Thread by @SalomonCrypto

(1/25) DAOs and Governance:

The Good, the Bad

The Ugly, the Hopeful

A Twitter essay on what I think governance means in crypto.

(2/25) A long time ago, the first ape climbed down from a tree and man was born.

Fast forward a few millennia, and @VitalikButerin gave us @ethereum, The World Computer.

Now in 2022, we are all trying to figure out how to build on it. Or really, how to work together on it.

https://twitter.com/SalomonCrypto/status/1547798539446542338

(3/25) First and most importantly, we must recognize that the nature of innovation and progress is messy. While you’re experiencing it, it’s easy to feel like everything is awful

Nevertheless, it’s important to examine what’s working and what’s not as we build towards the future

(4/25) Every protocol is doing something bespoke, but in general most organizations follow a similar playbook:

- quiet development by a core team, funded by early investors
- initial distribution event, tapering emissions
- transfer of responsibility to community

(5/25) The transfer of responsibility to token holders is perhaps the most important but least understood factor in this process.

Without responsibility, what is the purpose of a governance token? Why would anyone buy it and why would anyone want to hold it?

(6/25) So the early builders took a page from the analog world and said “a token has a value like a stock has a value.”

Tokens were invested with governance power and with it the right to vote and help shape the future of the protocol.

Your protocol.

(7/25) For a lot of protocols, this comes from a genuine and an admirable place; these are the ideas of democracy.

In practice, we’ve seen a chaotic system, confusing results and a lot of questions. For example…

(8/25) @LucaProsperi told us his side of the controversial @MakerDAO vote that took place at the end of June.

When all is said and done, the results are on-chain for all to see… But Luca’s tale shows the chain doesn’t capture everything.

https://twitter.com/LucaProsperi/status/1542481499110481921

(9/25) The tragic hack of @RariCapital (@feiprotocol) led to a round of yes/no votes that left me with whiplash… I can’t begin to imagine what it might have felt like to be a depositor.

Again, on-chain certainty has us in real world chaos.

tally.xyz/governance/eip…

(10/25)

https://twitter.com/TheBlock__/status/1542886525830311938

(11/25) There have been enough of these incidents, high profile and small, that a lot of people believe there’s no real democracy here.

Most of what we are seeing is decentralization theater indented for two purposes: regulatory cover and community shaping.

(12/25) Regulation uncertainty has left a lot of questions…

- Which tokens count as securities? Commodities?
- Who is liable?
- Who is making money off this?
- Who gets to tax what for how much?

Until we get requirements, “decentralization” is our answer to these questions.

(13/25) At the same time, decentralization is used to build and shape communities.

Investors are much more passionate when they are “contributing”. Analysts are happy when they are given “open” access. Trolls are quieter when they’ve been “promoted” to private discord channels.

(14/25) The problem isn’t just decentralization theater, we’ve also seen true decentralization hit some catastrophic edge cases.

(15/25) One of the more famous (and more sad) examples is @BeanstalkFarms. Their devotion to decentralization and led them to put all decision-making on chain.

Mistakes were made, lessons learned, code has been fixed, and the barn is being raised again.

But the cost was huge.

https://twitter.com/kelvinfichter/status/1515735698103582733

(16/25) Or how about the case of Merit Circle DAO? The community decided their investor @YieldGuild sucks (paraphrasing) and to rug them. Despite real contracts.

I don’t know exactly what happened but (I think) YGG got $.32 on the dollar.

https://twitter.com/itstimconnors/status/1536734104422522881?s=20&t=ETWk3ygaTKZ57lkYx6jWnQ

(17/25) But perhaps the best way to wrap it up is from the team at @HouseSempronia.

“Building things in a DAO is a disaster and we encourage no teams to go down this path.”

https://twitter.com/dcfgod/status/1542650373697069058?s=20&t=li7XLWXQrt2KFPQGO1gE5A

(18/25) So look, I’m just going to be frank with you. I don’t really believe in DAOs. Some are a lot closer to the ideal, some are blatant shams, but the ones that survive are the ones who know how to manage a community and know how to whip a vote.

If it even needs whipping.

(19/25) Eventually I can see governance tokens as stocks and DAOs as corporations; @hasufl has already laid out the path.

Once we make these changes and take the best parts of corp-fi, THEN we can build our new ideas of governance and democracy.

What was that about liability?

https://twitter.com/hasufl/status/1542196610775629824

(20/25) Until then, there is a type of governance I’m bullish on.

This is The World Computer, we can iterate on all of the traditional ideas… but we can also build new primitives.

We can build programmable money.

(21/25) The best example is the system developed by @CurveFinance and @ConvexFinance.

$veCRV has votes. Votes decide emissions. Emissions have a monetary value. Therefore, vote have a monetary value.

One that the market can express!

https://twitter.com/SalomonCrypto/status/1543330112900239360

(22/25) As @ConvexFinance captured a critical mass of $veCRV, @VotiumProtocol developed a market to express that value.

Since then, the idea has exploded both to other DEXs

@BalancerLabs @AuraFinance 👀

And to new verticals and ecosystems

@dopex_io @PlutusDAO_io 👀

https://twitter.com/SalomonCrypto/status/1543668148188205057

(23/25) Some protocols have seen this vision and have already started build on top of it.

For example, @Pitch_Money is building a whole suite of products (like a voting incentive marketplace and next-gen liquid wrappers) to begin bootstrapping an economy around governance power.

https://twitter.com/SalomonCrypto/status/1537977676396277762

(24/25) So when people ask me what I think about the current state of governance in crypto, I give the annoying answer: “it depends.”

DAO-style governance? I have faith, but I don’t believe we’re there today

Market-based and automated protocol operations? Science fiction tech!!

(25/25) Decentralization is a big word that refers to a lot of things, and there are a countless number of DAOs out there, all doing something unique.

These are just my thoughts from my one limited, biased corner of the internet.

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https://twitter.com/SalomonCrypto/status/1548000445381062656