DAOs and the pitfalls of progressive decentralisation

Social image credit: Wikimedia / donatas1205 / Billion Photos / vgeny Karandaev / The Atlantic


These days I don’t seem to be able to go a day without coming across the phrase progressive decentralisation – an idea which seems to have become an axiom of sorts for aspiring community founders and DAO creators.

Although it can mean different things to different people, in this post I will focus on the strategy as outlined in the oft-cited Progressive decentralization: A Playbook for Building Crypto Applications.

In particular, I will explain why I believe the playbook’s emphasis on product/market fit over community is misguided, and make the case for why a DAO might be better off focusing on community first and foremost (under this approach, product/market fit can be pursued in parallel, but a strong and loyal community should, as a general principle, be the driving force).

Finally, I will share my thoughts on what it takes to create a fiercely loyal community, and introduce a DAO that I deeply admire – one that captures the very essence of this philosophy.

Let’s start by going through the playbook together.

Progressive decentralisation (a critique)

The starting paragraph reads:

Crypto founders have a unique challenge in front of them. In addition to building a product that people want, they also need to consider how that product can successfully run in a decentralized manner — that is, as a protocol owned and operated by a community of users.

Notice that the emphasis here is very much on building a product that people want; community is a secondary objective. This emphasis is mirrored a little further down:

The earliest stage of building a crypto application requires all the ingredients of a normal startup: a great team, lean development, tight execution, and quick learning. During this phase, the only thing that matters is product/market fit.

It’s also reflected in the ordering of “The Three Components of Crypto Success”:

  1. Product/market fit

  2. Community participation

  3. Sufficient decentralization (community ownership)

My thesis is that some DAOs may be better off with the following permutation:

  1. Fiercely loyal community

  2. Sufficient decentralisation (community ownership)

  3. Product/market fit

Where the distinction between 1 and 2 is blurry at best, and 3 emerges organically from the community itself (where the community, in a sense, plays the role of both customer and co-designer).


Why do I believe this?

To elaborate a little here, I see a relationship between the rising march of DAOs and the increasing complexity of the world. In particular, the increasing gap between the complexity of the demands placed upon collective human systems and the ability of any one individual to fully understand them – I think that deep-down, many of us intuitively feel this is true, even if we would be hard pressed to articulate it in this way.

My thoughts on this matter have been greatly influenced by the writings of the complexity theorist Yaneer Bar-Yam, who explores the relationship between complexity and human organisation in some depth in his paper – Complexity rising: From human beings to human civilization, a complexity profile.

To quote just two passages:

The complexity of demands upon collective human systems have recently become larger than an individual human being…

The implication of the disappearance or dramatic changes in centrally controlled human organizations is that the behaviors of collections of human beings do not simplify sufficiently to be controlled by individuals. Instead of progressive simplification from an individual to larger and larger collections of individuals, we have the opposite, an increasing complexity that is tied to an increasing complexity of the demands of the environment. This makes it impossible for an individual to effectively control collective behaviors.

To borrow some thoughts from his related essay – Teams: a manifesto – I think it follows that:

We are at the beginnings of a metamorphosis of social organization in which leadership no longer serves the role it has over millennia

We need to shift the ego’s focus from autonomy, to pride in collectivity

This is the next stage of social evolution and there is much we need to learn and do to achieve it.

Linking these thoughts back to DAOs, I suspect we are now living in an age where decentralised internet communities that figure out how to organise themselves as an interdependent complex collective of diverse individuals will end up converging on better decisions. This is the next stage of social evolution. And as a consequence, these sorts of orgs will have a better chance of not only surviving, but prospering over the coming decades.

As such, my thesis is that a fiercely loyal community (more on this below) coupled with effective governance (more on what this means in a follow-up post) should lead to product/market fit emerging organically from within the community (in the style of Grothendieck’s rising sea theorem) . And that, in a world which has now crossed a certain complexity threshold, this is perhaps the most effective way for a DAO to prosper / continue innovating / sustainably find product/market fit.

Within this context, I believe the progressive decentralisation playbook misses the forest for the trees:

Community participation and decentralized control are less applicable to traditional startups, but are crucial for crypto startups. Why are they so important?

The answer is that community participation and control results in limited platform risk — the risk that the rules of a platform will change against the will of its users.

… Another important reason for achieving decentralized community control is regulatory compliance.

These reasons, although relevant, are of secondary importance. The primary hope is that self-organising communities will lead to a better and fairer world (through better decision making and fairer value sharing).

The future of design is community-based

At this stage I think it’s worth offering some thoughts on the future of design.

