On Monday, Ethereum co-founder Vitalik Buterin published a lengthy blog post defending the utility of decentralized autonomous organizations (DAOs).
He gave three arguments for why DAOs are superior to traditional corporations and will not be completely outcompeted and rendered obsolete.
A DAO is a new, blockchain-native, bottom-up governance structure that does not have a centralized hierarchy or CEO. Instead, members of the organization make decisions by voting with governance tokens, which are implemented through smart contracts.
DAOs, as Vitalik explained, have been frequently chastised for being inefficient when compared to traditional governance structures. After all, previous attempts at decentralized governance have met with limited success.
The developer, on the other hand, claims that decentralized decision-making works best in “concave environments” – scenarios in which compromises between two extreme decisions result in the best outcomes. For example, moderate tax rates are usually preferable to either a 0% or 100% tax rate for optimizing revenue and keeping an economy healthy.
“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.”
Second, decentralized organizations work best for governing applications that need to continue operating in the face of threats from powerful outside actors. The decentralized file-sharing system BitTorrent is a well-known illustration of this.
Because it is decentralized, BitTorrent has long-term dependability that attracts long-term investment in addition to being resistant to censorship. DAOs can function similarly to corporations as censorship- and instability-resistant substitutes.
MakerDAO, the creator of the decentralized stablecoin DAI, is one example Vitalik gave. Unlike centralized alternatives like USDC, DAI may be better prepared to deal with censorship attacks from the US government.
At last, decentralized governance may be more effective at fostering “credible fairness” in systems that require some subjective decision-making. These could be algorithmic stablecoin DAOs, decentralized courts (such as Kleros), or retroactive funding mechanisms (ex. Optimism DAO).
All three cases necessitate strong governance systems that can “credibly persuade a large and distrusting public that it is strong.”