Ethereum co-founder Vitalik Buterin published a lengthy blog post on Monday defending the usefulness of decentralized autonomous organizations (DAOs).
He outlined 3 reasons that DAOs have unique advantages compared to traditional corporations, and will not simply be outcompeted and obsoleted by the latter.
Making Better Decisions
A DAO is an emerging, blockchain-native, bottom-up governance structure without a centralizing hierarchy or CEO. Instead, the organization’s members make decisions by voting using governance tokens, which are implemented via smart contracts.
As Vitalik explained, DAOs have frequently been criticized for being inefficient compared to traditional governance structures. After all, attempts at decentralized governance in the existing corporate world have seen limited success.
However, the developer claims that decentralized decision-making can work best in “concave environments” – scenarios in which compromises between two extreme decisions lead to the best outcomes. For example, moderate tax rates are usually best for optimizing raising revenue, and keeping an economy healthy, versus either a 0% or 100% tax rate.
“When decisions are concave, relying on the wisdom of the crowds can give better answers,” said Vitalik. “In these cases, DAO-like structures with large amounts of diverse input going into decision-making can make a lot of sense.”
Secondly, applications that must continue functioning when threatened by large external actors are best governed by decentralized entities. A popular example of this is BitTorrent, a decentralized file-sharing system.
By being decentralized BitTorrent enjoys not only censorship resistance, but also long-term reliability that attracts long-term investment. Similarly, DAOs can serve as both censorship and instability-resistant alternatives to corporations.
One example Vitalik included is MakerDAO – the issuer of the decentralized stablecoin DAI. Unlike centralized alternatives such as USDC, DAI may be more equipped to handle censorship attacks from the U.S. government.
Credibly Fair Systems
Finally, decentralized governance is arguably better for fostering “credible fairness” in systems that require some degree of subjective decision-making. These may include algorithmic stablecoin DAOs, decentralized courts (ex. Kleros), or retroactive funding mechanisms (ex. Optimism DAO).
All three cases require robust governance systems that can “credibly convince a large and untrusting public that it is robust.”
“Realistically, we probably only need a small number of DAOs that look more like constructs from political science than something out of corporate governance,” concluded Vitalik. “But those are the really important ones.”