One morning in July 2019, Kain Warwick woke up at 6:30 a.m. to a grim phone call from his co-founder and CTO Justin Moses.
“We have a problem,” said Moses.
Synthetix, the synthetic asset protocol that Warwick, Moses and their team had been creating for over two years, was the victim of a debilitating exploit: an attacker using the pseudonym “Onyx” was over 275 times in debt of $ 11 billion Created for synthetic assets What Synthetix was worth – ridiculing team members and sowing chaos in public channels.
Nowadays time and success seem to have softened what Warwick freely admits is a fiery disposition. Still hilarious and combative, he tends to rip his competitors and critics on Twitter, but otherwise presents himself as approachable and charming. sometimes even wise.
However, he raged in the Australian winter of 2019.
Synthetix blog Contributions from time cultivate a thin veneer of professionalism, but are laced with anger. In them, Warwick equates communication with the exploiter with “hostage negotiation” and says that paying a bug bounty to Onyx is a form of “blackmail”. He is drawn into a war of words and at some point spots Onyx with a terrible curse in programming circles and brands the attacker as a “Script Kiddie”.
In context, Warwick’s anger is easy to understand. The fledgling decentralized finance platform (DeFi) was in the early stages of a legendary run and had successfully achieved a total banned value of $ 40 million – just a fraction of a possible high of over $ 1 billion. Such an exploit can paralyze the growth of a young project, and over the next several months the “competitive” Kain went on the offensive: he put in place a mechanism that restricted funds from users’ wallets to take advantage of the protocol, a mechanism the Cain finally gave The Last Laugh when Onyx’s money ran out.
Warwick wanted to go further: permanently impose harsh penalties on anyone who tries to undermine his protocol.
In the end, however, what Warwick wanted was no longer relevant.
Control of the protocol had previously been given to a multi-signature system that was part of a larger 18-month process to decentralize the governance of Synthetix through the use of a number of decentralized autonomous organizations (DAOs). The majority of the signatories who control the protocol opted for a more reluctant approach in order to avoid a policy of austerity altogether.
At that moment, Warwick said he first faced the “confrontational” realization that he had lost the traditional “dictatorial” power of a CEO.
He could no longer “get into a tantrum and say,” That’s how we’re going to do it because that’s how I feel. “
I was in the minority internally and what I wanted to do wasn’t going to happen and I just had to put up with it.
The “dictator” had just become another delegate.
A new kind of unicorn
For those not privy to the principles of DeFi and Web3, the decision to decentralize governance over a billion dollar protocol probably seems insane.
Founders / CEOs like Elon Musk are worshiped with cultic devotion – and aside from fame, running a unicorn gives founders the potential to reap historical riches: all of the fortunes of King Solomon’s mines can be made by going public on a simple social app .
Billion dollar protocols like Synthetix and the Aave lending platform are particularly notable for their active revenue streams, growing user base and proven models, as well as their involvement in the fintech and blockchain industries – two of the hottest for speculators and investors. If the regulatory knots could ever be resolved, a Wall Street suit in the underwriting business would no doubt want to institutionalize anyone who proposed turning control of such a protocol over to a DAO.
“That’s true, that’s actually true,” says Aave co-founder Stani Kulechov and laughs at the allegations of insanity.
The suits aren’t the only ones who think it’s crazy. Even those ideological supporters who really and deeply believe in decentralized governance admit that the tools for DAOs to date are very limited.
Since October 29 and July 28, respectively, the entire administrative infrastructure of Aave and Synthetix has been operated by DAOs. The process is rudimentary at best: AAVE and SNX token holders vote on suggestions for improvement with Boolean results, and participants’ votes are weighted in proportion to the number of tokens they hold. While certain departments / administrative bodies may be divided into separate DAOs, the structure in the respective networks remains largely the same.
Token Weighted Yes / No Votes: This is the mechanism that dictates payroll, treasury holdings, protocol upgrades, long-term strategy, business operations, and all other forms of governance for two of the largest and most successful DeFi platforms – a couple of extensive, high stakes experiments are conducted in real time.
Putting ideology over practicality can often be a difficult proposition, as anyone who has led a revolution can attest. Despite all the uncertainty, the decision to decentralize was an easy one for both Warwick and Kulechov.
“At some point we realized that the protocol was so valuable that we made it practical to have to decentralize, “said Kulechov. “As a team, we cannot continue to assume this responsibility for something that is highly decentralized outside of us.”
