Are DAOs Decentralized? Part One

As important as decentralization appears to be, everybody you ask seems to have their own ideas about what it actually means. Depending on who you talk to, decentralization might have something to do with:

1. A social movement to build software that’s difficult or impossible for governments to censor.
2. The architecture of the network used to host the software that facilitates voting in a DAO.
3. An organization’s ability to avoid regulatory oversight.
4. The structure of organizations and how power gets distributed throughout them.
5. Something else entirely.

In this series, I want to focus on #4.

To state the obvious, the idea of a “decentralized organization” conjures an image of an organization that isn’t centralized in any single location.

How does this differ from a “centralized” organization? A centralized organization might exist in one place, or power might be centralized within a particular group of people, or perhaps even a single person. On the flip side, we might surmise that a decentralized organization doesn’t exist in any single location, with power somehow being decentralized between members.

One of the things that makes decentralization tricky to talk about is the fact that it can be referred to as a process (decentralization) and a state of being (decentralized). We can talk about organizations being centralized or decentralized for various reasons, and we can also talk about organizations as being more or less centralized or decentralized relative to each other as well.

A lot of DAOs focus on creating environments where anyone can show up and participate, but there’s a big difference between accepting help from whoever comes along and making sure people are empowered to participate in a way that can be considered decentralized.

This problem certainly isn’t confined to DAOs: many organizations struggle with questions about how to fairly distribute power between founders, investors, and workers in the form of equity. Giving any group too little or too much power can disrupt the balance the organization needs to stay productive.

To gain more insight into the pros and cons of decentralized governance, it would be helpful to have a way to gauge how decentralized different organizations are relative to each other. Here’s how I want to go about that:

• The first part of this trilogy will elaborate on the question of what decentralization means so we can start thinking about how it might be measured.
• In Part II, we’ll look at what academics have had to say about measuring the level of decentralization in government.
• Finally, in Part III, we’ll use the insights from Part II to introduce a framework for measuring decentralization in DAOs.

In a 2019 report entitled Decentralization: An Incomplete Ambition, Nathan Schneider argues that decentralization can be more accurately described as a political flag people use to signify a common identity than a technical term that can be used to describe a particular type of arrangement.

Decentralization can be a useful rallying cry, and it bears liberating truths, but it also obscures a fuller reality. A case of alleged decentralization is almost certainly more accurately, modestly described as a matter of broader realignment or reorganization. (p16)

Nathan’s conclusion provides a helpful starting point but it’s not completely applicable when we’re only looking at DAOs. He’s talking about the definition of decentralization in general, whereas we’re interested in its meaning in a specific context: governance. Still, this characterization of decentralization as a political flag raises important questions about the meaning of decentralization in DAOs.

As Nathan and many others have pointed out, whenever we look at something that’s been called “decentralized,” the reality of things doesn’t seem to support such a conclusion. For example, the Internet has historically been described as “decentralized” in spite of the fact that a number of centralized organizations have been, and remain necessary for the thing to even operate.

On one hand, characterizing decentralization as a political flag makes sense. We often hear people ask “is this organization decentralized?”; they don’t ask “is this organization more decentralized than that organization?” In other words, it’s not about whether or not an organization possesses any particular characteristics that make it decentralized, it’s simply a matter of whether or not the organization is part of “the club.”

If decentralization is truly just a flag, then we can say embracing decentralization doesn’t seem terribly different from declaring support for a particular gang or religion.

On the other hand, if people used decentralization as a technical term, it could hypothetically be used to describe a variety of different organizations rather than just one. To put it a different way: can we say that DAOs are the only “decentralized” organizations, or do other types of organizations qualify as decentralized as well - what about employee-owned organizations, organizations that adopt holacracy, or certain types of co-ops?

If centralization and decentralization are about the distribution of power in an organization, the simplest way to decide whether or not an organization is more or less decentralized than another is to look at who’s in charge.

If Organization A has five people in charge and Organization B has six people in charge and both of these groups have ten members, then at least on the surface, it would appear that Organization B is more decentralized than Organization A.

If we accept Nathan’s conclusion that decentralization is just a rallying cry, it begs the question: is talking about decentralization really just a way of “flying colors,” or will DAOs attempt to create transparency around governance and prove their commitment to decentralized governance?

Applying this line of thinking to DAOs, for a DAO to be considered “less centralized” than a comparable organization, there needs to be transparent evidence that all of the power isn’t in the hands of one or a small number of token holders. This raises a couple of important issues:

1. Given the way DAOs vote, ensuring this level of transparency isn’t easy.

DAOs generally use one of two methods to facilitate voting: “one token, one vote” and membership-based voting, typically using something like Snapshot.

In both cases, it’s not enough to consider the distribution of voting power at any given time, we also have to consider how much voting power a single voter can potentially gain access to. A DAO might look decentralized by having an active community of voters but if a single voter can buy enough tokens or set up enough accounts ahead of a vote, it’s possible that the real power in a DAO lies with a lot fewer people than anybody ever intended.

2. Many DAOs may not want to provide this type of transparency.

A lot of individuals in DAOs prefer to obscure their identity to help minimize any legal risk associated with their participation. In the bigger picture, this means DAOs that privilege decentralization in terms of their ability to avoid regulation over decentralization in terms of the distribution of power in the DAO would not be likely to embrace this type of transparency.

If different types of decentralization are inherently at odds in this way, we have to judge each type on its own merits. Just like you can’t judge a fish by its ability to climb a tree, you can’t judge a DAO focused on avoiding oversight on the same terms as one focused on distributing ownership.

Before we start thinking too deeply about how to measure decentralization in different types of DAOs, and whether or not it’s even possible, it’s worth reviewing what’s already been published on the difficulties of measuring decentralization. Academics have offered several frameworks for measuring decentralization in different types of organizations and fortunately, this even includes DAOs.

Whether we only focus on specific types of DAOs or try to accommodate different DAOs based on their own priorities about decentralization, developing a framework for measuring decentralization in DAOs will mean considering a number of important variables. That’s exactly what we’re going to do in Part II.

After all, what good is a DAO if it isn’t actually decentralized?

• Part II reviews the literature on measuring decentralization in organizations.
• Part III applies the ideas from Part II toward a framework for measuring decentralization in DAOs.

Schneider, Nathan. (2019): Decentralization: an incomplete ambition, Journal of Cultural Economy, DOI: 10.1080/17530350.2019.1589553 https://canvas.harvard.edu/files/7831767/download?download_frd=1