Is DAO Governance Broken? How Voter Apathy and Power Struggles Should Be Fixed

Transcript

It is to me a little bit crazy to just be like, I mean, he's the founder, so I think like respect to him and he has built this. So, it's not like it's completely not a good idea, but it is just a little bit crazy that you just like throw all this money with no accountability over what is supposed to be a decentralized protocol like with no fiduciary duty. >> Hi everyone. Welcome to Unchained, your no-hype resource for all things crypto. I'm your host, Laura Shin. Thanks for joining this live stream. Before we dive into today's discussion, we're going to take a quick word to hear from the sponsors who make This episode is brought to you by Cape, America's privacy-first mobile carrier.

Same premium service you'd expect from any other carrier, but designed so your number, your location, and your data actually stay yours. Get 33% off 6 months at cape.co/unchained. Today's topic is DAOs and their issues and where they go from here. Here to discuss are Nick Almond, head of governance at the Cato Institute, and Prophet co-founder of Meta DAO.

>> [music] >> Welcome, Nick and Prophet. >> Hi, Laura. Good to be on. >> Thanks for having me. >> Yeah. >> Nice to have you both. So, the last couple of years, the DAO space has been changing a lot. We saw last year that a few DAOs paused or even disbanded. In the last month, there's been a lot of different DAO controversies. And on a related note, we're also seeing this debate about tokens versus equity that was sparked by Dragonfly investing in Venice. Um so, I wanted to talk about a number of these incidents in depth amidst this backdrop of this moment where it feels like, due to the fact that crypto is in an adoption phase, we're going to maybe be on this centralization trend

for a little while. Uh at least this is just my theory. And I, you know, kind of see that maybe in the future, like once the technology's more adopted, then we will see decentralization kind of swing, you know, things swing back to the decentralized end of things. Uh, but in order to kind of unpack all these trends, let's just start with one of the bigger controversies that happened, which is the one with the Ethereum Name System or ENS DAO. Uh, you know, I feel like this one really highlights a lot of the themes. So, Nick, do you want to just give us a recap of what happened there that created such a firestorm on social media and continues to?

>> Yeah, I mean, it it's still kind of ongoing, I guess. But, um, yeah, so [clears throat] ENS DAO is the kind of latest of the DAO dramas, I would say. Um, it's been brewing for quite a while, I think. Um, it was uh, a DAO that has started to show some of the classic, um, failings of DAOs over the years. They kind of hit a level of, I would say, late-stage DAO mature mature DAO when, um, quite a few people had sort of like become, uh, part of the scenery, if you like, of the DAO over the time. It sort of progressed into, uh, a sort of network of working groups.

Uh, there was a grants system. Uh, quite a lot of money was leaving the treasury to fund various, um, sort of satellite, um, companies that had uh, formed to, uh, be access service providers, um, on the DAO. And people were starting to get a little bit upset about a variety of, um, typical DAO dramas, I would say. Got quite political. Um, there was questions around the efficacy of the spending and all that sort of stuff. Uh, and it kind of came to a head over the last, um, few, uh, over the last month or so, as effectively the founder, uh, utilized their own tokens to effectively, um, intervene in in in in a security council that was looking to stop them

transferring the treasury to the foundation. So, the kind of foundation has decided to come in, take over the treasury, assume responsibility, take it away from the DAO, and the founder Nick has effectively utilized his own tokens to a to achieve it. That's kind of where we're at at the moment. >> Yeah, so I think it was the COO of the Labs entity, Katherine Wu, made a proposal that the management of the treasury be handled by a foundation. And they you know, they cited like all kinds of reasons for the proposal, which you know, I I think a number of them are legitimate. Um but then what ended up happening was I think there was at the

same time a proposal to renew a security council whose main function is to veto any bad governance proposals that make it through to you know, basically protect the DAO. Um and what happened was that Nick Johnson, you know, as you mentioned, the co-founder of ENS Labs, he uh used his tokens to block that renewal. And you know, another kind of like interesting tidbit is that in the snapshot, he didn't vote. And so when he did an executable vote, it sort of like came out of nowhere cuz then it it didn't match, you know, how the snapshot looked.

So, um yeah, this this definitely caused like a lot of you know, or Sturm und Drang, I guess we would call it. Um you know, cuz initially they they were actually I think supposed to be separate. You know, the vote about the treasury and then the vote about the security council, but then they sort of became conflated into one thing, which is you know, is he trying to control the DAO? You know, on the flip side, what I would say is obviously he's probably put more work in on this thing than anybody else. So, so you know, he he was on Unchained Money, one of our other shows, and that's also what they were talking about. But but actually, so before we dive into some of the other details on this, I

just want to ask Prophet, like, do you have any other, you know, kind of details about that that you want to highlight, or like an analysis about what happened there that you want to share? >> Um I mean, I think it is probably relevant to bring up how much the ENS, like, ENS Labs has actually developed e-spending to develop ENS, which I believe is on the order of more than a million dollars a month, right, Nick? >> Yeah, something like that. Like, 20 million over a couple of years. >> Yeah. Which, yeah, I mean, I'm a founder, I run a business. I feel like that is quite high.

I don't know all the intricacies of ENS, but like, if I were an investor, and ENS is a private company, that would be a red flag, for sure. >> Because you just feel like the amount of resources necessary to do the work that they're doing it wouldn't cost that much as that. And so, you're you're saying, like, maybe the salaries or something are inflated, is that what you think? >> be my guess, yeah. >> Okay. Okay. Yeah, that's that's also I so I actually don't know how large that entity is. Do either of you have a sense?

>> Um I think the burn was quite high. I think it's this kind of drama has shaken out some of the the question of effective spend in the DAO, which is the kind of number one thing that that tends to happen in the kind of late stage DAO drama, as people start to lament the like how well the money has been spent. And on the lab side, who are effectively looking to assume control of the the treasury, that there has been a lot of spend with very limited output, I would say. There was there was going to be a V2 ENS protocol. Um I believe there was a short-lived idea of doing a um ENS L2.