Warwick was more succinct on this matter:
It is just better for everyone when there are no dictators.
A series of extensive interviews with Cointelegraph, Warwick, Kulechov and some of the leading figures in DAO engineering and organization discussed the practical aspects of decentralized governance and the advantages and disadvantages of competition. The unique decentralized governance for value recording offers talent to a non-traditional work environment and the future of DAOs in the future.
Centralized versus decentralized
Just as Bitcoin is still proving the value of a decentralized ledger after twelve years, it can take some time for skeptics of decentralized or distributed governance to come up with the concept.
“You have the right to be skeptical. We are not quite at the point where this is the case Add Worthwhile, ”said Patrick Rawson, co-founder of the DAO engineering think tank Curve Labs.
Ultimately, decentralized governance will become a “hub of contracts that will make time more efficient for everyone and lower operating costs,” argued Rawson, but right now, “the optimizations aren’t there.”
Rawson cited authoritarian China’s response to Covid-19 as an example of the “tweaks” centralized agencies can currently offer. China has been able to stop the virus from spreading within its own borders because it has “been able to put screws in doors and completely lock people”.
Similarly, there is a valid “popular wisdom” that projects should be centralized to get the optimization benefits and then gradually decentralized over time. He concludes that:
People who are skeptical are skeptical because centralized structures have proven themselves time and time again.
However, DAOs have certain competitive advantages, argues Eric Arsenault, director of growth and DAO design at DAOstack.
“There are certain things you can absolutely keep up with and there isn’t even an alternative,” he said. “When it comes to questionable legal activity or securities-related issues, a DAO is absolutely more competitive – and possibly the only valid option.”
Both Aave and Synthetix occupy decidedly gray areas of law. Legality aside, Arsenault argues that a well-coordinated, well-motivated decentralized organization will always outperform a centralized one in the long run.
“Ultimately, a DAO enables open innovation – permissionless innovation and collaboration. A traditional siled company will always be bound by its hierarchy and the leaders – and your ability to contribute will always be limited to some extent, “Arsenault said.
A combination of open innovation and legal space was part of what led Warwick to decentralize the governance of Synthetix.
“I love this idea that people who are not even in the same building coordinate or are not all tied to a single legal entity – the governance system can be the coordination mechanism,” he said. “Even if we don’t know how to optimize it, that attracted me ideologically [decentralizing Synthetix]. ”
According to Rawson, user property is also not to be missed. He cited Uber’s example: the parent company benefits from drivers’ profits, and drivers in particular have limited voice and rights.
“But if that were the other way around, where the drivers slowly take possession over time, of course the drivers will focus on that,” said Rawson.
Sharif Sakr, an analyst at blockchain investment firm BR Capital and a member of Free TON DAO, agrees that DAOs have a unique appeal and range of reward structures for certain people – especially those who are unaffected by the “whim” of traditional hierarchies are.
“When I came to Free TON, my view of incentives changed completely. And it made me think differently about incentives and motivation as two kinds of separate but hopefully parallel things. They were motivated, they were young – even if they weren’t younger than me, they were felt younger. I thought, “Whatever you have, I want some of it.”
Sakr initially came to Free TON to do the reconnaissance for BR Capital as the investment in the project was being weighed. He was quickly enchanted by the unique DAO structure and now jokes that his Free TON work cuts the time reserved for his BR Capital duties and occasionally gets him into trouble.
“Through Free TON, I’ve seen people create something, deliver something, get paid for this thing, get community applause for this thing, and then see this thing being used for a bigger cause that they believed in from the start . “
It’s a very fulfilling cycle, and I think the normal world has denied that feeling to younger people for far too long […] And that is a kind of miracle from which there is no turning back.
Not only does Rawson offer top talent a different kind of workplace experience, but they believe that centralized / decentralized competition ultimately boils down to who can offer the most resilient, compelling ecosystem – and this is where centralized companies just can’t compete.
“Once you can launch the equivalent of a mutual fund or credit union in 15 minutes, the competition will move away from ‘who has the best technology’ to ‘who has the best, most loyal network?’ Then start playing a game of ecosystems rather than innovation, “said Rawson.
A range of services
Another question that skeptics of decentralized governance often raise is to what extent the governance is for real decentralized – how different are DAO operations from those of a normal company when the vast majority of governance tokens (and therefore voting rights) are held by a founding team?
