0<\/span><\/p>\n

Synthetix blog <\/span>posts<\/span><\/a> from the period maintain a thin veneer of professionalism, but are laced with fury. In them, Warwick equates communicating with the exploiter with a \u201chostage negotiation,\u201d and says that paying a bug bounty to Onyx is a form of \u201cextortion.\u201d He gets dragged into a war of words, at one point smearing Onyx with a terrible curse in programmer circles, branding the attacker a \u201cscript kiddie.\u201d<\/span><\/p>\n

In context, Warwick\u2019s anger is easy to empathize with. The young decentralized finance (DeFi) platform was in the nascent stages of what is now considered a legendary run, having successfully attracted $40 million in total value locked \u2014 just a fraction of an eventual over $1 billion peak. Such an exploit can cripple growth for a fledgling project, and over the next few months the \u201chyper-competitive\u201d Kain went on the offensive: deploying a mechanism that slashed funds from user wallets attempting to exploit the protocol, a mechanism that eventually gave Kain the last laugh as Onyx\u2019s funds were drained.\u00a0<\/span><\/p>\n

Warwick wanted to go even further, too: instituting harsh slashing penalties in perpetuity for anyone attempting to undermine his protocol.\u00a0<\/span><\/p>\n

In the end, however, what Warwick wanted was no longer relevant.<\/span><\/p>\n

Control over the protocol had previously been handed over to a multi-signature scheme, part of a larger, 18-month process of decentralizing Synthetix\u2019s governance through the use of a series of decentralized autonomous organizations (DAOs). The majority of signatories controlling the protocol decided on a more reserved course of action, avoiding a slashing policy entirely.\u00a0<\/span><\/p>\n

It was at that moment Warwick says he first faced the \u201cconfronting\u201d realization he\u2019d lost the traditional \u201cdictatorial\u201d power of a CEO.\u00a0<\/span><\/p>\n

He could no longer \u201cthrow a tantrum and say, \u2018This is the way we\u2019re going to do this because I feel this way.\u2019\u201d<\/span><\/p>\n

I was in the minority internally, and what I wanted to do was not going to happen, and I just had to come to terms with it.<\/span><\/i><\/p><\/blockquote>\n

The \u2018dictator\u2019 had become just another delegate.<\/span><\/p>\n

A new kind of unicorn<\/span><\/h4>\n

To those uninitiated in the tenets of DeFi and Web3, the decision to decentralize governance over a billion-dollar protocol likely seems insane.\u00a0<\/span><\/p>\n

Founder\/CEOs like Elon Musk are worshiped with cult-like devotion \u2014 and aside from the fame, helming a unicorn grants founders the potential to reap historic levels of wealth: all the fortune of King Solomon\u2019s mines can be earned from the IPO of a simple social app.\u00a0<\/span><\/p>\n

Billion-dollar protocols like Synthetix and lending platform Aave stand out in particular for their active revenue streams, growing user bases, and proven models, as well as their involvement in both the fintech and blockchain industries \u2014 two of the hottest for speculators and investors. If the regulatory knots could ever be unwound, a Wall Street suit in the underwriting business would no doubt want to institutionalize anyone who suggested handing over control of such a protocol to a DAO.\u00a0<\/span><\/p>\n

\u201cThat is true, that is actually true,\u201d says Aave co-founder Stani Kulechov, laughing at the accusations of lunacy.<\/span><\/p>\n

The suits aren’t the only ones who think it\u2019s crazy. Even those ideological adherents who truly and deeply believe in decentralized governance admit that, as of today, the tooling for DAOs is highly limited.\u00a0<\/span><\/p>\n

Since October 29th and July 28th respectively, the entirety of Aave and Synthetix\u2019s administrative infrastructure has been operated by DAOs. The process is, at best, rudimentary: AAVE and SNX token holders vote on Improvement Proposals with boolean outcomes, and participants\u2019 votes are weighted relative to the quantity of tokens they hold. While certain departments\/administrative bodies might be split into separate DAOs, the structure largely remains the same across the respective networks.\u00a0<\/span><\/p>\n

