How incentivizing competition, empowering rivals, and using non-token based voting can fix decentralized governance in web3
Whatever you make of the Renaissance-era Italian philosopher and political operator Niccolo Machiavelli, many of the principles explored in his writings about leadership and the preservation of political liberty remain relevant today. Echoes of such principles can be seen in the Federalist Papers and the design of the U.S. Constitution, as well as in more recent scholarship about the establishment of political institutions. As someone who closely tracks decentralized governance practices across web3 — including how such practices influence decentralization and can be incorporated into various models of decentralization — I believe several Machiavellian principles can also be applied to fix decentralized governance in web3.
Currently, most decentralized governance models in web3 feature DAOs (decentralized autonomous organizations) that use simplified models of direct or indirect democracy, as well as those derived from the world of corporate governance. While these systems have been an effective first step, the majority of DAOs have failed to overcome the complexities and sociopolitical realities involved in decentralized governance, and their legitimacy and utility has suffered as a result. Machiavelli’s philosophy was developed with a pragmatic understanding of the struggle for social power and is borne out of the premise that no mechanism exists to guarantee virtuous actions. This makes Machiavellian principles a useful guide for designing effective decentralized governance.
So in this piece, I examine the issues facing DAOs and discuss why many current solutions haven’t yet resolved them. I then share how Machiavellian principles can be applied to DAOs and suggest four design guidelines for the creation of “Machiavellian DAOs” that: (1) embrace governance minimization; (2) establish a balanced leadership class which is subject to perpetual opposition; (3) provide a pathway for the continual upheaval of the leadership class; and (4) increase the overall accountability of the leadership class. In a second companion piece, I share how these “Machiavellian” design guidelines can be implemented in practice.
Decentralized governance enables web3 protocols to decentralize and achieve credible neutrality. Ensuring that protocols have effective decentralized governance is therefore critical for web3 to succeed. This is especially true for web3 systems that rely on a decentralized layer of clients/ applications operating on top of shared smart contract/ blockchain infrastructure, as such systems will involve many different participants with many different motivations.
However, as with many other experiments in decentralized organizations, web3 protocols face significant hurdles — and current solutions have not yet proven to be effective. The most common issues currently facing DAOs, and decentralized governance generally, can be outlined as follows:
Lack of coordination. In an effort to promote decentralization, most DAOs have neither leaders nor a full development roadmap. Centralized and highly coordinated projects can possibly implicate regulatory requirements if a token’s value is dependent on others’ “managerial efforts”. While a path to decentralization is critical for most web3 projects, it inherently creates barriers to ongoing coordination and development. Without hierarchies, DAOs face significant challenges that traditional hierarchical organizations avoid or are built to navigate.
Misalignment of interests. Interests of DAO members (and token holders) are not always aligned, which is challenging for ecosystems that rely exclusively on token-based voting. Power imbalances across different groups of stakeholders could hinder the credible neutrality of a protocol, limiting that protocol’s growth and impact. Furthermore, off-chain agreements and financial interests may lead to certain DAO members having conflicts of interest that could influence their votes.
Lack of accountability. DAO governance mechanisms don’t currently have a way of holding individual token holders accountable for the bad decisions they make while governing a protocol. Another issue is that the lack of leadership hierarchies within DAOs — combined with the limitations of direct democracy — make it hard for DAOs to hold their contributors (including delegates and subDAOs) accountable. Evaluating contributions also requires tremendous nuance and subjectiveness. This accountability challenge increases the risk of DAO contributors’ rent-seeking or self-dealing.
Vulnerability to attacks. Token-based voting can make DAOs susceptible to attacks stemming from vote buying and other manipulations. As Ethereum co-founder Vitalik Buterin has observed, the unbundling of the economic interest in a token from the token holder’s right to participate in governance could easily result in governance attacks (and other problems even in the absence of attackers).
Low participation. “Direct democracy” often leads to low voter participation, which in turn makes DAOs susceptible to manipulation by more well-organized and more active groups. Even if DAOs could increase participation rates (for instance, by paying users to vote), there’s no guarantee that they would benefit from such increased participation (the votes may not be high quality). Ultimately, an informed electorate is necessary to make informed decisions, and given the relative complexity of DAO governance and participants’ time constraints, it’s unrealistic to expect a high-functioning direct democracy in web3.
When combined, all of the above issues present significant headwinds to the success of decentralized governance and DAOs in web3. The opacity of current practices further compounds the problem, making DAOs tools for “decentralization theater” — where protocols merely pretend to be decentralized.
Many models and tactics for addressing all of the above challenges have been proposed. One advantage of web3 is that there has been ongoing rapid experimentation, and fast iteration cycles, in DAO governance — a sort of “lightspeed democracy”. It’s a public laboratory where democratic experiments play out in just months, when such experiments would otherwise take decades if not centuries.
