DAOs are inefficient, so certain protocols are avoiding them.
The hype of DAOs
A DAO allows decision making to be tokenized – typically in a one-token-one-vote kind of way.
The common, but inaccurate, portrayal of this approach is that DAOs allow for community involvement and “democratize” decision making.
The truth is that DAOs take the same one-share-one-vote approach that is taken by private companies/corporations but with the drawbacks of:
No CEO
No board for governance
Probably a larger amount of unengaged tokenholders (although unengaged shareholders, especially with the emergence of passive investing via ETFs, poses a similar issue for companies/corporations).
The issue with DAOs
DAOs, to date, have had significant issues – and Vitalik has specifically identified the problem with one-token-one-vote systems.
One basic issue is that a small minority of token-holders often have enough votes to exceed the quorum required to pass a governance vote. This results in governance votes (e.g. on grants) that aren’t in the interest of other token holders.
Perhaps a bigger issue is that DAOs (if their governance scope is large) don’t have centralised decision-making (like a CEO does) and so they are slow to move and indecisive. I see this as a major issue for L1s that have given a lot of power to governance.
What web3 does have to offer?!?
Rather than running governance with a DAO, an interesting approach is for a small centralised team to set up a new offering and deploy it immutably to a blockchain in such a way that nobody (DAO or contributors) can change it. This is the idea of unstoppable protocols talked about by TokenBrice. Unstoppable protocols offer something that conventional corporations don’t necessarily offer, which is a set of rules/systems that are coded, formulaic and cannot easily be changed (without overpowering Ethereum).
Here are a few protocols doing this to a large degree:
Liquity Protocol (LUSD) – there is no governance.
Curve & Uniswap – both protocols are immutably on-chain, although there is governance around governance-token distributions
Curve – interestingly, Curve’s governance (read more from TokenBrice) is highly financialised. It’s now almost explicit in not being “democratized”, which I think is a good thing and I consider this an interesting and worthwhile approach.
Uniswap has had issues with its DAO providing questionable grants, but the protocol itself is fairly immutable.
Loopring – a layer 2 for transfers and token exchanges and NFTs. The protocol is reasonably immutable and 80% of protocol fees go to a private company (the relayer). I think this is also a worthwhile and interesting approach. There is going to be a DAO that controls 20% of protocol fees, and maybe that will have issues OR maybe it will be financialized like the Curve DAO. [To be honest, given what has happened with Convex financialising Curve, I wonder whether protocols will just directly financialise rather than wait for an abstracted layer to do that like Convex and Votium have done.]
P.S. I think democratization is a useful tool, it’s just that most companies and DAOs that claim to do it are not doing it. Democratisation, for me, means one-person-one vote not one-share/token-one-vote. The only companies really doing democratization are those with some form of identity (e.g. phone verification like Celo or eye verification like Worldcoin).