Ethereum co-founder Vitalik Buterin published a lengthy blog post on Monday arguing for the usefulness of decentralized autonomous organizations (DAOs).
He outlined 3 reasons why DAOs have unique advantages compared to traditional corporations, and that the latter will not only be outmoded and obsolete.
Make better decisions
A DAO is an emergent, blockchain-native, bottom-up governance structure without a centralizing hierarchy or CEO. Instead, members of the organization make decisions by voting through governance tokens, which are implemented through smart contracts.
Like Vitalik explained, DAOs have often been criticized for being inefficient compared to traditional governance structures. After all, attempts at decentralized governance in the existing corporate world have met with limited success.
However, the developer claims that decentralized decision-making can work best in “concave environments,” scenarios where trade-offs between two extreme decisions yield the best results. For example, moderate tax rates are often best for optimizing revenue growth and maintaining a healthy economy, compared to a 0% or 100% tax rate.
“When decisions are concave, relying on the wisdom of crowds can yield better answers,” Vitalik said. “In these cases, DAO-like structures with large amounts of diverse input for decision-making can make a lot of sense.”
Second, applications that must continue to function when threatened by large external actors are best governed by decentralized entities. A popular example of this is BitTorrent, a decentralized file sharing system.
Being decentralized, BitTorrent enjoys not only resistance to censorship, but also long-term reliability that attracts long-term investment. Similarly, DAOs can serve as censorship-resistant and instability-resistant alternatives for corporations.
An example of Vitalik included is MakerDAO – the issuer of the decentralized stablecoin DAI. Unlike centralized alternatives like USDC, DAI may be better equipped to handle it censorship attacks of the US government.
Credibly fair systems
Finally, decentralized governance is arguably better at fostering “credible fairness” in systems that require some degree of subjective decision-making. These may include algorithmic stablecoin DAOs, decentralized courts (e.g. Kleros) or retroactive funding mechanisms (e.g. Optimism DAO).
All three cases require strong governance systems that can “credibly convince a broad and untrustworthy public that it is robust.”
“Realistically, we probably only need a small number of DAOs that look more like political science constructs than something from corporate governance,” Vitalik concluded. “But those are the really important ones.”
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