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

DuPont, Q. (2017). Experiments in algorithmic governance: A history and ethnography of “The DAO,” a failed decentralized autonomous organization. Bitcoin and Beyond, 157-177.

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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This is one of only a handful of ethnographies of major crypto projects that have come out. I’d be curious to compare the methodology with Koray Caliksan’s “Rise, Fall, and Rebirth of Electra Protocol” or Ludovica Rella’s “Steps towards an ecology of money infrastructures: materiality and cultures of Ripple.” An initial gloss: Rella portrays Ripple as shifting the definition of money towards something more aware of its role in creating a marketplace (which he describes as a "New materialist take on infrastructure in Leigh Star and Easterling meets social theory of money to understand blockchain and DLT’):

“Infrastructures, understood ecologically, include devices, active forms, and imaginaries in seamless webs of mutual relations of co-evolution. These ecologies are always potentially prone to slippage, dissolution, disassembling, reassembling and reappropriation, dependence, and competition.”

Caliksan takes an approach that more closely resembles Dupont’s, I think, reading it as a community of actors interacting and generating the protocol between them.

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Thanks for these links and brief overviews! It makes a lot of sense to me that we should be doing some comparisons between analyses of projects to see if there are common kernels we can pull out as generalizable knowledge to keep in mind for future projects.

From this post, @Larry_Bates drew our attention to some of the key themes regarding governance.

Do you think the Caliksan and/or Rella pieces surfaced similar findings regarding governance?

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By crypto standards, this article is paleolithic (published 2017). Decentralized Autonomous Organizations are very much in the news again. Back in 2017, for most of us, they seemed like a vague promise of crypto-powered ‘living’ organizations like self-maintaining, autonomous vehicles surviving as taxis (and presumably issuing tokens to investors). Today we’ve seen a huge growth in DAOs, there are DAOs buying art, DAOs directing stories, DAOs directing charitable organizations (including Dupont’s whale DAO) and of course DAOs being used to direct massive crypto projects.

Under what conditions should someone consider a DAO? Is the explosion of DAOs a miniature bubble like ICOs were in 2017 or are there clearer use cases this time around?

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I believe a lot of the “DAOs” of today are not actually “decentralized” and are “DAO” in name only. We are so far from “self-directing” pools of capital that the term “DAO” is really a stretch of truth when applied in modern times if not an outright lie. I think we need to reconsider what “decentralized” means and what qualities must exist for an organization to be “decentralized”. I would start with not having one 51% owner as a simple metric for “decentralization of ownership”. If an organization can’t claim “decentralized ownership” how could it be a “decentralized organization”?

I believe before we can actually achieve a “DAO” as originally envisioned and intentioned we might need to start from a more honest framework to show that we are going from “centralized” to “more decentralized”. As of now, the space made it seem like we could make a hard transition from centralization to decentralization, but clearly that is not how the transition works in the real world.

I think one of the best actual use-cases for a DAO would be to consolidate capital in a situation where a union might be desired but unattainable. Mixed-martial arts fighters are a perfect example: their livelihood depends upon them working as individuals, but they would have better collective bargaining if they pooled their resources. In that they are not allowed to form unions, a “FightDAO” has been proposed as a solution to this specific problem. I do believe situations like individual fighters wanting to pool resources, but not being allowed to unionize is an example of a situation where a “DAO” is the natural logical solution. However, the parts of the DAO that would need to be “automated” to ensure there is no manipulation of the market or manipulation of the pooled resources are not yet decentralized enough to claim a true “DAO” status.

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@Fizzymidas do you know of any legal frameworks that might provide some guidance for something like a DAO? I wonder if you’d be able to merge a corporation with a governance token or something like that.

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“Merge a corporation with a governance token”

It would be difficult to do this without the tokens qualifying as “securities” which would then require a whole new level of regulation. Adding voting rights to an organization in the US creates a whole quandary of regulatory problems that the crypto space wants to avoid by operating outside of the US.

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I think we need to reconsider what “decentralized” means and what qualities must exist for an organization to be “decentralized”.

There’s so much to be learned about both the idea of measuring decentralization and in term of understanding the process of how to decentralize specific functions. A rush to poorly thought out decentralization could definitely expose the project to fundamental risks, as was witnessed with The DAO and as DuPont pointed out in his chapter.

This also made me think about the risks that an ecosystem faces from the perspective of governance, or Governance Extractable Value as Leland Leeand and Ariah Klages-Mundt called it in their post on the topic.. The list of potential ways that a group of users can extract value from an ecosystem for their personal benefit is likely to grow given the amount of money being managed by DAOs and the reality that some projects just copy their governance approaches without meaningfully exploring the potential risks.

