Research Summary - Experiments in algorithmic governance A history and ethnography of “The DAO,” a failed decentralized autonomous organization

TLDR:

  • Quinn DuPont began an ethnography of the DAO community
  • During his study, the DAO was hacked, allowing him to document how the community dealt with the aftermath.
  • From his findings, Dupont established a framework in which three variations of governance emerged that would affect a decentralized autonomous organization in the future.

Core Research Question

  • How can an ethnography help understand the discourse surrounding governance in a decentralized community? How can that information be used to extrapolate whether the operationalization of a concept works or not?

Citation

Background

  • This is a chapter from Bitcoin and Beyond, a book about blockchain technology and cryptocurrency. The chapter’s focus was originally meant to track the Slock.it DAO and its outcomes.
  • During the period in which the author was doing his ethnography, the DAO was compromised and effectively dissolved. The chapter’s focus shifts from attempting to understand the governance involved with the DAO’s operation to examining the community’s discussion of the implications of the attack.
  • Slock.it is a German company that was founded with the intention of leveraging the Ethereum network to establish a DAO and connect the Internet of Things (IoT) to blockchain technology.
  • Decentralized Autonomous Organizations or DAOs are a theoretical framework put forth to facilitate working milestones to be achieved in tandem with reciprocal payment for work completed via a decentralized smart contract.
  • Slock.it created The DAO using that theoretical framework.
  • The project became the largest individual project to date in the Ethereum community, raising over $150 million worth of Ethereum from investors.

Summary

  • The DAO was launched April 30, 2016, going live with roughly $150 million worth of Ethereum contained within its contract.
  • There was an initial two-week “debate period” during which the community was supposed to decide how to allocate funds, and which projects were most attractive to the investors.
  • After the initial two-week debate period elapsed, The DAO was attacked, and drained of 30% of the Ethereum contained in its contract…
  • Developers had promised a decentralized governance structure would be the guiding principle behind the DAO.
  • The DAO was meant to be governed by a smart contract acting as the mechanism that facilitated automated investments into projects based on votes by the DAO token-holding community.
  • The collapse of the DAO resulted in the promised governance structures needing to be re-examined, which created a rift between those that believed “code is law” and those who opted to allow a centralized modification mechanism to restore funds to investors after the attack.
  • After multiple warnings had been issued by community members raising issues of theoretical vulnerabilities, a vulnerability known as the “race to empty” attack was discovered.
  • Slock.it’s core developer team assured the community that the vulnerabilities would not be a problem and continued to push forward with development.
  • Before the Slock.it team was able to push an update to the system, an attacker drained the DAO of 30% of the ETH supply using the “Race to Empty” attack.
  • The post-exploit community discussion revolved around the concept of “code is law,” whether rolling back transactions would undermine the principle of immutability that was meant to be one of the main value propositions of blockchain technology.
  • The Ethereum Foundation initiated a contentious hard fork that rolled back the transactions and implemented a “withdrawal-only” contract to prevent the previous race to empty exploit from recurring.
  • The hard fork resulted in many of the community members refusing to mine the forked chain, and continuing to mine the compromised chain, establishing “Ethereum Classic” as the ideological opposition to Ethereum

Method

  • The research used a variant of grounded theory methodology; it specifically followed Merriam and Tisdell’s (2016) “Basic” qualitative method.
  • Initially the researcher had a project in development called “The DAO of Whales” to directly test the DAO governance structure.
  • The DAO of Whales was intended to be a fund that coordinated capital to protect whales in the wild, using an autonomous response structure.
  • The collapse of the DAO prevented the DAO of Whales from coming to fruition.
  • After The DAO’s collapse, the researcher gathered comments and posts from community members from Reddit and subforums (/r/Ethereum, /r/TheDAO, etc.)
  • The researcher employed global searches on Reddit to find commentary about The DAO.
  • Comments were ingested into Atlas.ti to code the responses into categories and word clusters.
  • Researcher determined chronology to be the most important axis of analysis since the discourse shifted significantly before, during, and after the exploit.

Results

  • The failure of the DAO made it impossible to articulate a specific result on governance, and thus the researcher highlighted three areas of study that could advance understanding: legal authority, practical governance, and the experimental nature of using algorithmic systems for distributed action.
  • In the DAO community, the exploit highlighted the need to reconcile algorithmic authority and judicial legal authority while attempting to establish a new form of legal authority.
  • Lex mercatoria or medieval merchant law was invoked by community members to suggest that the response to legal matters needed to be agile and situational rather than rigid.
  • Many community members who agreed with the hard fork lauded the reaction as an example of good, pragmatic governance.
  • The previous held ideals of practical governance in the context of algorithmic authority were placed in question by the DAO exploit.
  • The community was split between the perspective that the exploit was an expensive lesson for the ecosystem, that it was not philosophically consistent to revert to centralized authority to fix a mistake, and the perspective that full decentralization should not take priority over protecting the community’s funds.
  • The DAO relied on humans to act rationally within the system’s parameters, whereas reality showed that network actors reverted to becoming tied into small self-interested networks.
  • The governance of The DAO discredited its ideological underpinnings and showed a problematic response by developers to risk management and crisis mediation.

Discussion & Key Takeaways

  • DuPont questions whether the Ethereum Classic community actually believed in decentralization or whether they feigned a moral code to protect their investments into the original Ethereum ecosystem.
  • The research argued that the forms of algorithmic authority present in the discourses on The DAO properly exist in a continuum – as governance through algorithms, governance with algorithms, and governance by algorithms.
  • The DAO might have been just a high-risk investment vehicle masquerading as a new way of doing things.
  • The researcher found three key themes of governance emerging from this discourse:
    • (1) the shift of legal authority from existing, juridical authority to algorithmic authority;
    • (2) the difficulty of designing and governing algorithmic systems, and especially immutable and decentralized ones;
    • (3) the challenging ethical terrain of experimentation with forms of distributed action through autonomous, decentralized systems.

Implications & Follow-ups

  • The researcher questions whether blockchain technology and cryptocurrencies should be seen as apparatuses for socio-technical experimentation in society.
  • The researcher posits whether socio-technical experimentation can occur without nefarious actors gaming the system to exploit a given community’s goals to create a profit.
  • The researcher asserts that these technologies could have extremely damaging impact if a system is not well-governed.

Applicability

  • The notion of “code as law” was put forth in an environment which makes it impossible to know what sentiment is organic and what sentiment is social engineering.
  • In an anonymous or pseudonymous environment, opinions can be distorted through the use of sock-puppets and coordinated messaging campaigns.
  • The rigid mantra of “code as law” may be an unrealistic model for governance within the real world and especially in the presence of malicious attackers, but the advancing complexity of algorithms may eventually create an environment in which a malicious attacker cannot affect the entire network and is compartmentalized.
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