Original Author: Miles Jennings, General Counsel of a16z crypto
Original Translation: Luffy, Foresight News
Regardless of how you view the Italian philosopher and politician Niccolò Machiavelli from the Renaissance period, many of the principles he explored in his works about leadership and maintaining political freedom still hold practical significance today. The resonance of these principles can be seen in the design of "The Federalist Papers" and the U.S. Constitution, as well as recent academic research on the establishment of political systems. As someone closely tracking the practice of decentralized governance in Web3, I believe that some Machiavellian principles can also be applied to repairing decentralized governance in Web3.
Currently, most decentralized governance models in Web3 adopt DAOs (Decentralized Autonomous Organizations), which use simplified models of direct or indirect democracy and models derived from corporate governance. While these systems are effective first steps, most DAOs have failed to overcome the complexity and socio-political realities involved in decentralized governance, thereby compromising their legitimacy and utility. Machiavelli's philosophy is based on a pragmatic understanding of power struggles in society, with the premise that there is no mechanism to guarantee benign behavior. This makes Machiavellian principles a useful guide for designing effective decentralized governance.
In this article, I examine the challenges faced by DAOs and discuss why many current solutions have not addressed these issues. Then, I share how Machiavellian principles can be applied to DAOs and propose four design guidelines for creating "Machiavellian DAOs": (1) Embrace minimal governance; (2) Establish a balanced and perpetually opposed leadership; (3) Provide pathways for continuous change in leadership; (4) Strengthen the sense of responsibility of the leadership team. In a sister article, I share how to implement these "Machiavellian" design principles in practice.
Current Issues in Decentralized Governance
Decentralized governance enables Web3 protocols to be decentralized and achieve trusted neutrality. Therefore, ensuring effective decentralized governance of protocols is crucial for the success of Web3. This is especially true for Web3 systems that rely on shared blockchain infrastructure to run client/applications, as these systems involve many participants with different motivations.
However, like many other experiments in decentralized organizations, Web3 protocols also face significant obstacles, and current solutions have not been proven effective. The most common problems currently faced by DAOs and decentralized governance can be summarized as follows:
Lack of coordination. In order to promote decentralization, most DAOs have neither leaders nor a complete roadmap for development. If the value of tokens depends on the "efforts" of others, centralized and highly coordinated projects may involve regulatory requirements. While the path to decentralization is crucial for most Web3 projects, it poses obstacles to ongoing coordination and development. Without a hierarchy, DAOs face significant challenges that traditional hierarchical organizations avoid.
Misalignment of interests. The interests of DAO members and token holders are not always aligned, posing a challenge for ecosystems that rely entirely on token voting. Imbalances of power between different stakeholder groups may hinder the trusted neutrality of the protocol, limiting its development. In addition, off-chain negotiations and economic interests may lead to conflicts of interest among certain DAO members, affecting their voting behavior.
Lack of accountability. Current DAO governance mechanisms fail to hold token holders accountable for their erroneous decisions in managing the protocol. Another issue is the lack of leadership hierarchy within DAOs, coupled with the limitations of direct democracy, making it difficult for DAOs to hold their contributors accountable. The lack of an accountability system increases the risk of rent-seeking or insider trading by DAO contributors.
Vulnerability to attacks. Token-based voting may make DAOs vulnerable to bribery and other manipulative attacks. As Ethereum co-founder Vitalik Buterin has pointed out, separating the economic interests of tokens from the rights of token holders to participate in governance can easily lead to governance attacks.
Low participation. "Direct democracy" often leads to low voter turnout, making DAOs susceptible to manipulation by more organized and active groups. Even if DAOs can increase participation in some way (e.g., by paying voters), it does not guarantee that DAOs will benefit from this increased participation (the quality of voting may not be high). Ultimately, informed voters are necessary for making wise decisions, and given the relative complexity of DAO governance and the time constraints of participants, achieving efficient direct democracy in Web3 is unrealistic.
In summary, all of the above issues pose significant obstacles to the success of decentralized governance and DAOs in Web3. The opacity of current practices further exacerbates the problem, making DAOs a tool for "decentralized performance" – protocols that only pretend to be decentralized.
Many models and strategies have been proposed to address the above challenges. One advantage of Web3 is the rapid experimentation and iteration in DAO governance—a form of "lightning democracy." It is a public laboratory where democratic experiments can be completed in a matter of months.
Solutions
Below, I summarize some strategies and methods that help address the challenges of decentralized governance mentioned above. Then, I will apply Machiavellian principles to DAOs and revisit these contents.