Below, I summarize some of the tactics and approaches that help address the above issues in decentralized governance. I’ll then return to these in the context of applying Machiavellian principles to DAOs.
Given the practical challenges associated with direct democracy, many DAOs have turned to representative democracy to enhance their decentralized governance. Representative democracy mechanisms most often take the form of delegate programs, where token holders nominate and elect a number of delegates to vote on their behalf on various matters that come before the DAO for a vote.
The success of any DAO with a delegate program will ultimately depend on the quality of the DAOs delegates. And so far, such delegate programs have mostly defaulted to selecting industry “good actors” as delegates, which raises questions about the long-term scalability and viability of such programs. Professional delegates — whose only job is to participate in such DAOs — have also begun to emerge as another category of delegate.
SubDAOs or subset-organizations within a DAO can complete defined tasks on behalf of the DAO — whether it be risk monitoring, network and protocol development, community management, business development, and so on.
As compared to a traditional company, subDAOs are meant to operate in a much more open and decentralized manner, working and coordinating transparently with other subDAOs. This structure is intended to reduce the risk of potential significant information asymmetries among members. When structured properly, subDAOs can therefore be effective in operating DAOs — without jeopardizing overall decentralization.
Vitalik Buterin among others (including some of my a16z crypto partners) has called for systems to adopt mechanisms other than token-based voting to better represent the interests of all stakeholders. Buterin has proposed two alternatives to token-based voting: 1) proof of personhood (“systems that verify that accounts correspond to unique individual humans, so that governance can assign one vote per human”); and 2) proof of participation (“systems that attest to the fact that some account corresponds to a person that has participated in some event, passed some educational training, or performed some useful work in the ecosystem”).
DAOs have already proposed or implemented iterations of these ideas. For example, layer-2 rollup protocol Optimism balances decentralized governance across two houses: a token house; and a citizen’s house, composed of specific ecosystem members that receive citizenship (and voting power) in the form of “soulbound” or non-transferable NFTs. The recently launched Worldcoin protocol provides for biometric-based proof-of-personhood, which could lead to more people using proof-of-personhood governance. The community behind liquid-staking protocol Lido has discussed adopting dual governance, where LDO (Lido governance token) holders and stETH (liquid staked ETH issued by the Lido protocol) holders would collectively vote on certain matters — thus addressing potential misalignment of interests across LDO and stETH holders.
Ultimately, the appropriateness of these solutions may depend on whether the underlying project is economic or civic in nature. For economic projects, detaching economic interest (measured in tokens) from governance power (measured in votes) may lead to economic results that are not optimal. But for civic projects, proof-of-personhood voting schemes are more attractive as they could better represent a community’s general interests.
Proposals for making DAO contributors — including delegates and subDAOs — more accountable to token holders include: (1) increasing compensation for DAO contributors to make those roles competitive with other roles in the industry, and therefore avoid adverse selection; and (2) establishing objective, predetermined criteria for token holders to evaluate performance.
To help make token holders individually accountable for their decisions on decentralized governance proposals, some have proposed that DAOs be forked frequently. This would enable the “good” decision makers to fork protocols away from “bad” decision makers, thereby leaving the latter with a version of the protocol formed from their bad decisions.
Minimizing governance calls for protocols to reduce their reliance on, and the power of, decentralized governance. Eliminating all but essential governance would enhance the credible neutrality of a system. And protocols using non-essential governance would eventually succumb to competition given the costs imposed by unnecessary governance.
Limited governance has been advocated for by industry leaders like Buterin, who has argued that this approach reduces all non-automated parameter choices. Many DeFi (decentralized finance) protocols have also implemented governance minimization, including Reflexer Labs and Liquity, which took the concept to the extreme by eliminating all human governance.
The writings of Machiavelli and his disciples (as detailed by James Burnham in The Machiavellians: Defenders of Freedom) offer a valuable perspective on decentralized governance — one that was born out of the constant upheaval and struggle for power in the Italian city-states of the 15th and 16th centuries. These challenges can be analogized to the issues DAOs must be built to withstand today.
The Machiavellian principles begin with a belief that an objective science of politics and of society is possible, and that the primary theme is the struggle for social power. The writings of the Machiavellians then explore several additional principles that not only predict the struggles of web3 decentralized governance, but also provide guidelines for addressing those struggles — from accepting the autocratic tendencies of organizations, to balancing a leadership class through perpetual opposition and continual upheavals, to increasing overall accountability of participants.
I’ll summarize these Machiavellian principles (as outlined by Burnham circa 1943) here and frame them for use in the context of DAOs:
The Machiavellians posit that the theory of democracy as self-government is not an actual or possible social reality — taking for example public referendums, which often have regrettable outcomes (whether it be Brexit, which is now deeply unpopular in the UK, or California’s frequent struggles with counterproductive ballot measures). The reasons the Machiavellians point to include ignorance of the issues and lack of time to dedicate to governance matters.