In a sense, the best design thinkers are already intuitively feeling and expressing what Yaneer Bar-Yam has described mathematically.

For instance, Don Norman has done a good job at explaining why he believes the future of design is community-based. In a 2020 post outlining his vision, he expressed the following thought:

We propose a radical change in design from experts designing for people to people designing for themselves. In the traditional approach, experts study, design, and implement solutions for the people of the world. Instead, we propose that we leverage the creativity within the communities of the world to solve their own problems: This is community-driven design, taking full advantage of the fact that it is the people in communities who best understand their problems and the impediments and affordances that impede and support change.

One of the influences he cites is Jeremy Myerson’s wonderfully insightful paper – Scaling Down: Why Designers Need to Reverse Their Thinking.

To quote directly from the paper, the first principle of scaling down is:

  1. Cultivate a Participatory Mindset—Not an Expert One

    Designers can no longer be “experts” who use design as a kind of proxy to make crucial decisions about form and function for the faceless masses. Scaling down requires a participatory mindset, which means creating with people rather than for them. Collaborative methods such as co-design, co-creation, and experience prototyping, for example, entail investigating and responding to real needs identified through an interactive, democratic process, and make certain design methods obsolete.

All this stands in stark contrast to the advice given in the playbook:1

To move fast toward finding it [product/market fit], it’s important to avoid design by committee (or community!… At this stage, there should be no pretense of decentralization — a core team is driving all product decisions by necessity, in the interest of finding product/market fit.

Economic incentives are not enough

Perhaps the most serious drawback with this strategy though is that you handicap yourself from building a fiercely loyal community from the outset. One underappreciated consequence of this is that you may find it hard to rely on community as a moat2 when you relinquish control.

For the core team, relinquishing control comes with an opportunity to begin transferring responsibility to the community. But as you go about engaging community members, it’s important to revisit incentives. Why will community members contribute to the product on an ongoing basis?

If you’ve focused on community first, you clearly don’t need to ask this question :)

The playbook goes on to list incentives (including token distribution) as the primary mechanism by which to motivate community contributions. And mentions Uniswap as an example of a crypto app that’s protected by the power of its network effects.

An economic incentive is one way to engender community contribution…

Uniswap, a decentralized exchange, is an example of how a crypto application with a fee can be protected by the power of its network effects.

With hindsight, this is perhaps not the best example. As we saw last year, Sushiswap was able to successfully fork Uniswap; at some point, I think most of us felt like it even had a fair chance of eating it for lunch!

So why was this attack easier than almost anyone suspected?

I think a key lesson here is that economic incentives cannot, by themselves, sustain a community (because the next guy can always come along and offer more). Put another way, although they are perhaps necessary (though even this is arguable), they are not sufficient.

A great community is bonded by something deeper than just money. At the very least, there is a shared set of values, an overlapping sense of purpose.

Clutching at copyright

The decision to release v3 with a more restrictive license suggests that, even today, Uniswap’s network effects are not something the team + investors feel comfortable relying on.

In case you’re not familiar with the details, Uniswap Labs (the founding team) chose to go with a BUSL 1.1 license that prevents the v3 code from being forked for 2 years – more precisely, it prevents commercial use of the code for 2 years (or an earlier date determined by governance); while some may argue that this is an acceptable compromise since Uniswap Governance has the power to grant exemptions and speed up the transition to an open-source license, I think those who do are underappreciating the importance of defaults (as well as the impact of the perceived legitimacy of those who introduce them).

Why did Uniswap Labs choose to take this path, which seems so contrary to the very principles that attracted so many of us to this space in the first place?

I would argue they were forced to do so because the initial culture they had put in place, which prioritised product over community, had longer term downstream consequences3 – specifically, it impacted their ability to cultivate a loyal community, even once they had “exited” to it. For those who would counter that Uniswap has a large community, I think it’s worth stating here that there isn’t necessarily a correlation between size of community and strength of loyalty (more on this in a follow-up post).

The sad truth is that, in the absence of a strong and loyal community, you’re left clutching at copyright as a moat.

Community as a superpower

I’ll ground my thoughts here in two essays by Luke Duncan that have particularly marked me. My thoughts on this subject are not particularly original. In fact, nearly all of them are borrowed from Luke.

Luke is one of the deepest thinkers in this space, and has been thinking and writing about the importance of communities in crypto for several years now.

In his 2018 essay on Community aggregation theory, Luke explains why he believes community and governance are where value will accrue over the long-term:

With an established and loyal community, any protocol that is running inefficiently can be forked in order to create net value for the community.

… That is the power of a strong and fiercely loyal community, and why I suspect value will tend to accrue primarily in the currency-governance layer rather than in any other protocol layer.

