Decision making in DAOs through voting or buying

Published May 17th, 2016 edit replace rm!

New England Town meeting

Direct voting does not work well outside small groups that know each other. Think New England town meetings, a group of business partners.

The traditional way to get around this in a large group is through representative democracy. Once in a while we vote in a small group of people that can vote between themselves.

Shareholder votes are not important in traditional companies

In traditional companies this normally works by the shareholders just accepting the current board or insiders proposals for board members. Actually it probably happens mostly through inaction by shareholders. Every now and again you will get share holder fight, but it’s the exception not the rule.

Most shareholders are quite happy with this, because they actually made their original decision when they bought the share in the first place. In public markets the real voting happens when people buy or sell the shares.

You can look at shareholder voting as a final safety for investors, allowing them to kick out the board. Even though it rarely happens.

Direct democracy in “The DAO” with 18,191 anonymous voters

Now in “The DAO” we have an experiment containing at the time of writing $130M worth of Ethereum and 18,191 Token Holders. It is based entirely on the idea of ballot voting proposals.

Dan Larimer writes pointedly about his experiences creating a similar experiment with Bitshares. It is pretty hard to see how it can possibly work. Maybe no proposals will ever be voted through.

Use a market based approach instead

I have been working on DAO like ideas for over 15 years and my idea was always about having lots of DAO’s each working on well defined problems.

Real voting on the success of projects in free markets (and the true wisdom of the crowds) comes from people buying and refraining from buying.

Ethereum allows us to have an unlimited amount of small and large DAO’s, but each focusing on solving a specific problem.

If I believe in the team, the problem and the solution I can buy in. If I don’t I don’t buy. Thats how markets work, and how it should work with DAO’s.

It may be clever from a technical standpoint to emulate traditional institutions using Ethereum Smart Contracts. But if you’re implementing a broken system, you just have a broken system implemented on Ethereum.

Does traditional voting still have a place in DAOs?

It absolutely does. The founding team should be able to vote. Maybe at some point they decide to create an external board for oversight? They should be able to vote as well. This external board could create trust in the project for potential token buyers.

A potential fix for The DAO - A dynamic market driven board

I am a big believer in the ideas of Nassim Taleb about anti-fragility. He is also a proponent of many of small experiments instead of a couple of large ones.

Another thing he believes in is skin in the game. Decision makers need to risk their own money.

So you could create a fluid market driven board by simply having a minimum requirement of say 5% of tokens to be able to vote. At the same time increase quorum to 50% of all of these token holders.

This may seem counter intuitive but it would allow a small group of knowledgeable investors buy enough tokens on the free markets to make decisions that matter. Small token holders would simply vote by buying and selling their tokens.

Posted May 17th, 2016

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My name is Pelle Braendgaard. Pronounce it like Pelé the footballer (no relation). I live in wonderful Managua, Nicaragua. I work with Clojure, Bitcoin and Ethereum.

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