With $14 billion locked in DAOs, over 1 million governance token holders, and 180 active DAOs, the DAO ecosystem is indisputably growing.
Yet, like all things in Web3, we are still in the public beta testing phase of the technology; some early experiments are encouraging, but we have a long way to go before being able to seamlessly utilize and adopt DAOs in a meaningful way.
Indeed, the DAO ecosystem is fraught with core challenges ahead, such as:
Identifying authentic users
If you are designing a governance token and want to airdrop it to your authentic early users, how can you differentiate between “authentic” and “inauthentic” users? Once governance airdrops became commonplace, sophisticated users began “farming” them, i.e., making transactions that mimic real activity in order to receive an airdrop and sell that airdrop at a profit.
These users are there for the financial incentive alone, and likely have little to no interest in long-term participation in the project. Being able to distinguish between these two types of activity is extremely difficult and can mean significant misallocation of airdropped governance tokens.
Increasing governance participation
In modern democracies, we have a turnout problem and an apathy problem. In web3 DAOs, the same problem exists. For 99% of DAOs, less than 0.5% of governance token holders actually participate in voting on proposals. How does a project distinguish between a healthy core governance community and unhealthy centralization into the hands of a few?
What happens if this small group of actors becomes bad actors for whatever reason? How do projects with a “founder” still in the picture balance on-chain governance with off-chain influence? These remain open questions at the heart of not just Web3, but overall economic and political coordination.
Innovating voting paradigms
Today, most DAOs are 1 token, 1 vote. Naturally, this means that voting power is concentrated in economic power: investors, “whales,” and, in the future, maybe even traditional asset allocators, can end up controlling decision-making with large financial backing. 1 token, 1 vote also means “majority rules” is the default. We are still very early in experimenting with new voting paradigms–for instance, quadratic voting, or futurity,…
While these above challenges remain “open questions” for the scaling and adoption of DAOs, they also create opportunities for innovation and first principles thinking from audacious builders!
Our Thesis: Opportunities to Watch Out For
I have learned in crypto, and in life, to be comfortable with a kind of cognitive dissonance: to simultaneously hold a long-term conviction in a technology’s vision on one hand, while retaining a harsh realism about its risks and current development.
There is nothing “inevitable” about web3, or indeed any technology — product, platform, or protocol; determinism is a kind of intellectual laziness (I find myself needing to stress this point in the current environment). The ecosystem must continually work towards exponential improvement, and first and foremost, continue delivering value to real users. Tooling, especially low-code or no-code, that enables users to spin up and manage DAOs — from the entire governance workflow to the specialized accounting required by DAO treasuries — is a step in this direction.
While DAOs themselves are not “investable” — just like investing in a structure such as an LLC or co-operative is not a thesis in itself — tools that enable DAO creation and aid in DAO management, especially as DeFi DAOs grow in capital power, are a very interesting area to watch.
Secondly, we are closely watching strong networks that could benefit from a DAO approach — e.g., talent networks such as developer communities or creator networks such as Trell or Chingari. We strongly believe that user-centric networks that progress to DAO governance could be built in these spaces, likely from scratch, and are excited to meet teams that are strong in their core community domain, eager to build with a web3 vision from scratch.
Lastly, we are closely monitoring innovation in the challenge areas above. We would love to see experiments and evolution in voting mechanisms, DeFi 2.0 DAOs, and more grassroot organizations form DAOs to challenge traditional orgs, even VCs like ourselves.
We are still in open beta across the web3 ecosystem. While technology enables novel incentive mechanisms, it cannot “solve” human behavior; it needs to reckon with it. The DAOs, which are at the heart of web3’s promise of decentralized ownership and governance, sit at the intersection between blockchain’s permissionless, autonomous immutability and the messy, political, suboptimal realities of human coordination.
Whatever evolves from this experiment will certainly be very interesting. Watch this space!
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