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  • J Huang and S Pettigrove

Debates over DAO governance heat up

This week ArbitrumDAO, the newly-established DAO governing the Ethereum Layer-2 scaling project Arbitrum, was forced to backtrack on a key governance proposal to transfer $1 billion worth of its governance token (ARB) to capitalise the Arbitrum Foundation.

The proposal was initially set to go ahead without the approval of ARB token holders who make up the ArbitrumDAO that in theory governs Arbitrum. The Arbitrum Foundation branded the proposal as a "ratification" and wanted to press ahead before the conclusion of a governance vote by token holders, who were overwhelmingly against this proposal.

In the face of criticism over a perceived lack of autonomy at the DAO, the Arbitrum Foundation sought to defend the ratification proposal in a governance forum post:

"When it comes to setting up a DAO, there’s a chicken and an egg problem...certain parameters involving code transfer, security council creation and the drafting of a constitution needed to be set before the DAO could take over."

This response did not seem to satisfy token holders and the wider crypto community who took to Twitter to voice their concerns over the lack of consultation:

Eventually, the Arbitrum Foundation bowed down to pressure and agreed to amend the proposal allowing tokenholders to vote on it separately:

it's now time to incorporate community feedback, and move forward with new AIPs (note: Arbitrum Improvement Proposals) and documentation that address key areas of concerns.

Some will see this as a win for DAO governance - that decentralised governance works even when it goes against the wishes of a founding team or influential group. However, the Arbitrum backlash also raises the important question of whether an organisation can really function from the bottom up, at least in the beginning stage and especially when huge amounts of money are involved.

MakerDAO Constitution approved

The Arbitrum controversy contrasts with the recent successful overhaul of MakerDAO's governance structure. MakerDAO is the DAO behind Maker, a $7 billion lending platform that also issues the $5.3 billion stablecoin DAI, backed mainly by the value of digital assets from borrowers. Just a few weeks ago, MakerDAO's community approved several sweeping reforms, including a new "Constitution" drafted by MakerDao's founder Rune Christensen.

The proposals include breaking up the DAO’s current structure into smaller units called SubDAOs, which are self-governing and self-sustaining entities with their own tokens within the MakerDAO ecosystem. The plan also aims to boost platform revenues by investing a part of Maker’s more than $7 billion in reserves into real-world assets and money-market funds, further diversifying the backing of the DAI stablecoin to make it more resistant against censorship and sanctions.

Andreesen Horowitz (a16z), a leading venture capital firm and significant tokenholder in MakerDAO had raised concerns over aspects of the proposal. The constitution was nevertheless approved by 76% of MakerDAO's community.

The MakerDAO Foundation said concerns over "misalignment" were one of the driving forces behind the changes:

The reason that alignment with a greater purpose beyond just financial return is so important is that indifferent, misaligned participants who are motivated to take part in Maker Governance purely for the sake of financial returns, while aligned in some areas of economic gain, will have nothing stopping them from exploiting opportunities to extract value for themselves even if it comes at a cost to the broader community.

The Foundation presents the new Constitution as an effective way of "alignment engineering":

The Maker Constitution specifies a maximally unchangeable scope of Maker Governance to the extent it is reasonable. This helps ensure transparency and reduce complexity asymmetry because the core processes and frameworks change minimally, enabling token holders to follow along.

It also says that SubDAOs will create efficiency for ongoing governance:

"SubDAOs are semi-independent DAOs that are linked to Maker Governance and whose core design enables a derisked, second layer of the ecosystem to foster fast-moving, unconstrained innovation, growth and experimentation. SubDAOs also enable delegation of responsibility and risk within specific, highly complex areas. In general, complexity, responsibility, decision-making authority and risk is off-loaded from Maker Core and pushed to the SubDAOs, except if the Maker Constitution specifies otherwise."

The controversy over ArbitrumDAO and the MakerDAO constitution are just two recent examples of debates sparked by the desire to balance efficiency and decentralised governance within DAOs. The debates themselves are an indicator of a passionate and engaged community and provide interesting case studies on the tensions involved in decentralised governance as DAO governance continues to evolve.

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