DAOs are Coordination Mechanisms
Tokens are Decision Making Tools
DAOs are often derided as "Discords with a multi-sig." This is meant as a jab but it is accurate. A discord with a multi-sig is no different from saying “a community with a treasury". The difference between a multi-sig and full on-chain governance is only a matter of who who has a say in accessing the treasury or parameter space being governed. Just like a multi-sig has a signing threshold to submit a transaction, a governance vote has a quorum requirement and passing criteria. It is a group of actors (the community) who can come together to unlock the treasury.
Governance tokens provide a flexible way for an unbounded and fluid set of actors to come together, coordinate, and signal intent for any decision that can be voted on. If tokens are sold on permission-less infrastructure like Automated Market Makers (AMMs) running on public blockchains like Ethereum then they can allow anyone, anywhere with an internet connection to participate in this coordination process.
Like with the pioneering DeFi products that catalyzed the first DAOs, the permission-less nature of DAOs is where the real potential lies. The ability for innovation, ideas, and work to come from anywhere is an intoxicating prospect. But this potential is not without its challenges and hurdles. By explicitly rejecting a closed, hierarchical system, DAOs need to figure out new ways to operate and make decisions collectively.
Scalability and Consensus
One issue that all DAOs quickly run into is the realization that requiring token holders to make all the decisions leads to both scalability and consensus problems. The more decisions, and the more information dense the decisions that need to be made are, the more resources that each decision maker needs to commit to make optimal decisions. This has costs in time and attention. This can be thought of as decision throughput, and it should always be considered a limited resource. So as you increase the number of decisions that token holders need to make and/or increase the complexity of those decisions, the smaller the group of participants able or willing to put in the effort. If not accounted for, it is a wealth concentration and centralization vector as centralized entities typically have a higher decision throughput than decentralized ones.
If we expect broad participation from token holders in the governance process, then we must either account for these costs or minimize them. Minimizing them entails either limiting the number of decisions or simplifying decision making. If we do not minimized the costs then the number of people who will be able to fully participate in governance will be limited. Participants can either dive deeper into fewer decisions, or make more decisions but with less consideration for each.
Decision complexity also increases the cost of making decisions. To help mitigate this, DAOs and their participants need processes for making decisions and coming to consensus. This lowers participants’ decision making overhead and increases decision throughput. Unlike public blockchains, which have very clear, computational rules about the validity of decisions, DAOs often do not have simple criteria to come to consensus. They require that the participants think through complex and subjective information in order to determine the correct outcome.
Rules Help with Consensus
To help come to consensus, a DAO needs structure and rules, as well as shared goals and values, that can be used to guide decision making. Structure and rules help streamline decisions that probably have an objective answer. And clear goals and values help with decisions that have subjective answers. These rules allow participants to address the trade-offs and characteristics of a proposal with a common perspective and language. There will always be interpretation differences between participants, but a strong set of accepted rules, goals, and values helps limit differences in interpretation and increase decision throughput.