Centralized Firms and DAOs

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Centralized firms are often compared to mini-dictatorships. While not perfect, their corporate model effectively reduces transaction costs, a concept proposed by Nobel Laureate economist Ronald Coase in 1937.

Are DAOs Centralized?

DAOs can be seen as both centralized and decentralized. They typically have figureheads or core leaders, yet these leaders cannot unilaterally enforce proposals as seen in traditional companies.

Example: Aave Horizon Announcement

Last Thursday, Aave Labs unveiled “Horizon,” a permissioned version of the Aave v3 codebase for qualified institutions to utilize tokenized money market funds. Despite plans to share revenue with the DAO at a decreasing rate, the introduction of a new token faced massive backlash from DAO members.

Marc Zeller, founder of Aave-chan Initiative (ACI), voiced concerns that Aave Labs should distribute value directly to AAVE tokenholders instead of introducing a new token that Aave Labs would predominantly control. This backlash led Aave Labs to cancel the Horizon token launch, although the product itself would still proceed.

Similarities with Uniswap

Aave isn’t the only DAO facing similar challenges. Uniswap Labs’ announcement of its Unichain L2 last year left the Uniswap DAO feeling excluded from crucial decision-making processes. Despite moving forward with Unichain, its underwhelming performance initiated discussions about using DAO treasury funds to promote it, raising ethical concerns.

Both Aave and Uniswap’s centralized leadership teams exhibit agility typically seen in startups. However, the rigid structures of DAO governance often hinder rapid decision-making processes. To progress, DAOs must follow a cumbersome series of steps, leading to increased transaction costs.

Conclusion

This raises essential questions: Are DAOs truly effective, and do their ethical benefits outweigh the increased transaction costs?