Representative Democracy and Delegates
Given the practical challenges of direct democracy, many DAOs have turned to representative democracy to strengthen their decentralized governance. Representative democracy mechanisms typically use proxy voting, where token holders nominate and elect representatives to participate in various votes within the DAO.
The success of these DAOs ultimately depends on the quality of the delegates. So far, most of these DAOs have defaulted to industry "rockstars" as representatives, raising long-term questions about the scalability and feasibility of such schemes. Professional delegates (whose sole job is to participate in such DAOs) have also emerged as another type of representative.
SubDAOs
SubDAOs or sub-organizations within DAOs can represent the DAO in completing specified tasks: risk monitoring, network and protocol development, community management, business development, etc.
Compared to traditional companies, subDAOs are designed to operate in a more open and decentralized manner, transparently collaborating and coordinating with other subDAOs. This structure aims to reduce the potential risk of significant information asymmetry between members. Therefore, if structured properly, subDAOs can effectively operate within DAOs without jeopardizing the overall DAO.
Tokenless Governance
Vitalik Buterin and others (including some of my a16z colleagues) have called for systems to adopt mechanisms beyond token voting to better represent the interests of all stakeholders. Vitalik has proposed two alternative mechanisms to token-based voting: 1) Proof of Personhood (a system where verified accounts correspond to unique individuals, allowing for one person, one vote in governance); 2) Proof of Participation (a system that verifies that an account corresponds to a person who has participated in certain activities, passed certain education or training, or performed certain useful work).
DAOs have begun to practice these ideas. For example, the governance of the L2 Rollup protocol Optimism balances token holders and ecosystem participants (consisting of specific ecosystem members who obtain citizenship in the form of "soul-bound" or non-transferable NFTs). The recently launched Worldcoin offers biometric identity verification, which may lead to more people using identity-based governance. The community behind the Lido liquid staking protocol has been discussing adopting dual governance, where LDO (Lido governance token) holders and stETH (liquid staked ETH issued by the Lido protocol) holders collectively vote on certain matters to address potential conflicts of interest between LDO and stETH holders.
Ultimately, the adoption of these solutions may depend on whether the project is fundamentally a commercial project or a public project. For commercial projects, separating economic interests (measured in tokens) from governance power (measured in votes) may lead to suboptimal economic outcomes. But for public projects, proof of personhood voting schemes are more attractive as they can better represent the overall interests of the community.
Strengthening Accountability
Suggestions for making DAO contributors (including representatives and subDAOs) more accountable to token holders include: (1) increasing compensation for DAO contributors to make these roles competitive with other roles in the industry, thus avoiding adverse selection; (2) establishing objective standards for evaluating performance by token holders.
To hold token holders accountable for their decisions regarding decentralized governance proposals, some have suggested forking DAOs frequently. This would allow "good" decision-makers to fork the protocol from "bad" decision-makers, leaving the latter with a protocol version formed by their erroneous decisions.
Minimal Governance
Minimal governance requires protocols to reduce their reliance on and exercise of decentralized governance. Reducing all governance except for necessary governance will enhance the system's trusted neutrality. Given the costs of unnecessary governance, protocols with frequent governance will ultimately be at a disadvantage in competition.
Industry leaders like Vitalik have long advocated for limited governance, believing that this approach reduces all non-automated parameter choices. Many DeFi (decentralized finance) protocols have also implemented minimal governance, including Reflexer Labs and Liquity, taking this concept to the extreme by eliminating all human governance.
Applying Machiavellian Principles to Web3
The works of Machiavelli and his disciples (refer to James Burnham's work "The Machiavellians: Defenders of Freedom") provide valuable insights into decentralized governance. This governance emerged from the constant turmoil and power struggles of the Italian city-states in the 15th and 16th centuries. The challenges faced in that era can be analogized to the issues DAOs must address today.
Machiavellian principles began with the belief that an objective science of politics and society is possible, with the primary theme being the struggle for social power. Subsequent works by Machiavellians explored other principles that not only predicted the struggles of decentralized governance in Web3 but also provided guidance for addressing these struggles: from accepting the authoritarian tendencies of organizations, to balancing leadership through perpetual opposition and continuous change, to enhancing the overall accountability of participants.
I will summarize these Machiavellian principles here (as described by Burnham in 1943) and apply them to the context of DAOs:
Direct Democracy is a Myth
Machiavellians believe that the theory of autonomous democracy does not align with social reality. For example, referendums often produce regrettable results (such as the highly unpopular Brexit in the UK). Reasons cited by Machiavellians include ignorance of the issues and a lack of time to attend to governance affairs.
