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  • D Sam and S Pettigrove

Decentralised Governance and DAOs: Machiavelli as a solution?

Updated: Sep 28, 2023

In a paper released this week, Miles Jennings of A16Z Crypto, offers a fresh perspective on how to tackle the challenges emerging in decentralised governance models within the web3 landscape using Machiavellian principles.

Most web3 decentralised governance models are currently administered by decentralised autonomous organisations (DAOs). These DAOs draw from both direct and indirect democracy, as well as concepts from corporate governance.

Jennings says:

the majority of DAOs have failed to overcome the complexities and sociopolitical realities involved in decentralized governance, and their legitimacy and utility has suffered as a result.

As a new and upcoming organisational structure which operates outside existing legislative frameworks in many countries, DAOs face a range of governance issues. In Jennings' paper, five key issues are explored.

  1. Lack of Coordination. Decentralisation, a defining feature of DAOs, means that decisions are collectively made by members. Without proper leadership or plans put in place, coordinating and developing web3 projects can be difficult.

  2. Interest Misalignment. DAOs mostly rely on token-based voting, which can lead to power imbalances and conflicts of interests. Aligning the interests of DAO members and token holders is a challenge.

  3. Lack of Accountability. DAOs currently lack governance mechanisms to hold token holders accountable for poor decisions. Assigning responsibility can be hard without clear leadership, particularly given judging who made bad contributions is subjective.

  4. Vulnerability to attack. Token-based voting systems can be vulnerable to manipulations like vote buying. Token holders may be motivated to manipulate the system by separating their economic interest from governing power.

  5. Low participation. Direct democratic models often suffer from low voter turnout. This can open the door to more manipulation by specific groups who hold more power.

Some solutions have been introduced by DAOs and their communities to address these issues. These include:

  1. Implementing representative democracy mechanisms through token holders electing delegates to vote on their behalf in the DAO;

  2. Creating subDAOS to help finish dedicated tasks and coordinate openly with other subDAOs; and

  3. Adopting non-token-based governance such as proof of personhood and proof of participation to address token voting issues.

There are also ways to increase accountability through paying DAO contributors more competitively to get the right people on board, setting clear performance criteria for token holders to evaluate performance, and introducing forking, a way where DAOs can let better decision makers 'fork' worse decision makers.

According to Jennings, Machiavelli's principles help explain and address web3's decentralised governance problems.

  • Principle 1: Acknowledging that true democracy is often unattainable due to voter ignorance and limited engagement. This can be seen in low voting participation rates in web3.

  • Principle 2: Recognising the natural tendency for organisations, including web3 DAOs, ending up as autocratic structures. Initial founders of the DAO's protocol are likely to become the ones with power.

  • Principle 3: Understanding that unchecked leaders can exploit their power and resist accountability from token holders.

  • Principle 4: Emphasising the importance of opposition within DAOs to foster healthy competition by addressing the inequalities in token holding between competing parties.

  • Principle 5: Underscoring the need for new leaders to rise into the leadership class. This involves addressing issues with DAO community members attaining true power due to the high costs involved in attaining tokens.

Jennings introduces four Machiavelli-inspired guidelines targeting these issues:

  1. Embracing governance minimisation;

  2. Creating a balanced leadership group 'that is subject to perpetual opposition';

  3. Providing ways for regular changes to leadership; and

  4. increasing 'the overall accountability of the leadership class'.

Jennings expands on his proposals for implementing these principles in a companion paper. The guidelines suggest that DAO governance will continue to evolve and a principles based framework for addressing current problems. As Jennings reflects, there is a fine balance between keeping the key objective of decentralisation and implementing too many changes that may undermine it. It will be interesting to see how DAOs continue to navigate this balance, especially as a number of jurisdictions around the world consider endorsing the DAO structure as a new form of legal vehicle.

By Michael Bacina, Steven Pettigrove, Dorothy Sam and Tim Masters


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