Um and these things these things haven't been shipped, I would say. Um there have been a number of different uh products that were shipped by the various working groups and what have you. Um, but I think it's I think it's fair to say on kind of both sides of the of the spend that the the treasury has not necessarily been, you know, capital converted into uh positive protocol outcomes for the for the last few years on on either side of the story, if you like. >> Yeah, and it just to it give more color on the L2 which was supposed to be called Name Chain. They did work on it for 2 years, I think, and then they ended up abandoning it when, you know, Ethereum kind of also changed its strategy.

But um you know, like Yeah, it's one of those things where it's just kind of like that like would it really have needed its own chain anyway, you know, just for, you know anyway so we can I think those are like separate questions from the DAO issue. But, one of the thing that I noticed they cited in their proposal about like why they wanted to give this foundation more control over the treasury is they talked about the low voter turnout, which, you know, I think is it's not only ENS DAO, but you know, I saw some of the um, stats about it and yeah, it definitely

like the voter turnout was, you know, just uh on a long slow sad decline. And and in a way that's actually how Nick's tokens ended up being half the vote on the Security Council. You know, he I guess he has 3% of all ENS tokens, but because there was almost no participation, that's how his vote became so consequential. But, you know, I would be curious to hear you guys talk a little bit about what you think are the best ways to resolve issues of voter turnout or or if you feel like there issues particularly ENS DAO like that were explained why they had such low low voter turnout.

>> Um yeah, I could So, yeah, voter apathy is one of the sort of classic DAO problems. Um largely I think there's there's limited reason like most the average token holder doesn't really want to spend their time governing a protocol. Um and so it tends to coalesce around a a sort let's say cow hole of DAO interested people from across across the industry. Um there's a kind of cluster of um you know, professional delegates and and people who are very interested in DAO governance uh over in the kind of EVM world that largely kind of coalesced around almost every DAO.

Um and so you kind of get this shared culture that emerges mainly because there isn't a broad participation from the wider token community. Um so it leads to this kind of um slow capture around the very most interested people, the people who are willing to spend hours and hours on governance forums and and things like that. Um it's difficult it's the finding mechanisms for trying to get token holders to turn up to DAOs and vote. Um I would say the the the biggest example of this was Jupiter DAO on Solana uh Jupiter DAO uh which was very very retail heavy and consequently even more chaotic. You go completely the other way the degens all

turn up and vote and stake their tokens to get voting power. Uh and it was pure chaos and and they wound down out of it for they had high vote voter turnout and that wasn't great either. Um so the I think uh until you get into things like decision markets which which Prophet will talk about um I think the the best case scenario is that you have a highly curated set of delegates. So over at Gito DAO we have a kind of curated set of delegates who are representatives of the kind of wider Solana ecosystem.

Um and they're they're not necessarily people who are trying to come in as professional delegates, um you know, get paid for being delegates, and you know, expect some be able to draw down the treasury for some of their services. Uh and instead, we've just got a lot of kind of Solana-aligned people who help us make good decisions. Um and so, the kind of curation around who the delegates are is is one of the best ways to do that. The token holders can still turn up and overrule the delegates if they want, but there's no real need to if everything's going well, I would say.

>> And how are those delegates appointed? >> Um so, the foundation curated. So, our kind of journey was we tried to uh do the airdrop distribution that is typical, um but the kind of Solana community was so alien to DAOs, like there was no DAOs that existed, that none of them turned it up turned up to vote. So, um we kind of had to uh emergently define a discover a set of delegates and and um and sort of assign tokens to them to be part of the delegate set, which made a huge difference in the kind of quality of the decision-making. So, rather than it be kind of like pseudo-randomly distributed uh power to a DAO, which is how most of the EVM DAOs did it, power randomly

distributed on airdrop day, we we have a kind of more aligned set of participants who are um who are helping govern our DAO, and it it works much better. >> Okay, Prophet, do you have anything to add? >> Yeah, I mean, obviously, Metadao has a pretty opinionated take on this, which is that voting doesn't really work, uh and that you need an alternative, and we use decision markets. I mean, I guess uh break apart the problem, uh voter turnout is not intrinsically an issue, right? The The main thing that we want from a governance system is making good decisions.

And people showing up is actually a cost, right? Like ideally like the best scenario is we make all the right decisions and just one person shows up and has to spend like the the least amount of effort making that decision. And the problem like why we want voter turnout in a in a voter base system is because as Nick alluded to like you can get captured otherwise, right? If I have 1% of the supply of the token, uh it can be in my interest to do well like capture maybe is best illustrated by like the 51% attack, right? If I have 51% of a token supply, um I may benefit from voting myself like the whole treasury uh even if it's not in the interest of

the of the DAO because like uh yeah, if I say it's like a $10 million treasury and then I have 51% so like 5 million tokens $5 million worth of the tokens like uh even if I completely nuke the DAO like I I would benefit $10 million by voting the whole treasury to myself. Um and then you can think of this like in the extreme where you yeah, there's only like 1% of the token supply voting uh and they like have captured this DAO. Uh and so yeah, I mean what we use instead is markets to make decisions. So instead of people voting, they they trade on uh essentially what would be good for the value of the token which I think is quite nice because uh it means that you

actually have like a direct incentive to participate which is that you can make money uh the same incentive to participate in any market. Um and that's uh yeah, if the market is wrong like if other people are wrong that you can yeah, make money by trading against them and so that is kind of like our our opinion in the take on this. >> Yeah, that's super interesting. I love that and I could see how like you know, when I when I was writing the script for this episode I was thinking oh this sort of reminds me of how like paying too much attention to like what's going on in the government can be boring whereas something that's more like yeah

