Seeing ENS struggling with governance, I think it's time to talk about the issues of DAO.

Written by: Eric, Foresight News

When the market environment is poor, it often amplifies existing issues within some favorable situations and eventually exposes them. Recently, Aave and ENS have exposed some internal organizational problems, and the core of these issues points to the DAO.

After so many years, everyone finally realizes that although DAOs have gone decentralized, they still face all the management issues encountered by centralized organizations.

What happened?

I believe many of you have seen a lot of analysis regarding the recent internal conflicts between Aave and ENS. For those who are not familiar, I will briefly review the events that transpired.

First, let's talk about Aave. The situation with Aave is actually a conflict between Aave Labs and Aave DAO. Aave Labs previously replaced the front-end integrated ParaSwap with CoW Swap, and the fees generated have shifted from flowing to the DAO to flowing into an address controlled by Aave Labs.

Aave DAO thus accuses Aave Labs of privatizing the protocol's revenue. Aave Labs, on the other hand, believes that transaction fees belong to the front-end and product layer revenues, which are unrelated to the Aave protocol, and that operating the front end also incurs costs, so taking away revenue is understandable.

In the architecture of Aave, the Aave DAO controls the protocol, including contract upgrades, treasury management, etc. Any proposals related to the development and upgrades of the protocol layer must be voted on by the DAO and can only be implemented after approval. Aave Labs serves as the core development team of Aave and is also responsible for driving project development in areas such as product and marketing.

In simple terms, Aave Labs developed the Aave protocol and handed over ownership of the protocol to the DAO after issuing the tokens. If it needs funding for tasks such as development, operation, or marketing, it also needs to apply for funding from the DAO. If the DAO does not agree, Aave Labs will not get the money.

From the perspective of Aave Labs, they believe that the DAO has not “found its place.” Without the efforts and strategic foresight of some members of the Aave Labs team, there might not be the Aave we have today. The implication is that the reason you can vote with AAVE here today is because we created Aave; don't think too highly of yourselves.

From the perspective of the Aave DAO, Aave Labs may have had a god's eye view in the early stages, but subsequently, the launch of Lens and even version v4 consumed a significant amount of funds from the DAO treasury without delivering corresponding returns. Furthermore, some have pointed out that Aave Labs has attempted multiple times to use the DAO to achieve its own goals but has been exposed.

Obviously, this is a conflict between the founding heroes and the existing management system, which belongs to the external contradictions of the DAO, while the adjacent ENS is an internal contradiction of the DAO.

Last month, ENS founder Nick Johnson wrote a profound statement on the forum, basically indicating that the ENS DAO is currently filled with political struggles, capable individuals are gradually leaving, and the leadership of the DAO has instead fallen into the hands of those who lack experience and even have interests inconsistent with the protocol.

The writing of these words was likely prompted by a proposal submitted by Limes, the secretary of ENS DAO, suggesting to terminate the operations of the three working groups: meta-governance, ecosystem, and public goods, at the end of the sixth term, which is December 31 of this year. The reasons are twofold: first, the proposals have turned into a game of “you support me, I support you,” with no one caring about what should actually be done; second, the lack of entry standards has led to the frequent occurrence of the phenomenon where “bad money drives out good.” Limes believes that improving the process can no longer address this structural ailment, and shutting down is the only way out.

The current DAO is a regression.

So far, the most successful DAO we can see is the Bitcoin community, and possibly Ethereum can barely be considered one as well. Why are most DAO governance models inefficient and fraught with problems? As someone who has consistently opposed purely democratic voting forms of DAO, I would like to present some viewpoints for your reference.

First of all, the author believes that the fundamental premise of establishing a DAO is actually a clear misjudgment.

The emergence of blockchain or cryptocurrency was initially intended to resist centralization, as it is believed that when power is held by a few individuals, decision-making is inherently unfair. Whether it is because decentralized governance is seen as a standard feature of Web3 projects, or because centralization is thought to lead to opacity and corruption, all point to one argument: “centralization” is the root cause of all problems.

From the results, the problems that arise in these traditional organizational forms are just as rampant in DAOs, and their destructive power is even greater. Therefore, if one believes that the centralized model is “backward” and thus launches a DAO, it completely fails to recognize the core of the problem.

As someone with a background in management studies, my biggest feeling is that management science does not even have the concepts of centralization and decentralization; its core consists of only four words: “planning, organizing, leading, and controlling.” I do not deny the idea of decentralization, but the emergence of the term DAO seems to me to be a sign of ignorance towards management science and a disrespect for history.

Management science has developed to this day without ever deeming there to be any good or bad between centralization and decentralization; it merely studies how to be most effective. For a specific problem, if a centralized solution is better, then centralize; if a decentralized solution is better, then decentralize. The evolution of organizational forms is essentially a process of survival of the fittest, and the commonly seen organizational form today tells us that DAOs, which are considered a better organizational form in the Web3 industry, may very well be an obsolete model. As for why “borrowing a corpse to resurrect a soul,” it may simply be the wishful thinking of the OGs.