As Coopahtroopa mentioned in his post on the DAO Landscape, there were more than 100 DAOs managing over $10 billion in assets as of June 24, 2021.

It will be interesting to see what the total amount of money managed by DAOs ends up being by the end of the year. Especially if more project decide to use exiting to DAOs (or ‘Dexiting’ to quote @Rich) as an attempt to avoid legal or regulatory blame, then it’s likely that we’ll see more governance exploits result from rushed rollouts.

I’m also very interested in exploring the role that culture plays in helping or hurting governance exploits as well. If you happen to know any good writing on the topic, please share!

Link citations:

  • Leeand, Leland, and Ariah Klages-Mundt. “Deep Dive #2.” Our Network, April 23, 2021. Our Network: Deep Dive #2 - Our Network.
  • Coopahtroopa. “DAO Landscape.” Mirror, June 24, 2021. coopahtroopa.mirror.xyz.
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At the moment no such legal Framework exists.

Wyoming tried, but the anonymity tradeoff does not please crypto people.

And like Chris said, trying to adopt existing corporate and organizational frameworks automatically turns those tokens into securities.

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@Larry_Bates Thanks for sharing this research on practical observation of DAO governance behaviors, it’s super valuable for me who are interested in DAO potential implementations on social mechanisms.

I much agree with the need for “automated”. I’d love to know your opinion on if we can define a standard for the degree of this? Does it make sense to use a given percentage to identify its decentralized degree? For example, company laws or regulations in some jurisdictions regulate the dispersion of share ownership for a company seeking for being listed (In Taiwan, the number of registered shareholders is 1,000 or more. Excluding company insiders and any juristic persons in which such insiders hold more than 50 percent of the shares, the number of registered shareholders is at least 500, and the total number of shares they hold is 20 percent or greater of the total issued shares, or at least 10 million). This kind of regulation could be regarded as the decentralization standard that the regulation requires for a listed company. Do you think we can also use some similar approaches to define a DAO? On the other hand, I also learned from Smart Contract Summit 2021: Governance Theory Panel that there are hierarchies in DAO communities by some KOL’s influence, would it make the purpose of seeking for the standard of decentralization become senseless?

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Astrid, these are fantastic observations and connections! One of the implicit points you make by proxy: you don’t need a blockchain to decentralize an organization. Further, I think while there is a good intention of establishing a metric, my experience tells me that decentralization has to be a tool and not a state in order for it not to become a point of failure. What I mean by this is that if a specific state becomes defined as the ideal “decentralized” standard, that means that nothing could ever be more decentralized than that organization. I think anyone can extrapolate why “decentralization as a state” does not work as an ideal.

I think it would be natural for a centralized organization to establish a centralized definition of “decentralization,” in effect declaring a unilateral form of decentralization in the process as their one and only form of decentralization.

In this light, an ever-changing spectrum of decentralization states on which an organization or state body can move makes more sense to me than a fixed scale. Further, the type of decentralization has to be articulated in order to ensure that indeed everyone participating in the conversation is discussing the same “thing”.

In short, I do believe a single standard would not only be “useless,” but it would completely undermine the notion of “decentralized” by having a unilateral definition. On the other hand, a spectrum of types of decentralization would also have to be ever-changing, and that does not align with how definitions work. I think we are entering a new paradigm of inter-disciplinary definition sharing, so that the redundancies across different industries start to disappear when unnecessary; but the characteristic separators that define what “type” of decentralization is being analyzed become the spectrum on which the different definitions live and evolve.

To sum: if something is identified as “decentralized” and the question is asked “can this be MORE decentralized,” inevitably the answer is almost always “yes”. This is why I pose that decentralization should be used as a tool and not a state so that we are not continually chasing a state that cannot philosophically be achieved.

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@Larry_Bates Thanks for your reply and the explanation of the ever-changing spectrum. I agree we have to avoid defining decentralization as a state and it should more likely be a spectrum. Flexibility is necessary no matter for hermeneutics or industry development. I just like to resolve a practical legal issue, from the lens of legal policymakers, it’s important to define DAO and find someone who is liable for a DAO’s actions. The current entities liability system’s dependent path is to categorize several types of entities, then define the responsibility of every role in a certain type of entity. Though the crypto community may not like this, a clear liability model may foster the adoption of this mechanism and reduce the bias.

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