similar to betting is more like a game it's more fun you know I think that's why like prediction markets feel more fun than just someone kind of pontificating on like what they think is going to happen you know which is or or what should happen which feels more like a truly political or governmental thing you know it's like the same thing it's just the spin makes it such that one feels like C-SPAN and the other feels like a video game or something so um anyway so I did want to also ask about one other proposal I saw which is Alex Van de Sand who was also one of the

co-founders of ENS made a proposal where the DAO can delegate 5 million of its tokens to new delegates and there were there was kind of some complex stuff about how there would be like certain metrics and like people could decide which metrics they thought important were important um and that basically like once those end up being delegated then that would mean that 60% of the DAO vote would be you know by these people and thus they would be large enough to block the largest stakeholders um and you know Nick Johnson himself said he liked that idea as long as the foundation could still run the day-to-day treasury um but I wondered what you thought of of something similar to that >> Yeah I thought it [clears throat] was a

good idea actually I think there's the the DAO has a lot of tokens that it could utilize but to distribute in the power base of the the DAO effectively so you can you can think of the governance tokens as like the tokenized responsibility or the the the tokenized power of the DAO. Um >> [clears throat] >> and this is, you know, to to address this idea that there's a single holder with 3 million tokens. Let's get 5 million tokens, distribute them to a broader set of people to rebalance the power structure in the DAO, so it's not so founder-heavy.

Um good idea, but how who where those tokens go to if you kind of like randomly distribute them again, you're going to end up back at the same problems. So, I think this is it's a it's a fair way to do it. The question is is can they do it now because I'm pretty sure the DAO has effectively been assumed control has been assumed by under the kind of new security council structure. So, we've you've kind of had this hard power battle over who actually like controls the protocol, and it comes down to the security council, which is effectively the old one's just being disbanded and a new one's being set up with a new token vote, and and kind of Nick is on there. So, um whether such a proposal like this redistribution of

power is possible anymore is a bit of a question, I would say. Like I'm still bullish on voting, by the way, so profit here is very anti-voting, I would say. So, I think it's still possible. But one of the things that makes a good voting system work is effective distribution, right? So, who how is the power being distributed? It makes sense to have like voting is still a great way to canvas opinion at at huge scale and have a nuanced answer. So, distribution is one of the most important elements of that, and I think we pick up a lot of bad governance based on bad token distributions.

So, I think that there is better ways to structure governance dynamics, and we just haven't innovated on this. So, we're kind of largely stuck in like 2016 DAO governance patterns. It's one of the reasons why I think Meta DAO is interesting cuz it's actually a fresh take on it. But largely the industry is kind of structured very heavily on some very old DAO technology effectively. And I think we we pick up the issues with the voting because of that. >> Yeah, one thing I did want to ask about voting structure is this. I was thinking about how, you know, in the US or or it could be the UK, but you know, we have like this representative democracy where, you know, and this is kind of like the concept of a delegate, but I think it could be something that's even a little

bit more structured. You know, cuz in the US we have the executive branch, we have the judicial judicial branch, we have the legislative branch, right? And so it could be something like what Alex had proposed where, you know, these different groups are become deleg- delegates yeah for for some period. But, yeah, I guess the way you were doing it, you guys are literally appointing, but it could also be that they are voted in, although then there's the issue of the voter apathy. So, >> [laughter] >> but, you know, does it feel like that is at least for for the DAOs that are governed more in this truly governmental sort of way that they're moving toward

this structure where there's like multiple types of governmental entities and, you know, the different actors in them can be elected in, so to speak. >> Um yeah, I'll speak to that cuz that's this is largely where I see a lot of it going. Effectively specialized substructures. The problem is the average token holder does not really have the context or necessarily the the knowledge to make effective decisions on a kind of frontier protocol, if you like. So, it makes sense that you'd want to shape the voting power towards expertise.

So, I do think one of the kind of more advanced structures will get to over the next few years is that we have effectively specialized substructures. We're doing bits of this at Gito DAO at the moment. Uh we haven't got to the point where we elect these individuals. They kind of you know, we're we're still hand selecting these things. Those kind of create these kind of weird loops where if you're frail to capture and decentralized systems are, then the people will you know, stack the kind of vote and be the the very dedicated people who come in and just want to get paid to sit on councils will be the ones who who are there for the vote. Um so, I think it still makes sense for there to be um utilize the tokens and distribute them or distribute subsets of the

treasury to to um groups who are effective and hold them accountable. So, the problem is is when these substructures just end up there forever. Um so, they should like effectively self-destruct. Um you know, we're doing this to set up this very defined thing. You have a mandate to spend this treasury over 6 months, 1 year, and then it all disappear and it automatically disbands. Um and I think that's likely to be we if we can get better structures which have this subsidiarity in Dows, I think that'll be um hugely beneficial.

Um the other the other thing I'll sort of flag is that Solana governance is just upgraded and has has a um interesting delegation structure by the validators. So, that has we've just introduced this uh protocol level program which allows validators to vote on network proposals, but delegates can override their vote individually. So, if they want to come and vote differently to their delegate, the token holder can come and overrule those delegates, which I think is a it's a kind of delegation with rev rev revocation, which I think is a a really useful structure.

>> Okay. And um Prophet, I wanted to ask you like do you do you see any merit in that uh you know, idea of having kind of like these expert governance people or are you just kind of down on on the concept of governing a DAO all together? >> Um, I mean, yeah, I think delegation is probably better than the status quo of just like or at least it seems like in ENS's case of uh having basically no one no one participate or like the people participate not being that knowledgeable.

Uh So, yeah, I mean delegation seems better. I mean, I guess like I live in the US. The US is basically like a delegation based DAO. Um, we have Congress. Uh and uh and yes, and it's like it is maybe not terrible. Like I think governments are probably not the most effective things in the world, but uh at least maybe the the fact that they don't change is useful in the context of a government and probably useful in the context of something like ENS where it's supposed to be this hyper structure that's not really changing that much.

