DAO or Die: How to Fully Decentralize the Off-chain Governance of Your Crypto Project

Web2 Ate Its Own Children

Source: https://cdixon.org/2018/02/18/why-decentralization-matters

Fork off!

Decentralize and rule

1. Can’t be bothered

2. Voter concentration

The concentration of MKR holdings (updated daily on mkrgov.science)

3. Legal stack

Web3: Who Do I Call?

To DAO or not to DAO, that’s the question

Overview

DAOfy you setup: A template for decentralized governance (Source: Otonomos).

1. The Core Component: A Trust or Foundation

Solving the coordination problem

  1. It offers a transmission mechanism for the wishes of a distributed, indeterminate group of token holders and the real world, without forcing those token holders to become shareholders or partners in a company or partnership. By using the trust or foundation as their representative body, the community of token holders can coordinate their actions and appoint trust protectors or foundation guardians, who, in turn, can appoint directors in operational subsidiaries (see below). If they wished to appoint such directors directly, they would only be able to do so by becoming direct shareholders in such operational entity, which is impractical and undesirable.
  2. Trusts and foundations can make grants to operating entities it owns or third parties that help with the growth of the network. This granting mechanism is unique to trusts and foundations and offers much greater freedom compared with how funding would work if it were done out of a company.

Trust or foundation?

Blockchain dynasties

  1. Structurally, the most crucial part of the setup is that the trust or the foundation is established for the benefit of the network participants, be they master node operators, Keepers, Stakers or token holders generally. Given the liquidity of their token holdings, by their nature, beneficiaries cannot be named by name or appointed individually. Hence, the trust or foundation has to be set up with no particular beneficiaries, which is not possible everywhere. Furthermore, a DAOfied trust or foundation setup should not leave residual powers with its settlor or founder to alter who is a beneficiary. We suspect that most projects that have set up trusts or foundations may have kept these (and many more!) powers with the settlor/founder, which leaves the reins of control firmly in their hands.
  2. Secondly, managers of the trust (i.e., the trustee) or the director(s) of a foundation’s Board or Council should themselves not be beneficiaries. This removes a potential area of conflict of interest since the trustees or directors have a fiduciary duty to the beneficiaries, i.e., the network as a whole, and are therefore obliged to act solely in the network’s best interest. Unfortunately, we know of many projects that have populated the key governance seats to the same insiders, who are typically also the primary holders of native token. This creates a very concentrated power core at the heart of many self-proclaimed community-lead projects.
  3. Finally, the law may intervene with the lifetime of the trust or foundation. The idea is that the entity outlives its creators and initial owners. Some jurisdictions, however, may not allow irrevocable trusts. More generally, few projects — perhaps understandably given the youth of their creators — have given much thought to succession. One project that has, Dash, made sure its trust lives forever. Ironically, when a US trust is set up to survive its settlor, it’s called “dynastic,” so networks can be thought of as decentralized dynasties!

Who is guarding the guardians?

How the Greeks did it: A Kleroterion randomized voting machine.

2. The Operating Entity

  1. The operational entity has to be a 100% subsidiary or otherwise controlled by the projects’ trust or foundation. This will make it possible for the trust or foundation’s protectors/guardians, themselves appointed by the network, to in turn appoint the Board of Directors of the operational company. This right by its majority shareholder to hire and fire the Board will guarantee that the operational entity executes the network’s consensus on how it uses the funds it receives by way of grants.
  2. Furthermore, the operational entity has to be able to receive grants, which is how it will cover its operations. Some vehicles such as non-profits are limited in how much they can receive without identifying their donors, so a standard limited company in a jurisdiction with good crypto infrastructure is recommended.

Further permutations

By Way of Conclusion: And The Winner Is…

Bonus! An Observation about Code, Law and Gödel

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Otonomos helps doers and investors in the crypto and blockchain community around the world form, fund and govern their legal entities, both offchain and onchain

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Otonomos helps doers and investors in the crypto and blockchain community around the world form, fund and govern their legal entities, both offchain and onchain

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