Why Every DAO Treasury Turns Into a Honeypot: Uneasy Money

Transcript

So, you know, we we've touched already on the fact that delegation rates uh have only been going downwards, but you know, despite me having fewer tokens than when ENS launched it it's still a proportionally larger uh impact on on voting. And you know, that's symptomatic of the the problems we're having with the ENS DAO and and really everyone's having with DAOs in general, you know, that the participation gets harder. Um but at the same time we have this massive honeypot of a treasury that is calling out for people to find ways to allocate it and reasons to justify it and and so forth.

Um and so increasingly, you know, governance gets dominated by by people who uh have reasons to want to allocate the treasury that they the way they want it to be allocated. And I think for the most part these people aren't malicious, you know, these are people who have pit projects that they think will be useful or or valuable or just fun to build, and they want to see them funded, and they're sort of prepared to put their votes, you know, where they where their mouth is, so to speak, and and, you know, make sure it happens. Um and it's kind of endemic to, you know, any sort of money buys influence uh voting, that, you know, as as time goes on, the votes concentrate in the hands of the people who can make money off owning them, and usually that's by,

you know, getting something in that they want. Um but >> And sorry, just Nick, just to to pause there for a second, right? Like, one of the things that I would say I was naive about when when starting a DAO and when, you know, I got involved in DAOs in the first place was this idea that it would become a debate over a capital allocation, right? That like which is a bit ironic cuz the first DAO, you know, of hack fame was about capital allocation. But outside of outside of that, right? Like, the ENS DAO was not supposed to be an investment vehicle investing in projects and and, you know, it was supposed to be kind of stewarding the ENS ecosystem. So, the idea that a DAO is going to be a good

way of allocating capital, it feels strange that that is kind of how it But, of course, it's a giant pot of money, and so it has to allocate and so therefore it does evolve into that. Like, you know, is that kind of some of the crux of this issue for you that like the DAO shouldn't be targeted by people who are looking for it to turn into essentially a investment vehicle? >> I think it's a big chunk of it. You know, when we launched the DAO, we had two problems we needed solving. One is that we wanted to decentralize governance over the protocol levers. So, upgrading smart contracts, you know, coming up with uh you know, pricing models and changes to those, uh dealing

with upgrades to other components and so forth. Um you know, any vulnerabilities, changes in price oracles, all >> I think I think >> No, we lost him. >> Uh-oh. >> Okay. >> Oh, there we go. >> Oh, he's back. >> Yeah, I cut out for a second. >> Yeah, all good. >> Yep. >> So, price oracles, you cut out of price oracles. >> Yeah, so protocol governance in in a nutshell, all the stuff we would love to decentralize and and like remove control of entirely, but for one reason or another is it's impractical to do so.

And the second issue we had was that we'd amassed a treasury through, you know, registration fees on the ENS names, and we wanted a a good decentralized way to allocate that specifically to ENS development and public goods. You know, ENS is always from day one being conceived as a public good in itself, and as a nonprofit, and you know, the intention of this was not, you know, this is an investment account. We didn't want to invest in other projects and see returns. We wanted to sort of pay back the the debt we felt we owed from from ENS being launched by a grant, and we wanted to continue to build the web three commons and with a specific focus of course on naming and identity and the things that

ENS was was focused on. And over time that allocation of funds has become you know more or less all consuming with the the protocol side taking a backseat in many ways, but the the larger issue I think even is isn't even just the the way interests affect all of this and the tendency for budgets only to go upwards of course. It's also the fact that dials just aren't very good at doing this in real time because you know every conversation has to be a committee you know everything has to be a working group and so on.

The the people who are hired are often individually competent, but there's no over overall sort of organization that that knits this into a coherent whole. And if we look at organizations that have succeeded in allocating this funding then it's things like foundations and so forth which have accountability to their constituents, but they act as a you know a coherent organization that has you know internal processes that does that operates independently but accountably to to the rest of the the environment they're in. >> Right.

>> I would I would add pain say that if I'm allowed. So you mentioned that a lot of allocation is investment. I don't think ENS had a problem with discussion investment or anyone wants done to wanted to have a return. Most of the discussions involved allocation of funds towards other things towards public public goods put work hackathons and toward other teams. >> Sorry sorry just to be clear like when I say capital allocation right like capital allocation doesn't it could be to nonprofits, but you still need to do it well right like still a problem whether you're trying to get a return or you know >> I think the ENS DAO sort of tries to think of the return as in the return for

development, right? So, I think one of the things I I helped on board when I was a steward of MetaGov was I I created a program to try to on board 10 new teams, mostly because I was worried about the bus factor of what happens if Nick is hit by a bus, right? What happens to ENS? We should be able to have like lots of other people, lots of other teams that are competent, are able to do that. And we had uh and we had enough capital to to do that. And we we on boarded, I think, 10, 12 new teams that And I would agree not all of them were great. Some of them were fantastic.