Um, so yeah. >> Okay. So, last uh question I wanted to discuss on this. So, Nick and Catherine uh said multiple times that they felt that having a foundation manage a treasury and the ENS token holdings and the endowment would be better than the DAO doing it because it just felt inefficient and you know, trying to make different financial decisions like sort of day-to-day was was challenging. And then Jeff Lau who has been at ENS for 9 years said that sending the treasury to the governor contract was idealism that created a honeypot with zero accountability.

And I wondered what you thought of this notion that protocols should it sorry, that DAOs should govern protocols but not money. >> Um >> [clears throat] >> Yeah, I think there's um I think there's there's a bit of both sides on this which is kind of true. I think if you stick a permissionless pot of money on chain, and some of these have been billions of dollars in size, it's going to attract people who are who are there to effectively extract the treasury. And it it and it is a kind of large honeypot. Uh so, yeah, the governor contracts was the fault here. It wasn't a sophisticated enough mechanism to be able to deal We we kind of asked too much of DAOs.

So, here's like going from we've not really tried DAOs before to putting a billion dollars into these governor contracts, which was meant to govern a DeFi protocol in sort of 2019, um was generally a bad idea. I think that that's kind of true. Um I however do think it's something that we need to like get to properly. I think the on-chain treasury management is what gives accountability to uh the token holders. So, a lot of what DAOs were formed for was a kind of in the wake of the ICO boom, where people raised loads of money and then just ran off with it. Um at this point, you would be trusting the foundation not to just everyone retire, right? It was a wanted to wanted off chain, or once it's under the scope of

control of the foundation, it's a lot of money. It's over a hundred million dollars. We now have to trust that ENS the ENS future is dependent on the the foundation not just retiring, right? You know? So, the the fact that it's in a treasury means that you know it's there, you know it's accessible. We should just get better at being able to broker access to it for through but more advanced governance structures. So, one of the kind of disappointing bits, I think, for ENS, this was a kind of darling project of Ethereum. It was one of the kind of tenpole DAOs that was still holding the dream alive. And then they the fact that they kind of give up and just moved it um into self-controlled treasury is is really kind of upset the Ethereum people uh for good reason, I think. They could have

advanced the DAO. And in fact, they did quite a bit of work on tearing down, doing a retro on what worked, what didn't. They created a kind of roadmap for improving it. And then they just kind of like let's not bother, let's just let's just centralize it around the foundation, which is a bit of a shame, I think. >> Prophet, what do you think? >> Yeah, I mean, uh I obviously I'm working on something new and and so I'm not totally uh opposed to new structures. At the same time, like the way that companies work and securities evolved uh was pretty linear in response to problems. Uh and there's like a a clear reason why we have things like fiduciary

and duty for a company. Um and also some level of control, which is that uh like Ralph Merkle, actually the inventor of Merkle trees, he put it in this great paper uh where he says like okay, so ideally we would just have experts make all the decisions, but uh the problem is is that we don't trust that the experts are going to make decisions for all of our interest and not uh for just their own interests uh because yeah, it and so we need like this accountability mechanism and that's historically been uh voting. Um and yeah, I mean, the uh treasury is quite big.

Uh it is to me a little bit crazy to just be like um I mean, he is the founder, so I think like respect to him and he has built this, so it's not like it's completely uh not a good idea, but it is just a little bit crazy that you just like throw all this money with no accountability over what is supposed to be a decentralized protocol. Um and yeah, uh like with no fiduciary duty. >> All right, so in a moment we're going to talk more about the tensions and complications with centralized entities and decentralized protocols, but first we're going to take a quick word from the sponsors who make the show possible.

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You also get two middle-to-end encrypted secondary numbers for banking and sign-ups, so you stop handing your real number to every app that asks. Go to cape.co/unchained and use code Unchained for 33% off your first 6 months. Back to my conversation with Nick and Prophet. So, Nick Johnson came on our other show, Unchained Money, and the group was talking a lot about how they felt like frequently a founder like Nick will put in most of the work on a decentralized protocol, but then be like vilified for wanting them to be more efficient or, you know, wanting to change them in a way that's more centralized. And, you

know, we we definitely saw something also similar with Aave this past year or past half year. Um you know, amidst all this I saw also ENS DAO also sunset its public goods which again is a move towards centralization it feels like. So, this is, you know, amidst just kind of this whole trend where it feels like after Trump got elected everyone's like, "We can be centralized now." So, >> [laughter] >> I, you know, wondered if you had thoughts about like what is kind of a good or um clear way to divide labor between a DAO and centralized entities like labs, and you know, when when it's even appropriate for somebody to do a

move similar to a cross protocol where they went fully private. So, I'd love to hear your thoughts on on all that. >> Yeah, I think it's um it depends [clears throat] what you're trying to build. If you're trying to build a decentralized system that you're hoping people to use almost indefinitely. Right? So, if you take ENS as an example, you could build that very deeply into a product that you're building. Right? So, you could use ENS identities as a way to as a very central component of your own product. Now, if that product changes, if that decentralized system changes, you know, without you being able to have any influence or foresight on that happening, then it kind of breaks your own product. You you

The point of a lot of these things is to be able to build long-term assurances that A, it's going to exist. It's just going to be there. So, these treasuries were designed to like ensure, you know, almost indefinite operation, right? And the they were there to build assurances that, you know, the founder's not just going to go insane and pivot and change everything around it. So, these protocols are intended to be integrated into lots of other protocols, and ENS is one of these things. So, in that case, I think that that's that's the most credible argument for a a decentralized governance structure around these things.

