The Decentralization Path of DAO: 4 Key Principles and Effective Power Transfer

Author: WhiteFlamingo

Compiled by: Q, The SeeDAO

The debate around community decentralization continues to burn in the furnace of the DAO ecosystem.

DAOs are (not yet) fully decentralized. While there are some useful and widely adopted frameworks and playbooks for community decentralization, there is no one-size-fits-all approach. A core reason for this situation is that DAOs are not fully autonomous: they require people to create decision-making elements for governance, incentives, and growth. These tracks are often set by "leaders" within the DAO. This has led to recent debates about whether DAOs are leaderless and/or whether there should be a CEO.

What is our perspective on this? We believe that DAOs are not leaderless organizations, but they also should not have a CEO.

Instead, DAOs should leverage their capabilities to achieve "leadership abundance." DAOs need to create functions and spaces for everyone to become leaders in shaping the culture and future of the DAO. This requires empowering everyone to become a leader so that decentralized communities can truly become resilient.

Therefore, we believe that what DAOs really need to do is integrate asymmetric influence to avoid design flaws that lead to dictatorship or over-reliance on individual actions.

To learn important lessons about how DAOs can better achieve this ultimate state, we interviewed experienced DAO operators who have been at the center of the DAO decentralization journey. Below, we will explore several key themes:

• How are DAOs actually decentralized?
• How does it change?
• How does leadership evolve and rotate over time?
• When and how does this evolution/rotation occur?

01 The D in DAO

Decentralization in DAOs is not inherent. Vitalik's famous article on DAOs, DA, and DO published in 2014 discussed how initial centralization enables communities to act flexibly and establish goals, missions, and visions. In short, centralized decision-making often makes sense in the "DAO" startup phase. Rafa from Mirror puts it best: "A DAO is an organization that creates DAOs."

Nearly half a century ago, Leopold Kohr wrote in "Failure of Nations": "When problems become apparent, they are already too big." The same logic applies to DAOs. As the scale and complexity of DAOs continue to grow, they eventually reach a point of no return where they need to decentralize to continue evolving. As seen in some larger DAOs, they decentralize decision-making to enhance transparency and trust, but at the cost of speed of development.

Despite this recognition, there is still no universally agreed-upon method for when or how to decentralize. The nuances of leadership transitions, elections, cultural norms, and departures vary from DAO to DAO.

To assist current and future DAOs in their decentralization efforts, we summarize the four most important things learned from conversations with key DAO operators.

1. There is no universally accepted definition of decentralization

"Decentralization of a DAO is the degree to which decision-making is dispersed and distributed." ------Joe, Index Coop

The first thing we learned from DAO operators is that there is no universally accepted definition or understanding of decentralization.

A reliable dictionary would tell you that decentralization occurs "when power is widely dispersed or distributed." In fact, many of the people we spoke with discussed decentralization in these terms. There is a general consensus that decentralization occurs when power is distributed to ensure that no single participant can disproportionately influence decisions.

Power hierarchies—what Tracheopteryx refers to as "network topologies"—exist in DAOs just as they do in non-decentralized organizations. This is not necessarily a bad thing. Leaders emerge whether or not they are formally recognized by the organization.

Minimizing the ability of any single party to control decision-making in the DAO sounds good. But how does this work in practice? Through DAO governance and decision-making processes.

DAOs have long been exploring different voting models to achieve fairer and more transparent governance. DAO operators mentioned that immature voting methods, such as one token one vote (or one person one vote), were popular in the early days until obvious flaws, such as plutocracy and governance attacks, were discovered. Since then, DAOs have tested reputation-based weighting, conviction voting, representative democracy, and even hybrids of some of these models.

These experiments often focus on reshaping power within the community through collective ownership. Fancy from Protein pointed out that their DAO's "leaders" (i.e., core team) have the same voting rights as other members.

This is similar to how moloch DAOs are designed. Spencer from WarcampDAO (a DAO with around 30 contributors, including the original moloch smart contract developers, building the DAOHaus platform) explained that the moloch design focuses on giving each member some form of executive power rather than creating any type of council executive.

These participatory governance models from Protein and WarcampDAO aim to increase the number of agents involved in decision-making.

However, communities have also adopted other forms of governance models, including appointing councils and/or delegated voting mechanisms. These models aim to achieve decentralization by enabling token holders to nominate and empower a small group of individuals to make decisions. Jack from MakerDAO stated that Maker uses delegated voting for decision-making. They have about 10 representatives who hold significant voting power and are empowered by the broader decentralized community to act in the best interest of the DAO.

Whether a DAO adopts participatory or delegated governance, or reimagined other governance models, the key point is that when a DAO makes critical decisions, there should be extensive discussion and negotiation around those decisions, and the resulting consensus should be executed subsequently.

2. Four key principles to consider in the decentralization process of a DAO

"We are gradually decentralizing and striving to provide more decision-making power to the community. To do this, there must be strong trust and engagement." --- Fancy, Protein

While there are some experiments like Loot (possibly the only "true" case of a project that has been fully decentralized from the start), most DAOs have to gradually move towards a decentralized future.

While this process may vary between DAOs, there are some best practices that many DAO operators agree should be adopted during the decentralization process.

The first key principle is to be cautious not to overemphasize permissionlessness. All DAO operators agree that there is a serious "overemphasis" on permissionlessness and openness regarding decentralization. They also unanimously agree that it is much better to have permissioned environments where power is genuinely distributed than to have permissionless environments where only a few managers control the multi-sig wallet.

Secondly, DAOs must involve the community throughout the process. As Fancy from Protein stated, "The key to unlocking value is actively encouraging contributors to establish their own stake in the DAO and become its guardians." This "localization," as Spencer from WarcampDAO described, is a critical part of the decentralized community structure. These local areas should not only be recognized but also clearly defined.