And it is true that the DAO uh a lot of the politics comes in and start discussing on uh it sort spending a lot of energy just discussing how to do the thing, how to allocate the thing. I don't think it means that the DAO wasted funds or a lot of money were misappropriated or >> No, no, I I don't I'm not suggesting that. I'm not suggesting that the DAO wasted funds. I'm I'm saying that like if you have a pot of half a billion dollars for take, right? Um that, you know, your job almost necessarily becomes how do you allocate those those funds, right? Now, you can also not allocate them, but then there's going to be a bunch of people that say, "You got a half a billion dollars and you're in

Ethereum, why are you not making Ethereum better? Why are you not you know, funding public goods?" It's like you can't opt out of this, right? Like the the >> problem that if you ask people to vote, you always vote to increase the budget. So, the vote the budget is always increasing, but the revenue not necessarily is. So, the pie what is shrinking, but at some point people will start realizing that, "Look, it doesn't fit everyone everyone at the same table anymore." >> And I want to push back a little bit on the idea that DAO doesn't waste its funds because how many Do you remember how many of the funded proposals in the first service provider program were sub name registries?

>> Mhm. >> It was four or five and I think one has survived to the the modern day and the the reason for that was like because everybody voted for their favorite sub name registry project and everyone had a different favorite and the the ranking mechanism was just the top end got in up to the budget limit. And you know, this this kind of resulted in a lot of duplicate funding on something that honestly needs but >> That is true but it's but it's also true that the DAO allocated almost half of its budget to ENS Labs and ENS Labs also had projects that tried to do things and then had to cancel, right? We we so it is I I think trying to do things and then having to walk back on it it's

hard right? We had to walk back on Name Chain. We had to walk back on Name Wrapper, like >> Okay, but here let me let me I guess zoom out a little bit cuz yeah, this is I mean Laughters for example specifically calls out the the Name Chain stuff and the Name Chain stuff is basically you guys worked really hard to build this thing that seemed to be necessary at the time and at some point you're sitting I assume you're sitting there and you're like we don't Like this was this is an extra yeah, okay and like both by the way both me and Ken have been there before we've >> I also wasted time building a chain like it like the whole Ethereum L2 scaling road map now we sit here in shambles going actually we should have just

focused on L1 but at the time you didn't have the luxury because L1 it was 100 bucks per transaction, right? So we had to do something. >> And let me yeah a little sort of correct the record about that because about 80% of what we've been working on the last two years has been ENS V2 and about 20% was Name Chain because largely ENSV2 is chain independent and you know when we decided we weren't going to do name chain which was a fork of an existing chain with you know deployment of our an existing chain architecture with our own needs catered to.

Um we had to rip out probably about 20% of the ENSV2 code that was concerned with cross chain transactions and synchronization and so forth. But the the very much the bulk of it was you know work on version two of the ENS. Um >> Okay. >> And I think you know people criticizing the decision uh you know are looking back with with you know the benefit of hindsight because when we announced we were going to be pursuing an L2 everyone went oh thank god finally you know transaction fees are so high this is sustainable. >> Of course.

>> And >> Yeah. >> when we announced we were canceling it everybody went yeah that makes sense. >> Exactly. And and by the way the DAOs DAOs in general >> Yeah. >> It was like when ENS launched like you had to do DAO. Of course you had to do a DAO. You had to one just like the regulatory environment and the uncertainty and the fact that Yeah but then also you know I think that it's important to to call out that DAOs in general were not just this like shallow regulatory thing to absolve yourself of responsibility. No no we all drank the Kool-Aid.

>> We believed it. >> We believed it that's why It worked. It worked as regulatory protection because we actually were naive enough to believe it. However I think over time and this is like you know >> now. We're a bit more cynical now. >> We're just a bit more realistic. Like can I never >> Yeah. >> All right can we just talk about the the cuz I think you know Aave is one thing right? Like we talked a lot about Aave. Um Aave in another reality could just be a company right? People are for services and you know, they they pay the company to operate the thing and it could be smart contract based and it could be decentralized, but you know, you just

pay a fee to labs. Labs, you know, keeps building the software. The software is, you know, semi-immutable or whatever, but like it it didn't need token governance to decide how to build the thing, right? Like a group of 50 people could get together in a room or a couple of rooms and say, okay, we're going to build this, this feature, that feature or whatever. Um, ENS doesn't feel like that, at least to me, right? And and you know, it isn't a company, it shouldn't be a company and we have like a real-world proxy for this, right? In in like domain TLD governance in the world, right? Like that's, you know, a lot of the prior art I think you guys, you know, pulled from comes from that and like a naming

registry shouldn't be a for-profit entity for a bunch of reasons, right? Um, so I think like it made a lot of sense for it to be a DAO. The question that I that I guess I have that maybe you guys can can clarify, especially ENS is also a bit unusual because it had revenue. Like people were paying for its services in a way that like other other DAOs did not have revenue, right? Their only revenue was issuing a token. So, you guys issued a token for the purposes of governing the thing, which made sense. It was supposed to be public good and you needed to govern it.

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