The "Leftist" and "Rightist" of DAO

Author: Abu

Compiler: Byte Yuan

Why Left-Leaning DAOs Are Bound to Fail

Foundational Argument

In countless narratives, DAOs, as a form of organization, can replace the capitalist market order that has been explored by responsible companies for centuries. So, how do DAO researchers view their opponents? The mainstream opinions are nothing more than:

1. Unequal distribution, AKA exploitation. Company executives or capitalists consume most of the value, while diligent 996 workers barely manage to pay off their mortgages.

2. Clear class distinctions, where the wealthy enjoy a dreamlike quality of life, while workers consume their lives in cramped rental apartments.

3. Mental devastation, as tech companies fill ordinary people's time with "garbage information," leading to their despair.

Critics may begrudgingly admit that large multinational companies have created the convenient lives we enjoy today, a life unimaginable to people decades ago. Ordinary people's homes can be warm in winter and cool in summer, they can enjoy a delicious lunch without cooking, and at midnight, they can choose from hundreds of attractive bloggers to ease their loneliness, often for free.

However, it would be better if the poor could earn more. So, let's DAO. Through DAOs, early ordinary contributors can also reap wealth; through DAOs, every member is equal; through DAOs, we create art and call for conscience…

Thus, you can see many social experiments that have appeared throughout history being revived in DAOs. These experiments draw nourishment from the designs of Saint-Simon and Comte in the 19th century, which we generally refer to as "utopian socialism."

The left-leaning attempts of DAOs are a restoration of some socialist ideas in the crypto field. The following will elaborate on my views from three aspects: the basic forms of left-leaning DAOs, the logic of profit and collapse, and the psychological roots.

Basic Forms

Although there are many variations, the basic idea of left-leaning DAOs is to create a "public domain capital" belonging to the DAO, and then through some mechanism design, allow the public domain capital to generate profits and distribute them fairly according to the mechanism. For example:

1. Multi-signature wallets for fund management. Generally speaking, a DAO with a "treasury" needs to manage community crowdfunding funds using a multi-signature wallet. It is said that this maximizes the assurance that treasury funds will not be rug-pulled by the management.

2. Collective decision-making in operations. This is where DAO tools concentrate their innovations, as the problem is evident: collective voting decisions are very inefficient. Hence, we see mechanisms such as majority rule voting, election committee mechanisms, random voter mechanisms, and bicameral power-sharing mechanisms.

3. Mechanical distribution of benefits. Currently, mainstream DAOs have two types of profit distribution: one is equal distribution, where the profits generated by the DAO are distributed to the community through sharing or random lottery, typically represented by various NFT DAOs; the other is a Ponzi-like mechanism, where early participants in the DAO are said to receive more profits, while later entrants should contribute principal rewards, represented by OHM forks.

Logic of Profit and Collapse

The establishment logic of profitable DAOs comes from the assertion that DAOs stimulate the creative entrepreneurial talents of their members, thus gaining efficiency advantages over traditional corporate organizations. However, so far, there has not been a successful case based on this logic. So how do so many DAOs make a profit? Generally, it includes:

1. Ponzi-like profits and their collapse: including obvious cases like OHM Ponzi, as well as hidden Ponzi schemes from token marketing. This is easy to understand, so I won't elaborate.

2. Information asymmetry profits for management and their collapse: This refers to the DAO management exploiting their own opacity regarding protocol code, funds, and market resources to earn personal profits. For example, pseudo rug pulls, using DAO funds for personal gain, or embezzling whitelist privileges. This profit-making method generates huge profits for the DAO management, but at the primary cost of DAO members' losses. Such DAOs are not a positive-sum game, and their collapse is to be expected.

3. Consumptive profits and the collapse of management systems: This refers to the competitive failure of DAOs that want to operate under honest management. Consumptive profits mean that the initial funds of the founders maintaining the DAO's operation or the profit expectations of forming the DAO are consumed, making it unsustainable. The reasons for collapse exclude insufficient product competitiveness and are more due to imbalances in profit distribution within the DAO and talent loss.

It can be seen that the three points of basic forms and the logic of profit and collapse correspond causally. If there is no left-leaning mechanism design in the DAO's form, there will be no unsustainable profits and inevitable collapses.

