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07.10 Decentralized Autonomous Organizations (DAOs): Sustainable Cooperation through Reputation Based Governance and Smart Consensus?

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Aim of the project

The project has two interrelated aims. The first, descriptive aim consists in mapping, through time, the decisions, actions and outcomes following the foundation, growth, consolidation and eventual decline of selected so-called Decentralized Autonomous Organizations (DAOs). The second aim is to explain how different governance mechanisms, in particular reputation-based governance and consensus voting and the social processes they trigger can account for variations in DAOs’ capacity to sustain value creation.

Theoretical background

The Theory of Governance Traps (Wittek, 2022) is used as a point of departure and extended to the context of Blockchain Governance in DAOs. Several theoretical analyses have pointed to the endogenous downward spirals challenging the viability of DAOs and related organizational forms. For example, some scholars argue that DAOs face the same “paradox of flexibility and structure” that threatens the viability of what has been labeled Fluid Organizations (Schirmacher et al., 2021; Schreyögg & Sydow, 2010). Similarly, analyses of algorithmic decision making and control point to the contested nature of the related practices (Kellogg et al., 2022) and highlight the inherent problems of ambiguity intolerance and pressures on social decision making practices (Herzog, 2021). A governance trap reflects a self-reinforcing process in which an institutional arrangement that is intended to elicit cooperation, also triggers behaviors that indirectly undermine it. An example are performance contingent incentives in organizations, like bonuses. Whereas such incentives are powerful in eliciting the type of behavior that yields the reward, they may also lead to the neglect of other behaviors that are not rewarded, but nevertheless important for overall performance, like not taking excessive risks (Becker & Huselid, 1992). Building on insights from research on goal framing and joint production motivation (Lindenberg & Foss, 2011), this theory argues that independently of its success in getting cooperation going in the short run, any governance structure also bears the seeds for its own decay in the middle and long run. This tendency towards endogenous decay has its roots in the brittle nature of human motivation when it comes to sustaining contributions to collective goods (Lindenberg, 2014). As recent experimental research has shown, maintaining a collective good is more difficult than creating a new one (Gächter et al., 2017). One implication is that governance structures geared towards keeping joint production motivation salient will be more successful in preventing the emergence of governance traps. DAO platforms – the digital infrastructures that potential DAO founders can use to configure their own DAOs, like Colony or Aragon – are well aware of the many potential threats that may lead to the (early) dissolution of a DAO. This is why they equipped their platforms with a series of tools that allow founders to implement and calibrate a variety of institutional safeguards to prevent and mitigate governance failures (Baninemeh et al., 2021). Reputation and consensus systems are two particularly important elements of the broader set of governance instruments used by DAOs (e.g. Rea et al., 2020).

First, most DAOs provide the opportunity to track and reward member contributions to the collective good, like a specific project. Often, such contributions can be made visible through an individual reputation score, and thereby contribute to the reputation of the DAO member. This reputation can be expressed in the DAO’s own token, and may therefore also have monetary value for the member, or it may translate into voting or control power within the DAO. The opportunity to build up reputations therefore can be a powerful incentive for individuals to invest intelligent effort into joint endeavors. But reputation systems come with their own challenges. For example, how to avoid that members who have accumulated high reputation scores in the past also keep contributing in the present? DAOs therefore differ with regard to their approach to reputation based governance. Particularly noteworthy is the solution that the Colony platform has developed. Here, the reputation algorithm is programmed such that a member’s reputation decays through time (e.g. at an hourly rate), in order to incentivize members to keep contributing (Rea et al., 2020).

Second, most DAOs have some form of collective decision making process in place. Such processes are used to vote, for example, on budget allocations for specific projects, or on strategic issues. Also here DAOs differ in the way they design the related consensus and voting procedures. Again, the Colony platform’s approach is pioneering in its reliance on what it calls lazy consensus, i.e. “decentralized decisions without voting”. This principle is based on the idea that voting is only necessary if there is disagreement, thereby avoiding one of the potential shortcomings of participatory decision making. A DAO is sustainable if it succeeds in eliciting and maintaining joint production efforts that create internal and social value - also if circumstances for this joint production deteriorate. Pre-programmed reputation decay and lazy consensus are just two of a vast array of blockchain based governance practices designed to boost the sustainability of DAOs through a radical implementation of organizational practices geared to increase accountability, objectivity and participation. But like any form of algorithmic control (Herzog, 2021; Kellogg et al., 2020), also blockchain governance creates a whole array of new challenges, some of which may actually undermine these very objectives. This project investigates under which conditions DAOs succeed to prevent and mitigate such governance traps.

Research design

A mixed method approach will be used for an in-depth longitudinal comparative study of selected DAOs (for an inventory of DAOs, see for example Digital Ethnography (Pink et al., 2017), and in particular the principles of Participatory Digital Ethnography of Blockchain Governance as outlined by Rennie and colleagues (2022), serve as the point of departure for designing the research strategy for this project. Data collection methods include interviews with different DAO stakeholders (e.g. founders, members, beneficiaries), participant surveys, focus group discussions, and text analysis of communications among DAO members. With DAOs being very recent phenomena that moreover consist to a large part of online interactions, an important task for this project will be the development of a feasible strategy of collecting and analyzing different forms of data. The technique of Ethnographic Arrays (Abramson & Dohan, 2015) will be applied for this purpose. The first phase of the project will consist of inventorizing DAOs that may be suitable cases for this project. This will be followed by approaching representatives of DAOs and exploring opportunities for participant observation as part of a co-creation process (Rennie et al., 2022). The respective DAOs will be followed for a period of three years. Data collection will involve (computer aided) content analysis of online communication and deliberation, as well as personal interviews and focus group discussions.

  • Discipline
    Sociology, Philosophy
  • Location
    University of Groningen, Faculty of Behavioral and Social Sciences, Department of Sociology


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