Um that and you kind of want to know if you're investing in a token, if you're buying something long term, um increasingly, um you know, tokens are starting to pick up value accrual modes of of action. We've just done this at at Gito, uh we're we're very like committed to uh ensuring that the DAO collects all the revenue, and then the DAO is then responsible for connecting that to the to the token. If you're trying to build a a kind of thesis around around that asset, um if it can change at the drop of a hat, then you you can't really do it, right? So, one of the nice things about decentralized governance mechanisms is that you can see the changes coming, and then you can respond in the market to

it. So, if everything's centralized around a founder and at their whim, then um you can't build long-term value thesis out of these things. You can't build uh these things into your products and have assurances that they don't change. Um if you're trying to build a system that's like that, then you need something like decentralized governance to effectively decentralize the risk for other people who are using it. Um I think there are some things that are much more centralized, make more sense, should be more founder-led. Um so, I think it's about I think a lot of the time we pick decentralized governance as a kind of reg arb rather than a we wanted to decentralize the protocol.

Um so, I think there's a lot of people who just set these things up without the intention to deep be decentralized and did it merely getting a token to market, if you like. >> Yeah, I also uh I mean, yeah, obviously there's a lot of things that the founder or like the the operational team uh should be deciding. Uh like, I don't think everything should be going to governance. Maybe at some point we can get governance tech to a place where it's like actually that good at making decisions, uh but that time is not now.

Uh and so, yeah, we have a pretty clear view, which is just like huge huge decisions. So, like say you're minting new tokens or you're like issuing new tokens from the treasury, that seems worth going to a proposal. Um and then really large funds. I mean, I do ultimately believe that like uh investors should have some oversight over the money of funds, because otherwise we get rugs, which is like the story of most crypto projects. Uh by number and probably by Well, um and uh yeah.

>> So, essentially um >> it almost feels like anything where it's going to affect the tokenomics should be controlled by the DAO because they're the DAO token holders. But then, for what uh, Nick and Katherine or or Unis Labs is proposing, where day-to-day financial decisions are more centralized like that, that would be something that's like, okay, or like within within, you know, certain limits. >> Um, I think it [clears throat] makes sense for, um, the entities associated with the with a protocol to all have some degree of financing that's sustainable. That

allows them to have, uh, you know, to be able to govern capital themselves. You know, the a lot of the kind of more extreme ends of the DAOs, where, you know, people are asking the DAO for short small amounts of money over again, sort of voting on post-it notes, sort of end game, was all all a disaster, right? So, what you want is the people who are capable of building the protocol, the people that the kind of high agents in the system, the kind of hyper agents in the system, they need the money and the capital to be able to activate that. Um, I think largely most grant systems have been mostly a disaster.

So, it makes sense for them to be like foundation mediated, uh, a lot of the time, I think. So, I do think there's some degree of treasury management. It would make I I think there's also a need to have a treasury that is on chain that gives the token holders assurances. And I do think it is like certainly economic governance rights and things like that need to need to go through a DAO. Um, but I don't think it's necessarily as clear-cut as like everything should be as on chain or everything should be in a foundation. I think what you want is the agents in the system building the things to all be capitalized enough to to to kind of achieve the goals that everyone's looking for.

>> Okay. So, I did also want to refer back to a comment that I made earlier about how Nick didn't vote in the snapshot about the Security Council renewal. And then of course his vote is what killed that renewal. And it sort of felt like, you know, it was meant to be a surprise move because if he had signaled that he intended to vote against it, then it would have probably generated some amount of opposition that would have made it hard for him to actually kill it.

And so, it sort of feels like in a way it could be viewed as a governance attack. Like like if it were an anonymous whale that had done that, like for sure I think you know, people were already upset enough that it was Nick himself. >> [laughter] >> But if it had been, yeah, some anonymous voter who had done that, then it definitely would have been viewed much more suspiciously. Um but I was curious like do you have certain kind of rules that you feel that founders or or best practices for founders to follow when engaging with DAOs?

>> Um yeah, interesting question. I think in the when it comes down to it, it it ends up with the hard powers, right? So, what you have a snapshot is a signaling mechanism. And then the actual on-chain execution DAO is the kind of real one. And so, I think there's certainly a bit of game theoretic thinking here. Let's like have the signal. The signal doesn't says I'm not turning up, but then I turn up and that give bought me a bit more time uh to avoid a kind of coordination event where people can come and out vote me. I think that was absolutely intentional and it was done as a effectively, yeah, it's as a capture attempt, if you like. But, you know, you can get into the argument over can you capture your own project and all that

sort of stuff around it certainly if it was someone different. Um similar things happened in Ave, you know, the the token holder vote uh for that was done over I think it was over um Thanksgiving and it was intentionally done as a short vote over a time when people wouldn't coordinate things like that. So, these kind of votes do happen. It's not exactly good practice if you like. Um the good practice is if more effectively to like what are the rules that you can all expect from this thing. So, we all operate under the shared rules and we can stick to them. Ideally these things would be on chain mediated mechanisms.

Um but you can effectively what are the rules of the game um and everyone sort of agrees to follow them and we do and we do follow them and effectively and that ends up trustless is the is the kind kind of game. So, yeah, the practices are yet to be fully forged I would say. We've seen all the worst practices I would say for sure. Um but what the good practices of uh of governance are still being forged I would I would say. >> And I've always been surprised that there's not as much as experimentation as I would have hoped on that. Like every pretty much every everyone uses this compound governor structure that was invented in like 2020 2021. Uh and I think it'd be cool to see for example

have it so that like every month there can only be one proposal a month and it's just like whoever gets the highest stake from the tokens that's the proposal goes live. And it goes live at the same time every month so that everyone can like be aware like okay this is when I should be participating and active. Um and yeah, I'm not exactly sure why it's been the case but it feels like uh everyone has kind of done like just followed the same exact thing like and not really innovated that much and been like oh well this doesn't work uh which makes me think that maybe they didn't want it to work in the first place. Uh and to be fair, like these are all people running their own businesses separately, like their own DeFi businesses. Uh and so I think you can