Next, let’s briefly speculate on the psychological roots of such left-leaning DAOs.

Psychological Roots

In Mises' great work "Bureaucracy: The Anti-Capitalist Mentality," he summarizes the reasons for the public's left-leaning views in his time. I have listed a few points that are suitable for the current situation, summarized as follows:

1. Psychological jealousy and self-deception

In a market economy, everyone can achieve upward mobility by providing value recognized by consumers, but only a few elites can do so. Among the remaining failures, some comfort themselves by convincing themselves that their failure is not their fault but rather a fault of the social order. They believe they are as capable and hardworking as those who have surpassed them, but the profits go to unscrupulous scammers and shameless "capitalists," and it's not fair.

2. Influence of literature and entertainment

Writers and entertainment stars are always anxious in the market era; they fear they will no longer be popular in the market and will no longer enjoy their current wealthy status. Thus, in their creative works, they always seek an escape, a pursuit of a socialist paradise—just as they pursue a backward pastoral ideal. In the U.S. (obviously), those who produce these boring dramas and movies are precisely those who are most passionately devoted to socialist ideals. This is not a random conjecture; Eugene Lyons, a journalist for Hoover's biography, once analyzed the influence of the world's most famous striptease artists on American radical movements.

3. Resentment of white-collar workers

The white-collar class has some unique grievances; they work in office buildings and seem to have no difference from their bosses' work; their colleagues climb the corporate ladder while they remain stagnant in their positions—these people are often less capable than themselves but gain status through unscrupulous means. They feel that their work is an important part of their boss's entrepreneurial activities but have never received proportional compensation. Ironically, white-collar workers are now an important component driving DAOs.

Conclusion

Leftist states can last for decades, and leftist parties can survive at least one term. Why do left-leaning DAOs collapse so quickly?

Because no matter how the mechanisms of left-leaning DAOs are designed, DAO members always have an open exit—selling off and leaving. This is the initial design of the crypto world, granting property owners the greatest rights, and respecting private property systems is the left's nemesis.

A NAP-Based Proposal

The above text summarizes the reasons for the failure of left-leaning DAOs: they always want to construct a "public domain capital," and friends familiar with the basic economic concept of the tragedy of the commons know that public domain capital only leads to resource waste. Furthermore, the protection of property rights in crypto allows DAO members to exit such DAOs early through selling off, thereby accelerating the collapse of left-leaning DAOs.

Therefore, as long as the starting point of constructing "public domain capital" remains unchanged, no matter what kind of mechanism innovation is introduced, it will only provide opportunities for public domain managers to seize personal interests.

So, let's reverse the thinking: is it imaginable to have a DAO without "public domain capital"? Of course, it is, and it is everywhere.

Companies do not have public domain capital; every asset can be traced back to shareholders, employees, and suppliers through layers of commercial contracts. As we have seen, such mechanisms have created many great products.

The NAP (Non-aggression principle) is a principle for handling property rights that has been continuously refined since Spencer proposed it. It naturally fits the crypto world: as long as you do not infringe on others, you can do anything you want.

Indeed, there are many academic scenarios in the real world that need to be discussed, such as the free-rider problem, victimless crimes (drug dealing), intellectual property issues, etc. But fortunately, in web 3.0, handling this principle is somewhat simpler.

The NAP-based DAO proposal starts from the core of asset ownership:

Step 1: Clear Ownership of Funds

In the DAO, each fund belongs to a specific individual (address or DID). This individual has complete disposal rights over their funds, including defining their use, secondary market sales, withdrawals, and waiving rights.

Step 2: Utilization of Funds

Now that we have defined the owners of each asset, the funds of DAO members will be very dispersed. So, how can we efficiently utilize these dispersed funds? In traditional corporate structures, shareholders generally appoint professional managers to manage assets; conversely, in mainstream DAOs, DAO members choose to entrust funds to project parties for use.

The problem is that in the real world, a real-name + relatively complete legal system tends to ensure that professional managers manage shareholder assets well for long-term benefits; however, in DAOs, the rules are entirely the opposite: teams may be anonymous, and real-world laws are absent in web 3, making spontaneous laws in cyberspace even more elusive.