Thirdly, in addition to involving community members, DAOs need to ensure they are codifying core activities. Jack from Maker DAO mentioned that this is particularly important for their strategic functions, especially when protocol revenues decline or efficiency needs to be improved, allowing for quick decision-making. DAOs need clear definitions and recognition of roles and scopes of power, including how to update these roles and scopes. While this may seem counterintuitive, Julz from Orca believes that rigid definitions of responsibilities, roles, and opportunities within the ecosystem actually "empower people with ownership and autonomy in decision-making."

Finally, DAOs need to pay attention to balancing engagement and outcome delivery. As Fancy from Protein stated, "You need to maintain your courage and believe that things will get done, while also stepping in when deadlines arrive but things are not completed." Stepping in can include simple actions like urging people to vote to meet the quorum for an important decision. Striking a balance between letting people work and high-level micromanagement is challenging, but having more contributors vote on a proposal actually increases the decentralization of the decision-making process.

If DAOs adopt these key principles, they will be well-positioned to build strong communities committed to decentralized development.

3. Tools and processes will define effective power transfer in DAOs

"If ballots cannot be automatically revoked or expire over time, leaders will forever hold power because removing them requires effort. Then they become the preferred delegates for others." ------David, jokedao

Decentralization in DAOs requires power transfer. To achieve power transfer, DAOs need the right tools and processes.

DAOs want to avoid situations where the entire DAO relies on certain individuals. This is crucial in DAOs, as it not only ensures the long-term viability of the DAO but also reduces risks. As Luke Duncan stated in his famous article on effective governance, DAOs should establish a structure that ensures the DAO does not lose vitality due to the inactivity of key individuals.

Spencer from Warcamp DAO reiterated this in his "Anticapture" framework, which aims to help DAOs identify whether their processes are susceptible to being "captured" by one or more actors. Spencer believes that a special process for enhancing anti-capture capabilities in the community is to establish small groups focused on sub-goals, such as sub-DAOs. Spencer is particularly excited about Orca Pods, which he describes as "a significant step in the right direction by creating a subgroup protocol that maintains connections between subgroups." In fact, Orca's founder Julz has long advocated for "proportional levels of power and control" and the need for DAOs to "elevate community contributors" to a sufficient level of decentralization.

Index Coop has achieved this, albeit through a slightly different approach. Index's DAO has a set of leaders—the Index Council—who set the overall strategy for the DAO and support it through resource allocation. The council is also responsible for decisions that do not have clear accountability. The council supports decentralization by effectively delegating actual responsibilities to the teams and individuals that make up the DAO. This approach ensures that decisions are not just made by those in leadership positions but are driven by the most capable contributors in specific areas of the DAO.

These management processes are even more effective when they are ritualized, systematized, and facilitated. Joe from Index Coop pointed out that they have GovReps, "who handle voting requests on Snapshot, review and edit proposals, execute voting announcements, and notify the community of any votes that may fall short of quorum." These ceremonial roles ensure that community members are accountable for their roles in the daily decision-making of the DAO. The decision-making process based on procedures and discussions also has the added benefit of increasing transparency, making the decision-making process more inclusive.

Establishing clear groups, defining group roles, and ritualizing their use provides clear experiences for DAOs in choosing how to advance the decentralization process.

4. DAOs should not underestimate the impact of leadership accountability, continuity, and turnover

"Rather than 'how to rotate,' it is about 'how to create space for people and let everyone take on the leadership role that suits them best,' i.e., creating more local parallel leaders." ------Spencer, WarcampDAO

One surprising lesson learned from DAO operators we spoke with is the importance of ensuring leadership accountability, continuity, and turnover.

First, all operators said that DAOs need accountability mechanisms. These accountability mechanisms can be agreed-upon values, guarantees signed by community members, or more formal mechanisms. In short, it is a formal or informal code of conduct that leaders adhere to. For example, members of the Index Council are elected by Index members, serve a term of six months, and are accountable to contributors and token holders, who can effectively remove council members. This is a similar representative democracy model currently used by Synthetix, although they will soon transition to a more direct on-chain access model that will also allow token holders to veto established decisions.

Second, DAOs need to create space for new leaders to emerge. Leadership transitions are something WarcampDAO has only recently begun to address, with three founders (who are still involved in the project) creating space for new leaders to emerge, while Spencer serves as a special addition to continue exploring this space with them.

Third, many DAO operators have noted a clear connection between leadership and reputation within DAOs. Therefore, it is crucial to ensure that core contributors who are consistently recognized can be promoted to replace outgoing leaders. And "the ideal state is to achieve consistency through an appropriate handover period," as Fancy from Protein stated.

Fourth, when leadership changes occur at a historical level within the organization, DAOs should pay particular attention to maintaining continuity. DAO members range from old to new, with some having been present from the beginning and others joining recently. Fancy discussed the importance of creating culture within the DAO and incentivizing the preservation of that culture.

A culture of open debate about leadership election practices and appropriate rotation may yield the healthiest and most effective decentralized organizational structure.

02 A Call to Action for DAOs in the Decentralization Process

Decentralization in DAOs has many illusions. By observing how pioneering DAOs struggle in the decentralization process, we can all better identify those DINO (Decentralized In Name Only) organizations.

This is a call to action from DAO Masters, encouraging DAOs embarking on the path to decentralization: clarify roles and scopes of power; define and strengthen their culture; ensure accountability mechanisms; and create space to maximize the impact of new leadership. Based on this, current and future communities will be well-prepared to maintain adaptability and recognition throughout the gradual decentralization process.