“Aave is not a decentralized protocol I would say,” said Pet3rpan, a semi-anon DAO organizer and a member of the Meta Cartel and Venture DAOs. “There may be token governance, but there is still enormous centralization [the founding team] even.”
Rawson agreed, saying that users should be careful about blindly accepting the “decentralized” label.
“If we look at the mechanics, maybe they aren’t [really giving up control]”Said Rawson.
Maybe all of this is planned behind the scenes, with a cabal of actors, the right people and mechanisms where they don’t give up control – they give up control theatrically.
This would boil down to “decentralized theater,” a show that gives founders like Warwick and Kulechov the legitimacy to claim decentralization without relinquishing power.
However, Rawson quickly warned that he did not know the inner workings of both projects and only advocated a healthy dose of skepticism.
“If they’re doing this really, really well, then I wouldn’t have any insight – that’s the point,” laughed Rawson.
Warwick and Kulechov both admitted that as founders they retain a “soft” force that raises their votes above others – and that they still own a portion of the tokens large enough to motivate them to keep going on the protocol to work.
However, founders who retain soft power are nothing new in the crypto space. Although Vitalik Buterin has claimed he no longer has any real control over Ethereum, he remains a figurehead in the eyes of many.
Kulechov also mentioned Linux founder Linus Torvalds as someone whose example he would like to follow:
“I like the way Linus Torvald does it on Linux. He provided practically the very first software from Linux, kernels, and even Git, and to this day, he keeps track of what’s going on in the community and is actively involved. I really like this approach to creating logs. It’s hard to build something, that you do it right where people use your protocol, and that you have sustainability – that’s something that is hard to leave. “
Warwick, meanwhile, made it clear that his gentle power has clear limits:
“If I showed up on Discord tomorrow and said,” Hey, I’m writing a SIP to change the token’s monetary policy and redirect all fees to address 0x0. “ (which would burn the money) For example, I can’t see a scenario where I get this across the line – no matter how persuasive I am. “
Sakr also pointed out that there are different types of soft power, some of which play an important role in a DAO. Social hierarchies are a naturally occurring phenomenon in any human organization, and there is nothing wrong with certain people having soft power out of respect – for example, product managers.
“A product manager only works with soft power. They’re rarely at the top of a hierarchy, but usually on the side – they’re not the head of engineering, they’re not the head of design, they’re not the head of advertising, they’re not the head of anything. They often have great personality and are not worshiped at all, but rather respected for the power of personality, imagination, gravity, and vision. ”
Soft power goes wrong when it becomes overly reverential, says Sakr, and grants an individual disproportionate influence and cultic status – status that founders often command.
Warwick also seems to resent what level of awesome gentle power he commands, and wishes he could participate without the cloud of his own influence hanging over him. He spoke about a hypothesis in which he would leave Synthetix publicly, rejoin Synthetix anonymously and build credibility in the DAO through a new person.
In the end, however, such an undertaking would be too complicated.
“As someone who is ultimately a crypto-anarchist, centralized power is bad,” Warwick sighed. “The fact that a founder retains soft power but not hard power is probably a good balance.”
Pet3rpan agrees. While Synthetix and Aave’s DAOs could have a higher level of token decentralization, ultimately it makes sense for founders to maintain soft power.
“It’s just a reality,” he said. “I don’t see anything wrong with that. The rhetoric ‘These people still have influence’, well, no shit […] You want to listen to people who have done the most. If a project leader is the person who has done the most – well, that’s not the biggest conspiracy ever. “
While the founders retain part of their stature, who actually does the work on a daily basis? Although some models have emergedIt remains an unanswered question how decentralized governments attract new talent.
“Personally, I like the idea that when you give the community the keys, you can walk away and say,” My job is done, “said Kulechov.
However, he acknowledged the unfortunate reality is that most of the smart contract engineering still comes from Aave’s founding team. He speculated that one day more third-party developers might join the DAO, but so far this has not happened on a large scale.
That means, “a lot of small functions came from the community,” he says. “The changes may be very small, but very useful.”
He described an example where a community member suggested that users in certain jurisdictions would have the option not to accept new, packaged tokens when depositing funds into Aave – a minor operational change that would give depositors significant tax and efficiency benefits would bring.