Therefore, we certainly need to re-establish a professional manager system within the DAO, which should meet:

1. Safety: The space for managers to rug funds should be minimized, even under the premise of high trust.

2. Flexibility: Managers should be able to utilize large amounts of funds within minutes, without the cumbersome financial approvals of web 2.

Thus, we describe a possible mechanism from four aspects: the generation of managers, the application of funds by managers, handling of rug situations by managers, and the profits of managers:

2.1 Generation of Managers

Fund owners will entrust funds (e.g., ETH) to managers and sign a trust contract that stipulates (trust fees, profit-sharing methods, exit conditions, etc.). Managers will receive a time-locked, linearly released ETH fund—tETH—into their managed pool. Trustors can withdraw their entrusted funds at any time according to the terms of the trust contract, leave the DAO, or reselect a manager.

2.2 Application of Funds by Managers

Once tETH leaves the pool, the time lock is activated, and the pool will automatically send ETH to the address where tETH is located over time (or through a DeFi protocol that can be claimed with tETH; technical details are beyond the scope of this article). At this point, the pool proportionally consumes all the funds of all trustors in the pool.

2.3 Preventing Rug Pulls

Since trustors can change managers at any time, this means their ETH can be withdrawn from manager A's pool and enter manager B's pool. Therefore, if they have doubts about manager A's use of funds, they can immediately withdraw from the pool according to the current profit consumption ratio. Once the ETH funds in the pool cannot cover the amount represented by tETH, the release is halted until new funds are added to the pool. (PS: Although this means that if a rug occurs, the earlier one withdraws from the pool, the less loss they can incur, considering that the speed of information dissemination far exceeds the speed of time-locked fund releases, this loss difference is negligible.)

2.4 Profits of Managers

There are three main questions related to why external funds are paid into the pool (rather than the manager's private wallet), how they are paid into the pool, and how profits are distributed in a pool that can enter and exit at any time. However, within this framework, these questions are easily resolved because one important factor for trustors to choose managers is their ability to profit from the funds, such as:

2.4.1 Why pay into the pool?

There is ample competition among managers; those who cannot help the pool profit cannot gain the trust of trustors and obtain large amounts of funds. Therefore, compared to web 2 managers, the probability and amount of extra income for managers are lower.

2.4.2 How to enter the pool?

The profits obtained by managers using pool funds can take two forms: a) generating income in the form of on-chain smart contracts, such as managers investing in DeFi protocols; b) direct remittances, such as managers hiring the community to complete certain off-chain tasks. The former can be reviewed by the community in advance, while the latter is also subject to trustors' profit and loss assessments due to its financial expenditures being on-chain.

2.4.3 How to distribute?

The main contradiction in distribution lies in how to distinguish the profits of different levels (early/late, large/small) of pool trustors. The traditional approach is equity dilution and acquisition, but this requires at least P2P matching, which is inefficient and not suitable for the principle of pools that allow free entry and exit.

Therefore, we shift our thinking; profits are also part of the pool's expenditures. Thus, the ETH in the pool minus the profits payable to tETH is paid to different trustors by the manager in the form of tETH according to the contract. In this way, the manager's profit-sharing plan serves as a dimension for their competitive trust allocation, for trustors to reference. (PS: What kind of trustors are more favored by managers is a subjective issue that varies by context; within the DAO, we reject the large pot of fair distribution and also reject blindly catering to early trustors' distribution methods.)

Through the above mechanism, we review the two principles of flexibility and safety proposed at the beginning. It can be seen that:

From a safety perspective, competitive managers reduce the probability of rug pulls from a priori perspectives, while the time lock + linear release mechanism provides a posteriori supplement, leaving ample time to minimize trustors' losses as much as possible.

From a flexibility perspective, managers can immediately sign a large investment using their private keys, not only optimizing the cumbersome financial approval processes of web 2 but also helping managers gain an edge in important business opportunity competitions. (This is not without precedent; for example, senior purchasers at TJX have the authority to immediately sign million-dollar orders.)

As suppliers or trustors receiving DAO funds, smart contracts not only guarantee their repayment ability for accounts receivable, but tETH, as a form of bond, also has a broad application space in the DeFi world. This allows suppliers to release liquidity more fully to enhance production efficiency.