Management science is essentially an insight into human nature. DAOs do not change the biggest variable in management, which is people, but attempt to use a seemingly democratic decision-making process, ultimately amplifying the evils of human nature.

In June of this year, Yuga Labs CEO Greg Solano proposed to dissolve the ApeCoin DAO and transfer all assets and responsibilities to a newly created entity by Yuga Labs called ApeCo. The CEO stated that the purpose of this move is to focus resources on ApeChain, the Bored Ape Yacht Club, and Otherside. The proposal has been voted through, and the reason I find this matter impressive is that the ApeCoin DAO often has some very outrageous proposals.

Readers who are interested can go to Snapshot to take a look themselves. Proposals such as developing new games, launching an independent NFT marketplace, and developing Meme tools, which are obviously thankless tasks, have all been approved one by one. Closing the DAO and consolidating power within the core team is a controversial move, but it may be the best option under the current circumstances.

The disputes and dilemmas between Aave and ENS are also common in traditional companies, where the clash between old and new systems, as well as the prioritization of avoiding mistakes over innovation, can be observed. While companies have some filtering and elimination mechanisms, decentralized organizations like DAOs are almost certain to encounter the problem of bad money driving out good, and there are no error correction mechanisms to balance these issues. For capable individuals, it is entirely possible to earn a decent salary in a company or start their own business, so why engage in potentially fruitless endeavors for countless unknown investors?

Currently, the large projects that have survived for a long time and have high market recognition have not reached this point because of DAO decisions. The vast majority are still determined by the core project team or investors for the next steps, while DAO merely casts a token vote as a formality.

It must be admitted that this is the only correct choice before the project matures. The core team's abilities and understanding are stronger than most mere holders, and they have a better grasp of all aspects of the project. They may be the ones who know best what needs to be done in the early stages of the project. There are countless examples of pure democracy leading to farce, such as many people starting to search on Google for what “Brexit” is only after the UK's exit from the EU, and Ukraine electing a comedian as president, among others.

“A company can only have one person in charge” has become a consensus, not because a single voice won't lead to mistakes, but because this system can quickly pivot when errors occur. If every decision requires full discussion and respect for everyone's wishes, the result may be endless disputes and decisions that can never be executed. The king of DeFi, AC, mentioned in an article that someone once questioned some of his decisions and decided to implement them in other ways, only to eventually understand why AC made seemingly unreasonable decisions in the first place.

The second question is, what exactly is the positioning of DAO within the ecosystem, which is quite vague.

In the author's view, a DAO is a very distorted entity, as it seems to only possess the power to vote, while the ownership of the protocol code, brand, and technology does not belong to the DAO. Overall, as token holders, you and I can only participate in the protocol to a certain extent, but do not own the protocol.

The logic that tokens issued on public chains are ecological currencies is valid, but what are the tokens of DApps? The existing global regulatory frameworks only state that tokens are a new form of assets, or that they are not classified as securities, but the exact nature of what kind of assets they should be defined as has never been clear.

This form of asset that has governance rights but does not have ownership becomes very delicate when problems arise. For example, if an expenditure approved by a DAO ultimately faces issues such as corruption or unclear fund allocation, who should be held accountable? For the token holders, should accountability fall on the token holders who voted in favor, the executors, or the developers of the protocol? It seems that everyone on this line has some responsibility, but there appears to be no specific basis for accountability.

The current company system, which includes legal persons, shareholders, and senior executives, is designed in part to have clear accountability when disputes arise. The DAO governance mechanism is very vague in terms of accountability. In the aforementioned ENS incident, when there are proposals within the DAO that satisfy private interests or simply support each other, you cannot find any accountability because every process conforms to the governance process, and every voter may be considered an “accomplice.”

The author does not deny the DAO itself, but believes that we clearly have a wealth of management science knowledge and countless past cases that can make decentralized governance more efficient and reasonable. However, the vast majority of projects seem to simply adopt an “absolute democracy” voting system to manage an organization with a market value of hundreds of millions, and this disregard for science resembles a regression rather than progress.

After saying so much, discussing specific improvement plans may still need to “vary by DAO.” In the case of Aave, it is about finding a way to balance the relationship between Aave Labs and the DAO, while in the case of ENS, what is more important is how to make the DAO more streamlined, how to retain talented individuals, and how to implement a balance between punitive policies and incentives to keep the “right people.”

Interestingly, the author does not believe that these clever founders are unaware of the issues with DAOs; perhaps they simply refuse to accept it, thinking they have the ability to accomplish what their predecessors could not. However, they ultimately have to acknowledge that there are reasons why history has favored the corporate structure. But this is not necessarily a bad thing; for the Web3 industry, it is only through experiencing these mistakes that one can learn what the right approach is.