Operational Inefficiencies
Note: Data in this section last updated July 3rd, 2022
Running any business is difficult, let alone one with no headquarters, no managers and no permanent workers. While there are a host of challenges faced by DAOs, some of the more common include:
Decision-making
Plutocracy vs. Apathy
Remote work
Compensation
Lack of tooling
Let’s look into each of these…
Decision making
While democratic decision making has numerous benefits – including input from multiple viewpoints, bias checks and increasing stakeSource: Redditholder buy-in – it also has several well-documented drawbacks.
Real-Time Photo of DAO Governance
Often maligned as “decision by committee”, critics argue that is a poor way to run an organization for several reasons:
Less Accountability: Individuals who have less stake in the outcome of a given decision generally spend less time evaluating solutions and are more prone to suggesting extreme solutions
Missed Advice: Groups often fail to take into account the experience of the most relevant person in the room
Noise: Without a manager to enforce meeting rules and keep discussions on track, large groups often get bogged down in minutia and waste time
Peer Pressure: Critics argue that social pressure has a major influence on group decisions, and people who have relevant concerns are often reluctant to share them for fear of “rocking the boat”
Competition: Individuals may try to “one-up” each other by suggesting more and more extreme solutions
Plutocracy vs. Apathy
There is a natural push and pull between centralization and decentralization in a DAO. While decentralization has its benefits, critics would argue that too much decentralization is just as bad as it means each individual has less at stake. This can slow the pace of decision-making and lead to apathy. Indeed, in one study it was estimated that fewer than 10% of members on Aragon and DAOstack enabled organizations participated in voting (although DAOhaus had a much higher percentage).
Voting Participation is Less Than 10% in Many DAOs
While upping the level of centralization and bringing more structure to the DAO would seem like the simple solution, that brings its own challenges as well.
The most obvious problem with a small set of large token holders is the risk of plutocracy (i.e. a “government by the wealthy”).
We’ve seen this dynamic play out before. Last summer, venture capital firm Andreessen Horowitz – a large stakeholder in the Uniswap DAO – spearheaded and passed a proposal that many members argued benefited them personally.
Ultimately, like most things there’s probably a middle ground here that each DAO will have to find on its own.
Remote Working
While remote working has its benefits, it also comes with its fair share of challenges. Some of the more common are:
Poor Mental health: Working from home can be lonely, and many remote workers report increased levels of stress, depression, feelings of isolation and sleep problems.
Distractions: Home offices provide several potential distractions such as video games, online shopping or social media. In addition, friends, family members and pets often drop in at unexpected times
Coordination Difficulties: It’s difficult to coordinate meetings and working groups in large organizations spread out over multiple time zones
Lack of Documentation: In office settings, a lot of experience is shared through “tribal knowledge” – information that is only known by people on the inside of a group. This wisdom is often shared at random times, such as over a coffee break in the kitchen. Because remote workplaces cannot replicate this, they need strong documentation and knowledge management
Poor Culture: Without meeting others in person, remote workers often feel they don’t really know their peers.
Fortunately, the benefits of remote working appear to outweigh the downsides, and Forbes has shown that remote teams are 35%-40% more productive than their office counterparts. It’s also very possible to remove many of these challenges with proper strong operational management. If you’d like to learn more, please check out my article “Kill the Office!: How to Make Remote Teams a Competitive Advantage”.
Compensation
Determining how workers are compensated is a major challenge for DAOs. While we’ve discussed several potential solutions, each of these has a downside:
Bounties: While bounties work well for certain departments and tasks (e.g. paying someone to fix a bug) they work less well for others. In addition, bounties often lack a “qualitative” metric. Sure, you can pay a bounty to someone to build a website, but what if it’s ugly?
Reputation-based Schemes: Tools such as Coordinape are vulnerable to a host of problems. In the most benign cases, there’s a risk that they will become popularity contents where people award tokens to their friends. The worst cases may see collusion and bribery.
Salary: Salary may be ideal for many positions in a DAO, but it runs counter to the ethos of a free and unconstrained work force. In addition, when determining salary, members may rely on their own personal perceptions of value rather than what is “market”
Ultimately, I believe there’s a strong change that DAOs will rely on multiple methods – using certain methods for certain types of tasks and often combining methods. These structures will likely vary from DAO to DAO and it’s likely that we will see an entire generation of “DAO ops” professionals arise to coordinate.
Poor Tooling
Traditional corporations have access to a wide variety of tools to manage remote workforces including Zoom, Slack, Google Drive and Trello.
Unfortunately, many of these tools aren’t always a great fit for the unique needs of a DAO. In particular, they often come with several concerns such as:
Centralization: Most of these services are centralized, which could be a major hurdle for DAO adoption. For instance, Google Drive is a great knowledge sharing tool, but it’s controlled by Google. This defeats the whole purpose of decentralization…in today’s world, Google restricting access to your documents may be as bad as a bank confiscating your funds
Applicability: Legacy tools are rarely designed for the specific needs of DAOs. For instance, there are hundreds of tools for payroll management, but only a few that don’t focus on traditional salaries or hourly wages. And anything that connects to a blockchain? Forget about it…
Cost: Enterprise grade tools often cost thousands of dollars per month. This is out of reach for many DAOs, and even those that can afford it may have trouble justifying costs in a democratized voting environment
While we have reviewed several solutions to these problems, it’s helpful to remember that the DAO tooling space is still extremely early and, as such, DAOs will have to figure it out on their own for a while.
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