It doesn’t make sense for an individual with low voting power to dedicate significant time and effort to governance. In web3, this principle plays out through low participation rates especially on highly complex governance proposals — ultimately hindering effective DAO governance.
Once an organization has considerable activity, the Machiavellians believe it is the natural tendency for labor to be divided among those with the talents best suited to complete such tasks — including individuals who specialize in the operational life of the organization. This inescapably creates an organizational leadership that constitutes “a relatively small minority, [which] is distinguished from the mass of the organization. The organization is able to keep alive and to function only through its leaders.”
All complex organizations ultimately default to autocratic leadership structures — a natural law the Machiavellians have dubbed the “The Iron Law of Oligarchy” — which persists even if one eliminates economic differentiation or implements different political structures. Even where such elimination is possible, other social structures inevitably develop. For instance, hierarchies developed and a ruling class emerged in both the Soviet Union and China, despite attempts to eliminate economic differentiation. Applied to DAOs, the Iron Law of Oligarchy suggests that DAOs will naturally default to autocracy, and the people most likely to exert autocratic control would be the initial development team of a DAO’s protocol.
The Machiavellians (as outlined by Burnham) assert that “…the primary object, in practice, of all rulers is to serve their own interest, to maintain their own power and privilege. There are no exceptions. No theory, no promises, no morality, no amount of goodwill, no religion will restrain power.” Even in democracies, the masses are often unable to hold their leaders accountable; and makes democracies particularly susceptible to powerful leaders forcing their wills upon the people — a phenomenon the Machiavellians call “Bonapartism”.
When left unchecked by other powers, “Bonapartist” leaders are likely to arise in democratic organizations, claiming “to be the most perfect embodiment of the will of the group, the people. Everything, therefore, is permitted to him since he is merely the symbol of the group as a whole.” Applied to DAOs, this principle suggests that DAO leaders could perpetuate their own power — or that token holders could face difficulty in holding them accountable.
Given the inherently autocratic tendencies of organizations — and the inability of the masses to hold leaders accountable — the Machiavellians argue that the only check on the power of leaders is power held by those in opposition to leadership. In a democratic system, this manifests in the form of liberty and the freedom to oppose leaders — critical tools that can enable decentralized governance to surpass the effectiveness and accomplishments of centralized governance. In particular, public criticism by an opposition both “exposes, and tends to force correction of, mistakes on the part of the governing élite which might prove fatal if too long and stubbornly maintained.”
While the right to public opposition is alive and well in web3, DAOs are sometimes unable to foster healthy opposition when token holdings aren’t evenly spread across competing perspectives. Due to securities law concerns relating to broad public token distributions in the United States, token distributions are typically structured as airdrops (distributions of tokens for free) or as ecosystem incentives (distributions of tokens to users in exchange for some user action, such as providing liquidity). But neither of these allow for priming decentralized governance with equally matched competitors. As a result, many DAOs are particularly susceptible to Bonapartism, where an individual or group could rise to power unchecked.
Opposition to power can also be ingrained in democratic systems through the separation of powers to establish proper checks and balances. As proposed by James Madison in the Federalist Papers, “Ambition must be made to counteract ambition.” Implementing bicameral legislatures are another pathway to achieving a balance of power when facing issues arising from uneven token distributions.
The Machiavellians believe that systems should not only have constant opposition, but allow new leaders to force their way into the leadership class — thereby creating churn, and avoiding a static balance of power. According to the Machiavellians, this churn must be forced, as the leadership class will always push against it to preserve their position and privilege.
Enabling broad participation by community members is already a hallmark of the web3 ethos, and often extends to DAO leadership, where community members often rise to become formal DAO contributors. However, community members are often limited in their ability to acquire true power in token-based voting systems given the financial hurdles associated with acquiring such power.
The Machiavellian principles I’ve shared here can be distilled into four guidelines for designing more effective decentralized governance. DAOs that wish to adopt Machiavellian principles to become Machiavellian DAOs should:
But here’s the catch: Empowering any parties within a decentralized system could undermine the very decentralization of such systems — it could lead to potentially significant information asymmetries, and increase the vulnerability of those systems to governance attacks. In addition, these guidelines could introduce inefficiencies and friction to decentralized governance that may make them inappropriate for certain systems, such as highly dynamic systems or ones that are civic in nature.
As a result, implementing these guidelines must be undertaken with care. But there’s ways web3 builders can do just that.
Read part two, “Machiavelli for DAOs: Designing Effective Decentralized Governance” here
Editor: Sonal Chokshi
Acknowledgements: Thank you to Ali Yahya, Andy Hall, Porter Smith, Robert Hackett, Ross Shuel, Sonal Chokshi for their helpful comments/ feedback on this piece
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