very reasonably take the take, like uh that they shouldn't be spending their time on governance. Uh but at the same time, like crypto is still very new. Um Like we it's not a guarantee that it's going to work, like DeFi is not going to work. Uh or it's not guaranteed that DeFi's going to work. And so uh it probably would serve us to like improve our our core mechanisms and and make it work. >> Yeah, it it basically feels like um there's, you know, this tension where is centralized entities they, you know, like like any business, there's a lot of things they would like to do in private, and then when they're

ready to make them public, they'll make them public. Um but, you know, DAOs should be like fully transparent. And And so when you have these two entities that are trying to work on something at the same time, and their MOs, you know, for lack of a better word, just are meant to be different, like there's going to be clashes around around that. Um so what we're going to uh switch to the Bonq DAO uh thing. And I also I know we're running out of time, but I also want to cover VBV. So we'll just cover Bonq DAO super quickly because this is something that's so obviously just plain stupid, frankly. Um which is that on July 6th, an attacker drained $20 million from Bonq DAO's treasury by

submitting a proposal that like, you know, was all flowery, promised to rebuild the DAO, etc. etc. But also included an instruction to send the proposer 4.4 trillion Bonq. And um this, you know, person only had to spend 882 billion dollars or billion Bonq, um worth about 4.4 million dollars, just to reach quorum. So, they did that. There were only seven votes or seven wallets that voted out of 18,000 possible. And there was no time lock on >> [laughter] >> proposal. So, once it was voted in, it executed immediately.

And I mean, this is just so fascinating because I also saw the Bonk Inu X handle said that law enforcement had been, you know, had been called about this. But I just don't even know like is this even illegal? Like I I just wonder. Um we saw that a judge after Avi Eisenberg manipulated markets to steal from Mango Markets that a judge ruled that you can't defraud a smart contract. So, I don't even know. Um but I guess it's so the two questions are, you know, just what do you think like went wrong there?

And what should what what should be kind of the bare minimum that DAO should do to prevent that kind of stupid situation? But also like is that a legal? Like I I just Yeah, so two-part question. >> I mean, I feel like yeah. Uh Nick and I may disagree over whether like uh voting is the best system or not, but this is actually like not even a voting issue. Like uh we at Meta DAO we have a Telegram bot and a Slack bot that notifies us whenever a proposal goes live. That system should have existed. Uh and that would have solved this problem. Like I think the issue was literally they just did were not aware that the proposal was live.

Um like the core team was not. And uh if if they were, it would have failed because they had enough tokens. Uh so, yeah, it's good to create like on-chain notification systems, I guess, is was my takeaway. >> Yeah, I agree with that. I think this um I mean, this is why you have people like myself who look at the DAO once a week at least, right? It was it was literally it's an apathy attack. This has been done a couple of times. Um very similar one happened with Compound a couple of years ago with someone called Humpty turned up. Um, and that was largely because they knew that the DAO was largely governed by uh like blockchain like uh blockchain clubs and in universities. And they did it

when they were all on holiday. And they managed to get a bought the tokens knowing that the blockchain clubs weren't around to to defend it. Similar thing. It was literally, you know, an attacker has seen the no one's looking at this thing. Uh it's largely been abandoned. All they needed to do is get, you know, buy these tokens and put it through it kind of high-risk play really because um they got like they were betting on simply no one just what looking at it. And it did have a time lock actually. It did have a one-day time lock. So that but it's just the the it did it was only one day that um was two is a bit a bit more advisable. But it it who knows how long it could have happened before someone noticed, you

know, if it if it it went unnoticed for a whole week, could it have gone two or three? Like does any time time lock matter under those contexts? I'm not sure. Um but yeah, as to whether it's illegal or not, I mean, who knows, right? Because this was effectively a it followed all the governance rules, you know, someone came in at the vote was up for 5 days. It did one one-day time lock. They proposed a new governance paradigm for Bonk. They're probably not going to do it. And they're just going to run off with the money. Um but you know, if in theory if someone tries to set up a new kind of and it was actually kind of futarchy uh approach to doing the DAO or whatever, you know, it's possible whoever's taking it over might have a new uh regime for the DAO that

they want to put in to practice and they might do something with that money that you know, but effectively they have taken captured the DAO. Um is it illegal or not? I'm not sure. It followed the rules. >> [gasps] >> Yeah, yeah, I understand that question is probably above both your pay grade, but yeah, when I saw that tweet, I was like, "Okay, who who are you contacting and what law?" Um not not that I think it's like legit or you know, that they did that. I'm just saying like there I don't know if there's any laws that govern these things anywhere.

Um okay, let's talk about tokens versus equity because this obviously was a huge thing on the timeline recently. And it's interesting because what sparked it was Dragonfly's investment in Venice and also in the VVV token. And I guess people had this misperception that VVV represented, you know, that like it like it was sort of like a governance token. Like it represented some kind of ownership in some sort of like network, but it's not. It's about um you know, when you when you have enough of it and I think it's like you stake it and then you're able to get this DM, which is another token that you can use for compute. Um which yeah, that that you know, we all we're all seeing the AI

revolution take off and you know, on some of the other podcasts on on this network like Bits and Bips in particular, people have been talking about how they feel like tokenized compute is that's going to be a thing. So Erik Voorhees as ever is very early on, you know, pretty much all the trends. Um you know, he's very um successful founder in crypto. Um talk to me a little bit about like where you think cuz cuz by the way, that you know this controversy about tokens versus equity is it's not new to VVV in Venice. Obviously, this has been going on for a long time in crypto. I think that's why it caused so much anger initially because this is just sort of like a sore spot.