By combining the currency use case with governance, communities will have a huge advantage in effectively aggregating the economic activity of the ecosystems that develop within and around them.4

These thoughts build on an earlier essay of his titled Thoughts On Governance and Network Effects, in which he makes the case that, when it comes to optimising for loyalty, the most important thing is to maximise Voice of network participants:

… having a defensible token model is not sufficient to maintain a strong network effect. Token balances can be copied by competitors, software and datasets can be forked, how do you ensure that your token holders are loyal and will continue to prefer your service over that of competitors?

… if we acknowledge that the biggest barrier to a fork is the desire to maintain a network effect, than we come to the conclusion that we must maximize Voice of network participants.

In a sentence, if you’re able to maximise voice, you’re able to maximise loyalty, and that is the strongest combination of offense + defence you can ask for.

I don’t have much to add to these two essays, so if you haven’t done so already, please read (and re-read) them!

In summary

Although the progressive decentralisation strategy can work well in some cases, it has its pitfalls.

In particular, focusing on product/market fit before community may handicap you from building a fiercely loyal community, even once you have “exited” to it. An underappreciated consequence of this is that you may be forced to rely on copyright as a moat in order to continue accruing value.

One way to avoid this is to place at least as much importance on community as on product from the outset (and probably, considerably more).

The key to a fiercely loyal community is a shared sense of purpose (values and mission), and a culture in which participants feel they have a strong voice (the earlier and the more intensely they feel this, the more loyal they will be).

Given a fiercely loyal community, product/market fit can and will emerge organically from the community itself (where the community, in a sense, plays the role of both customer and co-designer).

Further, in a world which has now crossed a certain complexity threshold, thinking of community as co-designer is perhaps the most effective way for a DAO to prosper and continue innovating over the long-term.

Final thoughts

One question we haven’t addressed here is how to go about maximising voice. Once again, Luke has some sound advice:

The best way to maximize voice is through effective governance.

Clearly this is much easier said than done. What does effective governance even mean? This is a very interesting and much longer discussion; one which I promise to address in a follow-up post.

Bear in mind these aren’t just theoretical arguments being put forward. This philosophy is being put to the test as part of a community Luke has founded called 1hive.5

If it succeeds, I suspect it will result in an important step change to our collective thinking – on the same order of magnitude as both Bitcoin and Ethereum. I don’t think it’s an exaggeration to say that 1hive has the potential to expand the scope of what most of us believe to be possible, and shape the future of human organisation for decades to come.



Thanks to Jessica Steiner, Gabi Garcia, Luke Duncan, Aude Launay, Tom Saint-Leger, Barnabé Monnot, and Louis (@albiverse) for reading drafts of this.

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1

As a side note, I think it’s also worth noting that when dealing with large complex, sociotechnical systems – which the most successful crypto applications will probably have an impact on – Don Norman highlights the importance of moving slowly.

Designs must confront several major complexities when applied to the large, complex, needs of the world. These complexities are of special importance to the application of Human-Centered Design. Three areas are of special note:

  1. Large complex, sociotechnical systems. When major political, economic, social and cultural variables interact, it is best to proceed slowly, with incremental, opportunistic steps (See Norman & Stappers, 2016).
    Community based Human centered design,

2

In fact the term “moat” is really underselling it here. As Barnabé Monnot has pointed out to me, community is much more than a moat. A moat is a passive line of defence. But a loyal community is far more active than that; it can contribute to improving the structure of the castle itself, and play offense too.

3

Decentralized autonomous organizations are closer to a complex dynamic system than a company. As such, the initial conditions of that system have a profound effect on the result (yet another idea I’ve borrowed from Luke :) 

4

Regarding product/market fit emerging organically from the community itself, Luke writes:

If a community desires, governance can be used to socialize the cost of provisioning public goods through inflation or transaction fees, including the systematic forking of “thin” protocols that have grown too “fat”, funding the creation of novel protocols which commoditize new markets, or building applications and tools which further enhance the utility of the community’s currency

5

A short extract from the 1hive wiki (to give you a flavour of just how special the culture is):

1Hive isn’t a company, there is no core team, and there has never been a crowd sale to raise funds to operate. Instead 1Hive has been issuing and distributing Honey to contributors for over a year. Up until recently it didn’t have a market defined price but it eventually found its way onto an exchange and now it does. The community doesn’t need Honey to have a certain price in order to distribute it, but as it becomes more valuable, the community is able to direct more resources towards community projects, and in turn those projects may grow the Honey economy further.

By optimizing how we issue and distribute Honey we hope to create a future that is more free, fair, open, and humane.