What is the most important thing that happened in Ethereum in 2021, and why?

In the past 12 months, the most important development in crypto has been the emergence of DAOs and the developments they are making in decentralized governance. Decentralized autonomous organizations (DAOs) typically have a governance token/unit that allows token holders to vote on the strategic actions of the organization. The tokens also allow members of the DAO to compensate each other for contributions to an agreed-upon mission. Some DAOs buy land, others bid on artifacts, price carbon, or reshape politics. Decentralized coordination at the scale of DAOs has not been done before in human history. We are watching a new form of governance being developed, and as DAOs collide with traditional organizations we are witnessing the reshaping of our world. If DAOs are not sufficiently decentralized they risk finding themselves becoming centralized as they try to compete with traditional entities. As DAOs brush against the traditional ecosystem, many will adopt traditional means of coordination as they try to compete with traditional entities. Since decentralized organizations have not been “battle” tested, the ability for DAOs to remain uncorrupted is unknown. DAOs could be nudged towards a centralized entity's motives due to a lack of token holder participation, or by individuals sponsored by centralized entities outworking unsponsored individuals, bribery is also a potential attack vector. As the ecosystem expands, it will have to address these questions or risk losing to traditional entities.

There are three main areas that DAOs need to focus on as they continue to scale and brush against the traditional world. They must:

1. Improve the DAO onboarding & benefits experience
2. Increase token holder participation
3. Create alternatives to Discord

Improve the DAO onboarding & benefits experience

The benefit of working at a traditional company is that business processes have been refined over decades. Human resources in 1990 and human resources in 2020 are fairly similar. HR at DAOs will be radically different, at a traditional company a person completes onboarding, in a DAO the individual’s journey looks closer to a video game. In games, an individual's enthusiasm determines the outcome. Some grind the intro levels while others jump from one main event to the next. DAOs need to accommodate and entice both types of people, those who read all an organization’s documentation and those who jump in headfirst. Right now DAOs rely on the enthusiasm of new members but this won’t scale to the next billion people in web3/crypto. In nations where healthcare is not guaranteed by the state, DAOs will need to step in to provide benefits, preferably in a decentralized manner. The closest entity the ecosystem has may be Opolis but it is not a perfect entity. Currently, most DAOs have a similar onboarding process. An individual hears about the DAO through word of mouth or social media. Then the individual lurks on a discord server, eventually deciding to join some kind of intro call after reading an introductory medium post of some kind. The individual then completes some kind of initial starting “quest”. What comes next is unknown, maybe a member of the DAO reaches out to the individual or maybe a member of the DAO doesn’t. The onboarding process should mirror that of an RPG video game, engaging, easy, and offering clear progression steps.

Increase token holder participation

Voter participation needs to be increased so that centralized entities cannot exert influence over DAOs and ensure that DAOs are correctly able to assess the true thoughts of token holders. If nation-states or BlackRock decided to begin accumulating tokens for a particular project, to maintain decentralization would the appropriate response be to fork the project? Doing so would cause institutional capital in crypto to dry up. If the crypto ecosystem wants institutional capital it must figure out how to progress beyond simple token votes. In such systems whales dominate, causing a lack of enthusiasm from smaller token holders. Once the “little” guy believes that their vote has no power, turnout drops and all we have succeeded in doing is recreating the current political and economic system with move hoops. Multiple voting types should also be explored such as quadratic voting.

“Quadratic voting is defined as collective decision-making procedure that involves individuals allocating votes to express the degree of their preferences, rather than just the direction of their preferences. Quadratic voting works by allowing users to "pay" for additional votes on a given matter to express their support for given issues more strongly, resulting in voting outcomes that are aligned with the highest willingness to pay outcome, rather than just the outcome preferred by the majority regardless of the intensity of individual preferences.”

- Lalley, Steven; Weyl, E. Glen

Individuals with large financial stakes in a DAO’s ecosystem should not exert undue influence over those with a smaller stake. voter participation may be incentivized through penalties for not participating in votes. To counteract these issues, failure to participate in votes may need to be penalized through slashing voting power, fees, or some other kind of mechanism. This creates a scenario where there are real consequences for not voting. Much like Australia which penalizes its citizens for not participating in elections, DAOs should explore the possibility of penalizing token holders for not engaging in governance.

Create alternatives to Discord

Discord has risen to prominence as the de facto communication mechanism for DAOs in the crypto ecosystem. As DAOs experiment and change the nature of governance, introducing a large point of centralization with Discord servers seems contrary to the mission/ethos of DAOs. Discord servers are regularly hacked by sophisticated users and armies of bots exist to compromise servers. A decentralized communications platform needs to be created so that DAO members have a platform to communicate on. Discord has already shown that in times of extreme duress, they can and will shut down servers. If a server was to be shut down during a time where a DAO was competing with a traditional entity, this would cripple the DAO. Allowing the entire DAO ecosystem to grow and continue to use Discord would be a critical misstep.

Conclusion

The explosion of DAO activity has shown the need for decentralized “plumbing”. Decentralized government, web services, onboarding, and payroll are all needed to onboard the next batch of builders to the web3/crypto ecosystem. As DAOs compete with traditional institutions, they will need to balance a need to remain competitive with the need to remain decentralized. This assumes that decentralized decision-making remains slower than traditional top-down decision-making. If DAOs can develop the “plumbing” necessary to scale and grow, they will outcompete traditional corporations. If not, we risk losing the essence of the crypto ecosystem as we compete with traditional players.

Sources:

1. https://vitalik.ca/general/2017/12/17/voting.html
2. https://vitalik.ca/general/2018/03/28/plutocracy.html
3. https://vitalik.ca/general/2019/12/07/quadratic.html
4. https://medium.com/1kxnetwork/organization-legos-the-state-of-dao-tooling-866b6879e93e
5. https://vitalik.ca/general/2021/08/16/voting3.html
6. https://blog.aragon.org/what-is-it-like-to-join-a-dao/
7. https://decrypt.co/86359/constitutiondao-hits-30m-ethereum-raised-one-day-before-sothebys-auction
8. https://www.bbc.com/news/world-asia-23810381

Let me know what your thoughts are! This was written as a response to a question asked as part of the eth foundation's hunt for a research intern. In the future, I'd like to write/think more about crypto so let me know if you found anything particularly interesting.