But talk to me about like where you think that debate is going and how you think centralized companies in crypto are using tokens to um you know, in other ways that don't kind of like cause that debate or or what you expect we might see more of in the future. Um yeah, I think that the the Venice kind of debate was very interesting because I thought like I'm I'm kind of mechanism design nerd and you know, we kind of got it we crypto was all about mechanism design in 2018 then turned into reg art around somewhere around 2021-22.

So we kind of abandoned this idea of utility tokens and that we might be able to build like token mechanisms that had viable token economies that were completely kind of non-fear form decentralized systems that had, you know, a credible valuation framework to them. Um, so I was quite surprised about the kind of token equity debate going so big with Venice because it I would say this is one of the only utility tokens or only viable tokens that we've seen in the last few years. Um, so I was kind of surprised that people just had somehow got considered it like just basic equity in the business, but I um it is a viable utility token and in fact

their mechanism they're effectively selling compute perpetuities. So you stake these tokens to buy a perpetual access to $1 of compute a day. So it's a really interesting product actually as a little financial instrument. There is a centralized company that you have to trust to continue to service that compute over time. Um, but the token did go up some something like 8X in the in the bear market. Uh, and I think a lot of it's a question of how much of that was the actual demand for the token for its for the compute. But there was certainly, you know, the majority of token holders stake these tokens it reduces is the flow of the supply and people are

utilizing the these DM tokens to actually get access to to compute. So I think it's a viable um system and I would love to see more of these utility like systems sitting alongside centralized companies. Um, but you need to find out where the actual commitment is. Like people had bought this token thinking they were getting something more to do with like claims on a centralized business rather than a rather than a utility token. And I think Venice has the choice of being able to say this is a token-centric project or not. And at the moment it's still completely up for grabs as to how they spend that money, if you like. Are they going to spend that money on making the token economy better? Or are they going to spend it on kind of like enterprise, um, you know, uh, inference business for

for that has nothing to do with the economy. So, I think the the question around whether it's equity or token-centric is just open. I think that's the problem that they have. >> Yeah, I mean, what I would say about this is like, uh, I do think the backlash was a little was definitely overstated. Uh, I mean, they actually were very clear in their communications from the start of what VV was and what DM was. Uh, and then it was not equity by any means. Uh, and some people, of course, bought it uh, in expectation of it being more like an equity instrument. But they communicated that fairly clearly. And it wasn't like, I mean, you've had plenty of instances in crypto where teams

actually rug the investors or like they say one thing and then they do another thing. That's not what happened here. Uh, and it's probably, I mean, I think people maybe just felt some PTSD from the other, uh, like times where they actually got rugged. And so, that's that was like the knee-jerk reaction. Um, uh, at the same time, uh, and like, I think props to Venice for trying something new. I think the only thing I would have would probably been good for them to do is to call it like Venice compute token or Venice utility token or something just to make it clear. Uh, but of course, yeah, like, I don't know if that's really their responsibility to make sure that like everyone reads their

docs or doesn't at least as Sarthak said could like consult an LM before buying a financial asset. Um at the same time I mean I think it generally like it it seems like they will try this experiment. I'm not super bullish on that asset class of utility tokens for a few reasons. I mean one is like it kind of I sucks for for teams for examples like this like now you have these two things that you've got to manage for obviously a lot of your users hold the token. Uh if you violate their expectations or if you do something that

hurts the token at the expense of equity which you may have to do right cuz equity has fiduciary duty. Um then that that could hurt and you've kind of got these like dual mandates. So that's one thing. And then I think the other thing is like uh it just remains to be seen that utility type tokens can be as valuable as equity tokens like or or like equities. I mean my takeaway from the whole debate is like I don't think Venice did anything wrong. It's just I would not buy the VVV token anymore. I mean the investors had just gotten into Venice at a billion dollars like on the equity and then the token was trading at 1.4 at the time. Um

meanwhile uh I would expect that if Venice becomes like a valuable business that most of the value accrues to the equity because they have control and they have fiduciary duty and a financial incentive to have it accrue to the equity. Um and yeah I mean if you look at for example like maybe we can analogize utility tokens like commodities future and the equities market is about one order of magnitude bigger than the commodities futures market in terms of like I mean it's kind of hard to compare cuz you're comparing open interest to market cap. Uh but like around 10 times bigger.

Uh and so yeah I mean I I think the models where people are trying to ascribe more value to the token and have the token is like the sole instrument at obviously people like founders on Meta Dow do this but then uh Morfo has like publicly stated Morfo is the only token that we care about. Um there's no equity we only have this ownerless foundation. Um Grass recently came out with this as well and so yeah I think that will probably be the the direction that more and more of these projects take as investors reject uh like most of these people who have bought tokens when there was an equity company uh have uh like the financial returns on those

instruments have not been good and so uh A people are not showing up as much because they see that and then B the people who do want to participate in that maybe have less money to allocate and so yeah it seems like the direction of of teams trying to treat the token more like equity is like positive and and where we're headed. >> Um I know we're like a little bit over time but do you guys have a few extra minutes? >> Yeah. >> Cuz we started like okay great. Um sorry Nick did you want to add something on that? >> Well profit >> So we've just done this at Gito right?

