Aave and Adobe stock modified by Blockworks
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Centralized firms are like mini-dictatorships.
They’re not perfect, but their corporate model has worked well on the basis of economic efficiency.
Firms reduce transaction costs, which is why they exist at all, argued the Nobel Laureate economist Ronald Coase in 1937.
Are DAOs centralized companies? Yes and no.
DAOs are centralized in the sense that there are typically figureheads or a set of actors who command disproportionate power to influence changes. Yet DAOs are not quite like centralized traditional companies, because even the founders of DAOs cannot snap their fingers and push any proposal through.
Here’s a perfect example. Last Thursday, Aave Labs announced “Horizon,” a permissioned instance of the Aave v3 codebase by which “qualified” institutions could use tokenized money market funds to tap into stablecoin liquidity.
Despite the proposal’s plans to share revenue with the DAO (at an annual declining rate of 50% in the first year, 30% in the second, and 15% in the third), the mere mention of a potential Horizon token drew near-unanimous negative feedback from DAO members, including Aave-chan Initiative (ACI) founder Marc Zeller.
The complaint in a nutshell: If Aave Labs plans to use Aave tech to create new business, then please give that value to AAVE tokenholders rather than some new token of which Aave Labs will hold a big bag.
The strong backlash prompted Aave Labs leadership to gracefully accept the community’s consensus. It abandoned the possibility of a Horizon token launch, though it will move forward with the Horizon product.
Aave Labs probably anticipated such a reaction. Had a Horizon token been launched, 15% was even promised to be allocated to the DAO, but that carrot failed to stave off fears of token dilution.
Source: Aave governance
There’s a striking parallel between the backlash to Aave’s Horizon announcement and Uniswap Labs’ reveal of its Unichain L2.
Recall that when Unichain was announced by the Uniswap Foundation last October, Uniswap DAO was caught off guard and felt left out of the decision-making process behind such an integral launch.
Jay Yu, president of Stanford Blockchain Club and a Uniswap delegate, argued that the announcement left “DAO delegates in the dark.”
Though Unichain proceeded with the launch (unlike Horizon), the consequences are catching up to it.
In response to Unichain’s poor market performance after a month of being live (Unichain has a mere ~$9 million in TVL), Uniswap Foundation proposed two weeks ago to spend $45 million worth of UNI tokens from the DAO treasury to spur activity.
But if Unichain is decidedly a “Labs” product, then dipping into the DAO’s coffers to fund that product is a big no-no.
Uniswap DAO delegate GFX Labs also points out that most Uniswap v4 hooks (such as Flaunch and Bunni) effectively disallow the DAO from monetizing v4 activity through a fee switch, due to the use of a “No-Op” hook which bypasses v4’s core contract logic.
“While this could mean Uniswap Labs and DAO lose a monetization strategy, Uniswap could always choose to turn on the protocol fee-switch on pools without hooks,” Rostyslav Bortman, co-founder of Hookrank.io, told Blockworks.
“Yet, most popular hook teams work in close collaboration with Uniswap Foundation, and we don’t see Bunni or Flaunch turning off the ‘protocol fee’ logic inside their hooks. Hopefully most hook teams will follow this example.”
In the cases of both Aave and Uniswap, you have centralized leadership teams behaving like startups absolutely should — that is, pivoting and launching fast to survive and succeed.
Yet DAO leadership is encumbered by the decentralized norms of DAO governance, limiting the agility and nimbleness that a startup requires.
To get anything done, a DAO has to behave in certain ways:
- The DAO has to post a request for comment (RFC) to invite community discussion
- After a reasonable level of discussion, the DAO commences an early temperature check
- If the DAO has problems with the proposal, the discussion inevitably spills over into the anarchy of Crypto Twitter
- The DAO eventually takes a final vote to finalize the proposal
That entire process brings up transaction costs rather than down, so do we really want DAOs? Do the ethical benefits of decentralization outweigh the burden in transaction costs?
DAO governance is a strange animal.
If Ronald Coase was still alive, I wonder if he would think DAOs are such a good idea after all.
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