It is futile for individuals with low voting power to invest significant time and effort in governance. In Web3, low participation rates are a direct manifestation of this, especially in highly complex governance proposals. This ultimately hinders effective DAO governance.
Authoritarian Tendencies are Inherent in Any Organization
Once an organization has a significant amount of activity, Machiavellians believe that labor will naturally be allocated to the talents best suited to perform these tasks, including individuals specializing in organizational operations. This inevitably leads to an organization leadership composed of "a relatively small minority group." This organization can only remain dynamic and effective through its leaders.
All complex organizations naturally tend towards an authoritarian leadership structure. This is the natural law that Machiavellians refer to as the "Iron Law of Oligarchy", which exists even when economic disparities or different political structures are excluded. For example, despite attempts by the Soviet Union and China to eliminate economic inequality, a hierarchy still developed, and ruling classes emerged. Applied to DAOs, the Iron Law of Oligarchy suggests that DAOs will naturally tend towards authoritarianism, and the most likely individuals to implement authoritarian control are the initial development teams of DAO protocols.
Leaders Seek to Maintain and Expand Their Power
Machiavellians claim that "…in practice, the primary goal of all rulers is to maintain their own interests, power, and privileges, without exception. No theory, no promise, no morality, no goodwill, no religion can limit power." Even in democratic countries, the masses often cannot hold their leaders accountable, and even democratic countries are particularly susceptible to the influence of powerful leaders imposing their will on the people—this phenomenon is referred to by Machiavellians as "Bonapartism".
If power is left unchecked, "Bonapartist" leaders are likely to emerge in democratic organizations, claiming "to be the most perfect embodiment of the will of the collective, the people." Therefore, everything is permissible for them, as they are the symbol of the entire collective." Applied to DAOs, this principle suggests that DAO leaders can perpetuate their power, or token holders may struggle to hold them accountable.
Only Power Can Check Power
Given the inherent authoritarian tendencies of organizations and the inability of the masses to hold leaders accountable, Machiavellians believe that the only check on the power of leaders is the power held by the opposition. In democratic systems, this manifests as the freedom of the opposition—this is the key tool that allows decentralized governance to surpass centralized governance. In particular, the open criticism of the opposition "exposes the errors of the ruling elite and often forces them to correct their mistakes. If these errors are stubbornly maintained over the long term, it may have fatal consequences."
While the right to open opposition exists in Web3, DAOs sometimes struggle to cultivate a healthy opposition when token distribution is not evenly spread among opposing viewpoints. Due to securities law issues in the US related to token distribution, token distribution typically occurs through airdrops (free token distribution) or ecosystem incentives (distribution of tokens to users in exchange for certain user behaviors, such as providing liquidity). However, these do not allow for the launch of decentralized governance with equal footing competitors. Therefore, many DAOs are particularly susceptible to Bonapartism, where individuals or groups may wield power without restriction.
Establishing appropriate checks and balances through decentralization, the opposition can also be deeply rooted in democratic systems. As James Madison proposed in "The Federalist Papers," "ambition must be made to counteract ambition." When faced with issues arising from uneven token distribution, implementing decentralization is another way to achieve a balance of power.
Entrenched Leadership Will Ultimately Fail
Machiavellians believe that power should not only be constantly opposed but also allow for new leaders to enter the leadership ranks, avoiding the solidification of the power structure. According to Machiavellians, this mobility must be forced, as the existing leadership will always oppose it to maintain their status and privileges.
Enabling widespread participation of community members has been a hallmark of the Web3 ethos and often extends to the leadership of DAOs, where community members often become formal DAO contributors. However, the ability of community members to gain real power in token-based voting systems is often limited due to financial barriers associated with obtaining this kind of power.
Designing Machiavellian DAOs
The Machiavellian principles I have shared here can be distilled into four guiding principles for designing more effective decentralized governance. DAOs looking to adopt Machiavellian principles should:
Embrace minimal governance
Establish a balanced leadership that is constantly challenged by opposition
Provide pathways for continuous change in the leadership ranks
Strengthen the accountability of the leadership
The challenge, however, is that empowering any party in a decentralized system may undermine the decentralization of such systems—potentially leading to severe information asymmetry and increasing the vulnerability of these systems to governance attacks. Additionally, these guiding principles may lead to inefficiencies and governance friction, making them unsuitable for certain systems, such as highly dynamic systems or public goods systems.
Therefore, these guidelines must be implemented carefully, and Web3 builders can do so through some methods (refer to Part Two).
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