Seeing that ENS is struggling with governance, I think it's time to talk about the DAO issue.

To some extent, a management system like DAO is a step backward.

Author: Eric, Foresight News

When the market environment is unfavorable, problems that existed even in favorable circumstances tend to be amplified and eventually exposed. Recently, Aave and ENS have both revealed some internal organizational issues, and the core of these problems points to the DAO.

After so many years, people have finally realized that although DAOs have decentralized, they have not missed any of the management problems encountered by centralized organizations.

what happened?

I'm sure many of you have already read the analysis of the recent internal conflict between Aave and ENS. For those who are still unfamiliar with the situation, I'll briefly recap what happened.

First, let's talk about Aave. What happened with Aave was actually a conflict between Aave Labs and the Aave DAO. Aave Labs had previously replaced the ParaSwap integrated in its front end with CoW Swap, and the resulting fees were redirected from flowing to the DAO to flowing into addresses controlled by Aave Labs.

Aave DAO therefore accused Aave Labs of privatizing the protocol's revenue. Aave Labs, however, argued that transaction fees belong to the front-end and product layer revenue, are unrelated to the Aave protocol, and that operating the front-end also incurs costs, so taking the revenue is justifiable.

In Aave's architecture, the Aave DAO controls the protocols, such as contract upgrades and treasury management. Any proposals related to protocol layer development and upgrades must be voted on and approved by the DAO before implementation. Aave Labs is considered Aave's core development team and is also responsible for product, marketing, and other work that drives project development.

In short, Aave Labs developed the Aave protocol and, after issuing tokens, transferred ownership of the protocol to the DAO. If Aave Labs needs funding for tasks such as development, operations, and marketing, it must apply to the DAO for funding. If the DAO does not agree, Aave Labs will not receive any money.

From Aave Labs' perspective, they believe the DAO failed to "find its place," and that without the efforts and strategic foresight of some members of the Aave Labs team, Aave might not exist today. The implication is that you're here voting for AAVE because we created Aave, so don't think too highly of yourselves.

From Aave DAO's perspective, Aave Labs may have had a god-like perspective in the early stages, but the subsequent releases of Lens and even version 4 cost the DAO a large amount of money without yielding corresponding returns. Furthermore, some have pointed out that Aave Labs repeatedly attempted to use the DAO to achieve its own goals but was exposed.

Clearly, this is a conflict between founding fathers and the existing management system, a conflict between the DAO and external parties, while the conflict between the neighboring ENS is an internal conflict within the DAO.

Last month, ENS founder Nick Johnson wrote a cryptic message on a forum, roughly meaning that the ENS DAO is now rife with political infighting, capable people are slowly leaving, and the leadership of the DAO has fallen into the hands of inexperienced people or those whose interests and agreements are not aligned with the agreement.

The reason for writing these words is likely that Limes, the secretary of the ENS DAO, submitted a proposal suggesting that the operations of the three working groups on meta-governance, ecosystems, and public goods be terminated at the end of the sixth term, which is December 31st of this year. The reasons are twofold: firstly, the proposal has become a game of "you support me, I support you," with no one caring about what should actually be done; secondly, the lack of entry standards has led to frequent instances of "bad money driving out good." Limes believes that improving the process can no longer solve this structural problem, and shutting it down is the only way out.

The current DAO is a step backward.

The most successful DAO we've seen so far is the Bitcoin community, and Ethereum could perhaps be considered one as well. Why is governance inefficient and riddled with problems in most DAOs? As someone who has consistently opposed DAOs based solely on democratic voting, I'd like to offer some perspectives for your consideration.

First of all, I believe that the premise for establishing a DAO is actually a clear misjudgment.

The emergence of blockchain, or cryptocurrency, was initially intended to resist authoritarianism, arguing that when power is concentrated in the hands of a few, decision-making is inherently unfair. Whether it's because decentralized governance is considered a standard feature of Web3 projects, or because centralization is perceived as leading to opacity and corruption, it all points to one argument: "centralization" is the root cause of all problems.

In retrospect, the problems that arise in these traditional organizational forms are just as prevalent and even more destructive in DAOs. Therefore, launching a DAO simply because the centralized model is considered "outdated" completely misses the point.

As someone with a management background, my biggest takeaway is that management science doesn't even have the concept of centralization and decentralization; its core consists of only four words: "planning, organizing, leading, and controlling." I'm not against the idea of ​​decentralization, but the emergence of the term DAO, in my view, reflects ignorance of management science and disrespect for history.

Throughout its development, management science has never argued that centralization and decentralization are inherently good or bad; the focus has always been on finding the most efficient approach. For a specific problem, if a centralized solution is better, then centralization is adopted; if decentralization is better, then decentralization is adopted. The evolution of organizational forms is essentially a process of natural selection, and current common organizational forms tell us that DAOs, considered a better organizational form in the Web3 industry, may very well be an obsolete model. As for why they might be "resurrected," it may simply be wishful thinking on the part of established organizations (OGs).