Warwick also said that most of the technical improvements and changes to the protocol are still coming from the core team – and that the team is following a “five-year plan” set before Synthetix decentralized governance – but more than 80% of the operational changes that were made Protocol, such as the adjustment of the collateral ratios, now comes from the community.
“The community is more into it. They see where something is not optimal, they can monitor the chain and see if something is pen or something inefficient, and therefore more and more of these are coming from the community, ”he said.
Pet3rpan emphasizes that DAOs that move important tasks from the core team to the community are an important step for long-term success.
“It’s like a mother and her child: you don’t want to pamper the child because it becomes this useless thing that always needs help,” he said. “If you’ve really removed the core team from Compound, or even Aave, […] They wouldn’t really exist. ”
He referred to Yearn.finance as an example of a DAO that has successfully invested in developing and attracting new talent.
Maybe if Andre [Cronje] didn’t exist anymore, we wouldn’t get those mergers and cool innovations like Deriswap, but YFI’s core product would keep going because they built the team and trained a team of really great engineers.
However, Pet3rpan also suggested that progress could be a process, not an event.
“It makes sense that the first applicants and the first participants are the core team. The other people, the workers and the contributors, they will come. Money and a large treasury in the DAO will take time – but it will come. “
Sakr also believes that talent migration from centralized to decentralized units is only a matter of time.
“I come from a world where energy and young people have been repeated almost over and over again mentally crushed […] I’ve seen so much failure in the centralized world. I just can’t see anything in this world that DAOs could compete against. That was so amazing or impressive. ”
Into the unknown
Few of the experts who spoke to Cointelegraph about this piece have been able to offer historical analogues for successful decentralized governance. It’s new, largely unexplored territory.
Of course, this means there’s a lot of development work to do – but according to Rawson, the scientists have already laid most of the theoretical foundations.
“Scholarships usually precede technological change,” he said. “Everyone sees this coming, everyone knows it’s coming. The people who do this thing every day and have this empirical experience … time may seem slower to us because a day in DeFi is 20 years in the real world, but it’s moving forward. It’s moving forward and it won’t be long before companies start out as DAOs. “
He shows The Handbook for Computational Social Choice, an extensive volume with 600 pages, which shows a variety of possible computer-aided governance and voting structures. According to Rawson, DeFi has only scratched 2% of the academic theory supply.
Furthermore, according to Sakr, the process of further developing the DAO tools could be less of a technological advance and more of a social step back to more traditional community structures.
“Some people have referred to it as the bourgeois fabric – the invisible, informal, unofficial relationships that bind neighbors, for example – that lead young people to shop for older people. Those kind of layers of trust that were there may have been damaged by the industrial revolution. “
He compared the Free TON community to another he encountered when he moved his family to rural France to escape the Covid-19 outbreak: an idyllic city shaped by loose but powerful collectivist ties:
A DAO is just a formalization of very deep and instinctive human ties that I believe have been suppressed.
From a market perspective, tooling could improve quickly as the time approaches when DeFi users are demanding some degree of decentralization from the projects they are using at the governance level rather than just the protocol level. Arsenault hopes that day will come soon.
“I would hope the market moves in that direction,” he said. “You’ve seen hacks, you’ve seen problems with rugpulls […] The more things like this happen, the more people will need some kind of governance mechanism to make sure their funds are safe. “
The founders and experts agree that a real DeFi requires Decentralization on both levels. For the founders especially, even if it means giving up certain privileges, they seem eager to move forward.
“You are saying goodbye to a power that you have, but at the same time you are saying,” Welcome! “To a new kind of power,” said Kulechov. “You accept that the model you had was there for a reason, but where you need to go you need the new.”
Likewise, Warwick implied that governance development for him now takes precedence over protocol.
“I think the details of how Synthetix works are far less important to me than the coordination and how we built those basic elements to make them bigger,” he said. “I think the incentive structure and the governance structure are more important to me than what they do.”
And is there any advice for the young founder who wants to defy the decentralized border and set up his company as a DAO?
“I think the most important thing is that there is no reason to be afraid to give up that power,” said Warwick. “As long as you support the community in this and make sure they are good stewards who will take over that role and power when you give it up, the people you give that power to will usually surprise you and be very dedicated and conscientious in dealing with things. “
It is nothing to be afraid of, it is something to be happy about – to be able to realize these decentralized systems.