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DAO Projects At Risk After Digix's Latest Update

DAO Projects At Risk After Digix Latest Update

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Some of the most highly ambitious applications of blockchain are DAO projects – self-governing communities where members can both submit and vote on proposals.

The basic framework for Decentralised Autonomous Organisations (DAO) uses self-enforcing smart contracts which can be used as a decentralized ledger, but can also enable communities to reach consensus.

Ideologically ambitious, DAO’s have had a chequered past. Back in 2016, the Ethereum-based crowdfunding project The DAO – which had raised over $150m in capital – was at the center of controversy when a loophole led to something between $50m and $60m being drained illegally frrom the project’s funds.

Since then, DAOs have been sidelined with blockchain development reverting back behind the closed doors of Foundations and centralized companies, meaning that the number of working DAOs are thin on the ground.

Digix’s DAO Project

Digix is a cryptocurrency organization with plans to tokenize gold. Similar to Tether (USDT), the Digix Gold token is a stablecoin: its value is less volatile because it is pegged to a real-world asset.

The Digix Gold token launched last month, but in 2016 Digix released a token which will enable its holders to vote on proposed changes to the DigixDAO (DGD) with voters being reimbursed with a portion of the transaction fees collected from the Ethereum network.

The DGD governance structure is not yet available, and the team has previously said that the priority was to launch the Gold token.

However on Tuesday, the Digix developers announced that they had updated the proposed governance structure for the DigixDAO.

The update will see the creation of two points classes: Quarter points, which reflect contributions towards governance and which, as the name suggests, are determined on a quarterly basis; and Reputation Points, which are rewarded on the basis of how actively a user has contributed in general.

According to the Digix blog, the update will also mean that participating DGD voters will receive reputation points for correct votes. In other words, users will be rewarded for voting with the majority and this will increase cumulatively: the more correct votes, the higher the bonus.

Although exact details, such as what the reward will be and exactly how much will be up for grabs, have yet to be decided, Digix argues that by offering an incentive, DGD community members will be more likely to vote carefully.

“Participants also receive additional reputation points if their voting in the past turns out to be “correct” in the future…In this way, we reward a participant who had made the right decisions in the past, hence incentivizing careful proposal vetting instead of spam voting.”

This is extraordinary. Rewarding people for voting with the majority does not guarantee that the best course of action is determined. Instead of basing decisions on the merits of a proposal, it encourages people to try and second-guess what the rest of the community is more likely to vote for.

There are admittedly few similarities between Digix and Dash: whilst the former is an ERC20 stablecoin, Dash is a Bitcoin-based peer-to-peer cryptocurrency. Whereas Digix has a market cap of $461m, Dash is closer to $3.5bn.

Dash already has an up and running DAO system and it is arguably one of the oldest, having been set up back in August 2015.

Like the proposed DigixDAO, the Dash DAO has also implemented a mechanism to encourage sensible voting but whereas all DGD holders have the right to vote, suffrage is restricted to masternodes in the Dash ecosystem.

Becoming a masternode isn’t easy, as the option is only available to those who hold at least 1,000 Dash tokens, which at current prices comes in at a stake worth $440,000.

Of course, this has its own difficulties: most obviously because it makes the option to vote in Dash the exclusive preserve of the lucky few who were there when Dash was going at a $1 a piece (as well as the exorbitantly wealthy).

However, decision-makers tend to act more rationally when they are personally responsible, and having an interest – albeit a vested one – in the survival and future of the Dash project acts as a guarantee for voters to consider proposals sensibly and carefully.

It was Berkshire Hathaway’s Warren Buffett who coined the phrase “skin in the game” to refer to executives that have a stake in the company and whose personal fortunes are therefore tied to that of the company’s.

Citing Warren Buffet positively might be controversial: he is a public critic of cryptocurrencies and just last week called Bitcoin “rat poison squared”.

That said, ‘the Oracle from Omaha’ isn’t alone.

In his book (also) called Skin in the Game, the Lebanese-American writer Nassim Nicholas Taleb argues that by being directly affected by one’s own decisions not only means people make more considerate choices, it enables them to deeply analyze mistakes, learn what went wrong and ensure a similar error doesn’t happen again.

A Golden Opportunity – Missed.

In the past, idealism has often collapsed because it has failed to fully account for the shortcomings of human nature.

DAOs are fascinating: they propose a workable model for effective community decision-making; they take the corruptible elements out of the system and replace it with technology that is notoriously difficult to fabricate. Members of the community can agree and disagree, but they can’t cheat.

The Dash DAO is not the perfect structure. A high-price threshold makes decision making an exclusive affair for the privileged few, but the stake qualification, or ‘skin in the game’ has fostered an environment for better decision-making and pushed Dash into the top-20 largest cryptocurrencies.

The DigixDAO governance update is disappointing. By rewarding people for voting with the majority DGD leaves itself wide open to poor decision-making, wrong-headed motivations, and the cultivation of a climate built around mindless conformity rather than rational decisions for the continuation of the project.

Members of the community could be punished for making what in hindsight turned out to be the ‘right’ decision. Similarly, a close-vote, such as a 49%-51% split, could wrack the DGD with instability and aggrieved community members.

DAO’s are a fascinating and encouraging use case for blockchain technology. Like most things in the sector, there is still a lot of work, but it would be a shame for DGD to set the DAO project further back by implementing a foolish solution designed for sensible voting.

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