Management science is essentially about understanding human nature. DAO did not change people, the biggest variable in management, but instead attempted to use a seemingly democratic decision-making method, which ultimately amplified the evil in human nature.

In June of this year, Greg Solano, CEO of Yuga Labs, proposed dissolving ApeCoin DAO and transferring all assets and responsibilities to ApeCo, a newly created entity within Yuga Labs. The CEO stated that this move was intended to focus resources on ApeChain, Bored Ape Yacht Club, and Otherside. The proposal has been approved by vote, and what makes this particularly memorable is that ApeCoin DAO has a history of making some truly outrageous proposals.

Readers who are interested can check out the Snapshots themselves; proposals that seem like thankless tasks, such as developing new games, launching a separate NFT marketplace, and developing meme tools, have all been approved. Closing the DAO and consolidating power in the core team is a potentially controversial but best solution given the current circumstances.

The disputes and dilemmas between Aave and ENS are also common in traditional companies. These include clashes between veteran employees and new systems, and a company prioritizing avoiding mistakes, thus stifling innovation. While companies have some screening and elimination mechanisms, open organizations like DAOs almost inevitably face the problem of "bad money driving out good," and there's no corrective mechanism to balance these issues. For capable individuals, it's perfectly acceptable to work for a company and earn a substantial salary, or start their own business. Why do something that might yield no results or returns for countless strangers' investors?

None of the large-scale projects we see today that have survived for a long time and have high market recognition are due to the decisions of the DAO. The vast majority of them are still decided by the core team of the project or investors. The DAO just went through the motions of casting a vote.

It must be admitted that this was the only correct choice before the project matured. The core team's capabilities and understanding far surpassed those of most simple token holders, and they were more knowledgeable about all aspects of the project. They were probably the people who knew best what to do in the early stages of the project. There are countless examples of pure democracy turning into a joke, such as many people only starting to Google what "Brexit" meant after the UK left the EU, and Ukraine electing a comedian as president, etc.

The consensus is that "only one person can make the final decision in a company." This isn't to say that a one-man rule won't lead to wrong judgments, but rather that such a system allows for timely adjustments when mistakes are made. If every decision required thorough discussion and respect for everyone's wishes, the result could be endless disputes and decisions that are never implemented. AC, the king of DeFi, once mentioned in an article that some people questioned some of his decisions and decided to implement them in other ways, only to later understand why AC initially made seemingly unreasonable decisions.

The second issue is that the role of DAO within the ecosystem is quite ambiguous.

In my view, the DAO is a very distorted entity. Its power seems limited to voting, but it doesn't own the protocol code, the brand, or the technology. In short, as token holders, we can only participate in the protocol to a certain extent, but we don't own it.

The logic that tokens issued by public blockchains are ecosystem currencies is sound, but what about tokens for DApps? Existing global regulations only state that tokens are a new form of asset, or that they are not classified as securities, but their exact nature as assets remains unclear.

This type of asset, which grants governance rights but not ownership, becomes extremely precarious when problems arise. For example, if an expenditure approved by a DAO ultimately leads to issues such as corruption or unaccounted-for funds, who should be held accountable? For token holders, should the responsibility lie with the token holders who voted in favor, the implementers, or the protocol developers? It seems that everyone involved bears responsibility, but there appears to be no concrete basis for assigning specific blame.

The current corporate structure, with its legal representatives, shareholders, and senior executives, is designed to ensure clear accountability in case of disputes. DAO governance mechanisms, however, are very vague in their accountability. In the ENS incident mentioned above, when proposals within the DAO prioritized private interests or were simply mutually supportive, no one could be held accountable because every step conformed to governance procedures. It's possible that everyone who participated in the voting was an "accomplice."

I am not against DAOs themselves, but I believe that although we have a wealth of management science knowledge and countless past cases that can make decentralized governance more efficient and reasonable, most projects seem to simply adopt an "absolutely democratic" voting system to manage an organization with a market value of hundreds of millions. This approach, which disregards science, is more like a regression than progress.

Having said all that, specific improvement plans may need to be tailored to each DAO. In Aave's case, the challenge is to balance the relationship between Aave Labs and the DAO, while in ENS's case, the more important issues are how to streamline the DAO, retain talented individuals, and incorporate punitive policies that balance incentives to retain the "right people."

Interestingly, I don't believe these brilliant founders were unaware of the problems with DAOs. Perhaps they were simply unconvinced, believing they had the ability to do what their predecessors hadn't. But ultimately, they had to admit that history had a reason for choosing the corporate system. However, this isn't necessarily a bad thing. For the Web3 industry, only by experiencing these mistakes can they learn the correct approach.

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