Token-weighted yes\/no votes: this is the mechanism that dictates payroll, treasury holdings, protocol upgrades, long term strategy, business operations, and all other forms of governance for two of the largest and most successful DeFi platforms \u2014 a pair of sprawling, high-stakes experiments being undertaken in real time.\u00a0\u00a0<\/span><\/p>\n

Embracing ideology over practicality can often be a tricky affair, as anyone who has led a revolution can attest. But even for all the uncertainty, the decision to decentralize was an easy one for both Warwick and Kulechov.<\/span><\/p>\n

\u201cAt some point we noticed that there is so much value in the protocol that we practically<\/span> have<\/span><\/i> to decentralize,\u201d said Kulechov. \u201cWe can’t, as a team, continue to hold this responsibility for something that is highly decentralized except for us.\u201d<\/span><\/p>\n

Warwick was more succinct on the matter:<\/span><\/p>\n

It\u2019s just better for everybody if there\u2019s not dictators.<\/span><\/i><\/p><\/blockquote>\n

In a series of wide-ranging interviews with Cointelegraph, Warwick, Kulechov, and some of the leading minds in the DAO engineering and organization space discussed the practicalities of decentralized governance, competitive advantages and disadvantages, the unique value capture decentralized governance provides, attracting talent to a nontraditional work environment, and the future of DAOs moving forward.\u00a0<\/span><\/p>\n

Centralized versus decentralized<\/span><\/h4>\n

Just as, twelve years on, Bitcoin is still proving the value of a decentralized ledger, it might take time for skeptics of decentralized or distributed governance to come around to the concept.\u00a0<\/span><\/p>\n

\u201cThey have every right to be skeptical. We\u2019re not quite at the point where this is <\/span>adding<\/span><\/i> value,\u201d said Patrick Rawson, a co-founder at DAO engineering think tank Curve Labs.<\/span><\/p>\n

Eventually decentralized governance will become \u201ca nexus of contracts making everyone\u2019s time more efficient, lowering operator costs,\u201d Rawson argued, but currently \u201cthe optimizations aren\u2019t there yet.\u201d<\/span><\/p>\n

Rawson pointed to authoritarian China\u2019s response to Covid-19 as an example of the \u201coptimizations\u201d centralized bodies can currently provide. China was able to shut down the spread of the virus within its own borders because they could \u201cput screws in doors and fully lock people down.\u201d\u00a0<\/span><\/p>\n

Similarly, there\u2019s a warranted \u201cfolk wisdom\u201d that projects should start out centralized for the optimizational benefits, and then progressively decentralize over time. He concludes that:<\/span><\/p>\n

The people who are skeptical are skeptical because centralized structures have proven themselves time and time again.<\/span><\/i><\/p><\/blockquote>\n

However, DAOs do come with certain built-in competitive edges, argues Eric Arsenault, head of growth and DAO design at DAOstack.<\/span><\/p>\n

\u201cIn certain aspects, you absolutely can compete, and there\u2019s not even an alternative,\u201d he said. \u201cWhen it comes to questionable legal activities or things involving securities, having a DAO is absolutely more competitive \u2014 and in fact is the only valid option, potentially.\u201d<\/span><\/p>\n

Both Aave and Synthetix occupy decidedly grey legal territory. But legalities aside, Arsenault argues that in the long run a well-coordinated, well-incentivized decentralized organization will always out-compete a centralized one.\u00a0<\/span><\/p>\n

\u201cAt the end of the day, a DAO allows for open innovation \u2014 permissionless innovation and collaboration. A traditional siloed corporation will always be bound by its hierarchy, and the ladders \u2014 and your ability to contribute to that will always be limited to a certain extent,\u201d said Arsenault.\u00a0<\/span><\/p>\n