We've just basically done a public confirmation through our our Dow to say that that we're a token centric project and the the meaningful asset in the in in in across the entire ecosystem is the token. And I think you're going to see more projects make effectively public declarations that you know that says this is the case. Um I think on the case of Venice they have an opportunity to demonstrate actually that it is a that the token is meaningful and they've now got this balancing act between the two. They They have a monetary policy on that token, and it's how much inference that they um distribute. So, if they double the amount of compute that they put through that economy, they're obviously piling more value into the token. So, it's going to be highly evaluatable, if you

like um and valuable, ul- ultimately, as as to what the real value of that token is. That's kind of why these things might be interesting. Um but, yeah, I think we're the the essentially the next year is just going to be It's going to be clear which which asset is going to accrue the value and which is most important. >> Yeah, there's something about it where it's um you know, obviously, this is not like an exact analogy, but just like a point system of, you know, any company or some kind of reward or whatever. So, um you know, people do like >> [laughter] >> forget the names of these, but there you know, there are those companies or or people or accounts that will um figure out the monetary value of, you know, any kind of airline rewards or, you know,

whatever. Um okay, let's just talk for a moment about like the future of where this is all going, and let's just start with Meta DAO, because obviously, like you guys are being talked about a lot, and I know you already shared a little bit, but like I would love to hear just, you know, a little bit of the backstory of like, you know, why you went this direction, and um you know, what you think is working well, or um and what other ideas you have that you'd like to implement. >> Sure. So, the core idea of Meta DAO uh is is I mean, there's a a few ways to frame it, uh but one is that uh this idea of ICOs uh is actually quite cool. Like this idea of anyone around the world being able to raise

money uh from a distributed set of participants is quite cool for a number of reasons. One is just like opens up access to capital, uh but then importantly, what we see on Meta DAO is that a lot of times your early token holders, like the people who participate, uh become early users, right? Like we had a company that raised on Meta Dow that 10x their their usage. It's like a crypto credit card product. And they raised from about 10,000 people and a lot of those people converted into essentially like marketers and users of the product. Um and and yeah, so like this is quite cool.

Meanwhile, I think tokens as they existed are losing their trust. There's like a few specific attack vectors, I guess, like we have scenarios where obviously people raise money and then just like disappear with that money. That is like the base case for an ICO. And then we also have issues where like yeah, kind of what we're talking about with the token equity split, like you as a token holder want to know that if the business becomes valuable that you actually have some stake in that and that it's not just like siphon off by some some labs entity that gets to take all the revenue and just like internally distributes the

profit. And so yeah, we we have this like token structure, this legal structure, and treasury structure to help mitigate some of the risks and like we're definitely not we're not pro we have the saying which is like we're not pro governance, we're pro oversight. Like we the goal of this is not to get communities necessarily like deeply involved in the operations of of these companies. It's mainly to provide a check and to provide trust and confidence in the tokens because that's what like makes them investable. Um and allows people to like align themselves with with companies in this way.

And yeah, I mean, I'd say right now it's going okay. Obviously right now we're in like a tough ICO market, but we're still doing I mean right now we have a really over-subscribed. I see other trying to raise two to four. Uh I actually haven't checked this morning, but when I went to bed, it was like $20 committed to that. Um And uh and yeah, we've done about 40 40 a little more than $40 raised for entrepreneurs across uh 13 companies so so far. >> All right. Well, any last thoughts on where you think the future of DAOs is headed especially um just in this moment in time where where we're just seeing so many DAOs

change in different ways, like you know, what do you feel like is next for DAOs? >> Um I think any that um left standing the um have projects of founders related to them that uh don't want them, they'll all go the same way. So, I think like any any remaining uncaptured DAOs will will get captured unless the um unless the teams and projects behind them uh are really committed to them. So, I think we're kind of seeing the end of like DAO 1.0 era. Um I hope that we end up back in a kind of more uh era of experimentation around governance practices and and uh mechanisms in the space.

I think ultimately, as we move more into kind of economic governance and we start getting to value accrual tokens, and we say you you you're not going to be able to do value value accrual type work out of a centralized company. So, it's going to be DAOs and things like that that end up doing the kind of on-chain buybacks, value accrual mechanisms, kind of um dividend-like, you know, distribution structures where people the protocol revenues are shared via tokens and things like that. All of that's going to have to be done by a a decentralized entity. So, I actually do feel like um we've hit close to DAO bottom. Don't want to kind of bottom call DAOs, but like I feel like I'm starting to see the I've been watching this stuff for a long

time and I I I'm starting to see the we've seen all of the failings so viscerally now the the next era of it can start to emerge and and we're we are starting to see projects like Meta Dow innovating on this. Um and I'm like I hope we see just like new Dow patterns, new Dow Dow contracts coming out in the near future that actually innovate on decentralized governance. So, hopeful still. >> Yeah, I agree. Like I I think I I don't have like any concrete evidence for this, but like it feels like right now we're at the bottom or close to the Dow bottom, right? Like it can't the sentiment count house can't get much worse than this.

Um but uh and yeah, plausible reasons why we might improve is like um I mean, yeah, I think one is just like uh I don't know actually. It might be tough because a big bull case for Dows is like this idea that uh you want to build something that's a valuable asset that doesn't comply necessarily with like securities regulation. Uh and it seems like for the next few years uh securities regulation is not going to be heavily enforced. Um but uh yeah, in terms of like I think what we need to do to improve here it's like

I hope that there are other people on the frontier like Meta Dow that are trying new experiments um because it really only takes one of these experiments to work uh or like several of them to to bring forward incremental improvements uh to like yeah, make this whole thing work. Like I think a big problem has just been what I talked about earlier where like everyone is trying the same thing and yeah, we know we now know like I think we all agree that the way that Compound Governor V2 like just that standard way of governance, yeah, it doesn't it doesn't work Uh at least for a long time.

And so we need if Dow's are work at all, we need to try something different. And so yeah, hopefully more and more or like we see some experimentation here that can yield valuable results. >> Okay, great. Well, it has been such a pleasure chatting with you both about Dow's and and all these recent incidents which are really fascinating. Thank you so much for coming on Unchained. >> Thanks Laura. >> much for having me. >> And thanks to everyone for joining us. We will catch you all not tomorrow, but on Thursday.

Bye now. Nothing you hear on Unchained is investment advice. [music] This show is for informational and entertainment purposes only and my guests and I may hold assets discussed on the show. For more disclosures, visit unchainedcrypto.com. >> [music]