With over 11,970 organizations listed by DeepDAO, the proliferation of DAOs is undeniable. However, the actual level of decentralization within these DAOs is often questionable.

While Snapshot voting is considered a decentralized process, the actual execution of proposals through multi-sigs relies on the core team. This poses a significant risk in the event of a team member going rogue and taking off with the funds, as exemplified by Velodrome’s case, where around $350k was stolen.

Although it is essential for DAOs to prioritize decentralization at both the protocol and community levels, there are also risks associated with completely decentralized platforms. Decentralized organizations have their advantages, but they also come with a price, such as bureaucracy, coordination costs, and weaker decision-making expertise. Thus, it is crucial to model a decentralization structure that effectively navigates the trade-offs between the benefits and costs to achieve a robust and sustainable model.

The concepts discussed in Progressive Decentralization — published three years ago — still hold relevance today, providing guidance on how protocols or organizations can decentralize in the most optimum way.

Having a decentralized structure from the very inception makes DAOs prone to bureaucracy. Unaligned community members adversely affect early-stage product decisions, while the chance of getting forked due to built-in composability is high.

Centralization at the beginning makes it easier to coordinate and iterate product decisions to arrive at a product-market fit. Once the product-market fit is achieved, cultivating a community around the product through incentives and enthusiasm sets the foundation for a vibrant community.

As the project achieves product-market fit and builds a robust community, the project can opt for decentralization through widespread token distribution. Optimum token distribution will grow the community and make the protocol community-owned and operated.

Radicle DAO

Radicle is a decentralized code collaboration network built on open protocols.

The launch of RAD, the native governance token of the network, was a crucial step towards the technical and economic decentralization of Radicle. Initially, core development for the Radicle project was coordinated by Monadic, which was dissolved and supported by the Radicle Foundation to further decentralize Radicle.

To aid Radicle’s mission of building free and open-source networks that are self-sustaining and community-run, the Radicle Foundation develops the social infrastructure necessary to support healthy and effective community governance. The use of the Radicle Foundation as a real-world entity for Radicle DAO has helped in the progressive decentralization of the DAO.

The proposed decentralization of Radicle DAO includes the transition of decision-making power from the founding team to contributors and users, and sustained governance participation without dependence on early members and investors. All project developments are to be coordinated and funded by Radicle DAO, while limiting the Radicle Foundation’s capacity to a support system for off-chain activities as a real-world entity. These changes further decentralize the DAO, making it technically, politically, and socially resilient.

In Radicle DAO’s path to decentralization, they have designed and implemented a strategy for distributing non-financialized governing power through NFTs in Otterspace Badges.

Nouns

Nouns is an NFT project, where each Noun is trustlessly auctioned every 24 hours.

The winner of the auction receives the Noun (NFT), and the bid ETH is deposited into the Nouns Treasury. Nouns were initially founded by ten Nounders. Once Nouns achieved product-market fit, they decided to have a real-world entity for the DAO in the form of the Nouns Foundation, to address potential legal and regulatory concerns. Along with the IP transfer agreement from the Nounders to the Nouns Foundation, the proposal veto power was also transferred to the Nouns Foundation.

This proposal to veto rights is a solution to the problem of 51% attacks on Nouns DAO treasury. Until an alternate mechanism is adopted to thwart governance attacks, the veto power will be used by the Nouns Foundation to veto proposals that aim to withdraw from the treasury for personal gains, bribe voters, make changes to the auctions to acquire a voting majority, and upgrade critical smart contracts. Although veto power is not absolute decentralization, it’s a simple design that works well for Nouns DAO.

Layer 2 Decentralization

While Ethereum transaction fees surged due to increasing demand, Layer 2 roll-ups such as Optimism and Arbitrum served as a solution for cheaper and faster transactions.

Recently, Layer 2 networks have also witnessed more transaction volumethan Ethereum’s main network. While Layer 2s are driving the adoption and accessibility of blockchains, they pose centralization risks in the form of upgrade keys. For example, Optimism’s security is managed by upgrade keyswith multi-sig execution.

While decentralization can be spanned out to architectural, political, and social, as stated by Vitalik, achieving technical or architectural decentralization is imperative for Layer 2 protocols that face centralization risks, as writing complex, bug-free code is incredibly difficult and poses the single biggest threat to L2 protocols.

Optimism’s technical decentralization focuses on creating multi-client fault proofs and multiple-proof schemes. Although the most ideal form of decentralization is creating fault proofs, which could take time, Optimism is working towards short-term decentralization milestones such as authorizing a security council at the direction of Optimism Governance to manage system upgrades.

The Arbitrum airdrop launched the next phase of decentralization for Arbitrum, with the launch of the Arbitrum Foundation and DAO governance for Arbitrum One and Arbitrum Nova. 12.75% of $ARB has been distributed to the community through an airdrop, transitioning the governance to the community.

An important aspect of L2 decentralization is upgradeability, which will be put in the hands of the DAO through the airdrop. On top of launching the DAO, The Arbitrum Foundation also established the Arbitrum Security Council, a 12-member multi-sig of highly regarded community representatives designed to be able to act quickly in the event of a security vulnerability and ensure the security of the chain.

Sufficient Decentralization

The concept of sufficient decentralization was introduced by the SEC, which states if a protocol is not sufficiently decentralized, the value of the token can be derived from the efforts of a centralized team/person. And if the protocol is sufficiently decentralized, then the value of the token can be derived from unidentified, coordinated groups.

While sufficient decentralization is an opaque term, which can be achieved in regulatory terms, achieving sufficient decentralization in its real meaning is a harder task. With the right frameworks, iterations, and regulatory approach, protocols can increase the degree of decentralization, but certain tasks like off-chain activities remain a serious challenge for decentralization. Sufficient Decentralization, authored by Marc Boiron, lays out a playbook on how to efficiently decentralize off-chain activities.

Here are some takeaways from the piece to decentralize off-chain activities:

• For protocol development, open-source code and public development should be provided, and grants and bounties can be offered to incentivize community members to contribute to the protocol.

• The application, evaluation, and funding of initiatives should be made public to ensure transparency.

• Business development is difficult to decentralize due to personal relationships, but it can be split across various efforts to limit information acquired by any one person.

• Community approval for deals can help mitigate risks, or business developers can be transparent with the community.

• Growth and marketing are the easiest activities to decentralize by allowing integration with other protocols, which can attract a wide range of users.

• Composability is a key factor in the decentralization of growth and marketing activities.

Closing Thoughts

As we embark on the journey toward decentralization, it’s essential to consider the trade-offs and benefits that come along with it.

While frameworks, playbooks, definitions, and best practices have been established, achieving complete decentralization remains an ongoing and iterative process. The degree of decentralization can vary significantly across different DAOs, and a one-size-fits-all approach is not suitable.

Progressive decentralization has proven to be a time-tested approach, with several projects adopting it as a path toward decentralization. While the “code is law” approach may not always be pragmatic, realizing that trust can be minimized but not fully replaced can help protocols achieve their decentralization goals.

Striking a balance between on-chain and off-chain governance, rather than solely depending on on-chain governance, could prove to be resilient and robust. Let’s embrace decentralization while being mindful of the challenges it poses and work towards finding the most optimal path toward it.