A combination of the open innovation and the legal leeway is part of what drew Warwick to decentralizing Synthetix\u2019s governance.\u00a0<\/span><\/p>\n

\u201cI love this idea that you can have people that aren\u2019t even in the same building coordinating, or are not all tied to a single legal entity \u2014 the governance system can be the coordinating mechanism,\u201d he said. \u201cEven if we may not know how to optimize for that, ideologically that was the thing that attracted me towards [decentralizing Synthetix].\u201d<\/span><\/p>\n

User ownership is also not a force to overlook, says Rawson. He offered the example of Uber: the parent company reaps the profits generated by drivers, and drivers notably have limited voice and rights.\u00a0<\/span><\/p>\n

\u201cBut if that were inverted, where drivers slowly gain ownership over time, that\u2019s where the drivers will naturally gravitate towards,\u201d said Rawson.\u00a0<\/span><\/p>\n

Sharif Sakr, an analyst for blockchain investment firm BR Capital and a member of Free TON DAO, agrees that DAOs have a unique appeal and set of reward structures for certain people \u2014 especially those disaffected with the \u201cwhimsy\u201d of traditional hierarchies.\u00a0<\/span><\/p>\n

\u201cWhen I joined Free TON, I think it completely changed my view of incentivization. And it started to make me think differently about incentivization and motivation, as two sort of separate but hopefully parallel things. They were motivated, they were young \u2014 even if they weren\u2019t younger than me, they<\/span> felt<\/span><\/i> younger. I thought, \u2018whatever they have, I want some of that.\u201d\u00a0<\/span><\/p>\n

Sakr initially joined Free TON to perform reconnaissance for BR Capital as they weighed investing in the project. He quickly found himself enchanted with the unique DAO structure, and now jokes that his Free TON work is cutting into time reserved for his BR Capital duties, occasionally getting him into trouble.<\/span><\/p>\n

\u201cThrough Free TON, I have seen people create something, deliver something, be paid for that thing, receive community applause for that thing, and then see that thing deployed for a bigger goal that they believed in from the start.\u201d<\/span><\/p>\n

It\u2019s a very fulfilling cycle, and I think the normal world has denied younger people that feeling for far too long […] And that\u2019s kind of a miracle from which there\u2019s no turning back.<\/span><\/i><\/p><\/blockquote>\n

Aside from offering top talent a different kind of workplace experience, Rawson believes that eventually the centralized\/decentralized competition will come down to who can offer the most robust and compelling ecosystem \u2014 and that\u2019s where centralized entities simply won\u2019t be able to keep up.\u00a0<\/span><\/p>\n

\u201cOnce you can launch the equivalent of a mutual fund or a credit union in 15 minutes, then the competition moves away from \u2018who has the best tech\u2019 and towards \u2018who has the best, most loyal network?\u2019 That\u2019s when you start to play a game of ecosystems rather than a game of innovation,\u201d said Rawson.\u00a0<\/span><\/p>\n

A spectrum of power<\/span><\/h4>\n

Another question that skeptics of decentralized governance frequently raise is to what degree the governance is <\/span>truly<\/span><\/i> decentralized \u2014 after all, if the vast majority of governance tokens (and therefore voting power) are retained by a founding team, how dissimilar are DAO operations from that of a normal company?<\/span><\/p>\n

\u201cAave is not a decentralized protocol, I would say,\u201d said Pet3rpan, a semi-anon DAO organizer and member of the Meta Cartel and Venture DAOs. \u201cThere may be token governance, but there\u2019s still huge centralization on [the founding team] itself.\u201d<\/span><\/p>\n

Rawson agreed, saying that users should be cautious about blindly accepting the \u201cdecentralized\u201d label.\u00a0<\/span><\/p>\n

\u201cIf we look at the mechanics, perhaps they\u2019re not [really giving up control],\u201d Rawson said.<\/span><\/p>\n

 <\/p>\n