In this week's episode of Flywheel, we had on Rune Christensen, the founder of MakerDAO. He joined to discuss SubDAOs, a new type of crypto-enabled social entity springing forth to help grow DAI.
At this point Rune's DAO experiences have left deep scars on his idealogical beliefs of how society can be run. On the one hand, he thinks that crypto can bring about a better future and help align interests across cultures and peoples. On the other, he's seen how the worst human traits are magnified when billions of dollars are involved.
His thoughts on crypto were shaped by the politics at MakerDAO, which have been extremely messy and public in the past. Rune's Endgame path has not been without criticism. When Rune proposed it, the community split into three and those who believed in full decentralization left to create and support other trustless debt issuing protocols.
DAO's are hard. They are extremely political and viewpoints become entrenched as time goes on. This is why Rune has turned to subDAOs as the answer.
The Ideal DAO and Its Challenges
At its core, a DAO represents a new form of human organization, governed by blockchain-based smart contracts rather than traditional hierarchical structures. The ideal DAO tries to ensure that every token holder, regardless of the number of tokens they hold, has the ability to influence the DAO's direction. Rune emphasized that token holders should be empowered to identify detrimental behavior within the organization and take corrective action.
However, this vision has been marred by challenges, conflict of interest is ripe for abuse. Contributors might vote for their own benefits or act against the DAO's best interests. As a solution, Rune suggests implementing stringent rules and protocols to evaluate actions, which should be based on facts and not influenced by outside influencers. A protocol needs to have clear rules for every potential outcome to prevent a tyranny of the majority. The goal is to emulate real-world investor protections and fiduciary duties within the digital realm of DAOs.
The Power Dynamics within DAOs
Rune wants to create a spectrum, where one end has actors with substantial formal power but limited day-to-day influence, while the opposite end is dominated by those who control daily operations but lack significant formal power. Striking a balance between these two extremes is crucial to prevent power struggles and ensure the organization's smooth functioning.
He further highlights that the success of current DAOs often hinges on a tight-knit group or "cliques" that holds significant influence. Without these groups, many DAOs may struggle to sustain themselves. This centralization of power and influence runs counter to the core tenets of decentralization, raising concerns about the long-term viability and authenticity of such DAOs.
Rune envisions a model where the community is central, and contributors are task-oriented rather than political entities. He hopes to move away from the idea of "elite" or "main" characters in DAOs, given the potential for power abuse. To ensure proper checks and balances, he suggests alignment engineering, where certain foundational rules can't be violated regardless of token majority. For example, paid contributors should abstain from voting on decisions related to their compensation. Violations could lead to being labeled as "misaligned" or dangerous to the DAO's system.
With SubDAO's Rune wants to try and fix the mistakes he made with Maker, namely limiting the amount of control contributors can exert over the new protocols. He said several times on the podcast that contributors are not the DAO and should have zero control over it. DAO's are a money spring, they can turn on the tap anytime they vote for it and award compensation that enables them to vote for more self-compensation. Rune's SubDAOs are built to remove all controls a contributor/builder might have to influence the project if there is a conflict of interest, even if the contributor is a majority token holder.
Rune uses the metaphor of an immune system to describe the protocols that should be in place to protect the DAO. Such protocols would detect and act against behaviors or entities that might harm the organization.
A Fresh Start
The Maker protocol has ossified into a "boring" protocol at this point Rune told us. It's politics are conservative and the primary mission is to ensure the DAI peg is kept, while positively managing the collateral to provide yield for DSR. Maker can't try out new ponzinomics or take risks that could destabilize DAI.
Dave wrote the following about Maker's plans:
What makes Endgame’s SubDAO effort so interesting is that it is the first time tokens will play an integral part in their existence. To bootstrap each SubDAO, a SubDAO token will be created and farmed to DAI holders who upgrade to NewStable. What tokens do is that they give SubDAOs a way to incentivize activities, and accrual value, and maintain a level of independence from the Parent DAO. To kick off incentives, a recent discord message in SakuraDAO by Rune revealed that SubDAOs will receive 3333 MKR per year as an initial subsidy from Maker Core to bootstrap and incentivize activities. With nearly $5 million in value to be distributed to each DAO, this kind of support is unprecedented yet this does not come without its potential drawbacks.
As stated earlier, SubDAOs must be held accountable for their missions and actions. Recently, a maker-subsidized core unit DECO has not lived up to expectations and is effectively rugged from their commitments. Their last update was 11 months ago and it seems like the $2.5 million of MKR and DAI they have received for their contributions have effectively gone to waste. For SubDAOs not to stray off course, there should be a line of communication for community stakeholders (e.g. quarterly community call) and a system to measure progress whether that may be milestones.
SubDAOs are a way for Rune and the current Maker community to experiment with new ideas that could either positively impact DAI growth, or go to zero and fail. Anything is possible in these SubDAOs, they are a way for the protocol to expand without hurting its core operations. Maker has already seen success with Spark, an Aave fork enabling lending. DeFi Dave has also covered in depth SakuraDAO, which was how we were introduced to Rune for this episode.
New SubDAOs can set their own rules, escaping the politics of the CoreDAO. New ideas are open to flourish. Builders also get to try new ideas that potentially never would be voted for by the Core DAO. Tokens have more upside, and some builders don't want cash payments. It's tradeoffs that determine who works for what DAO, core or sub.
For people like Rune, who is core to the identity of Maker, leaving the stablecoin giant for a second time is not possible. He retains too much voting power and there isn't enough liquidity to absorb his token sales. SubDAOs give Rune a new lease on building, while staying within the MakerDAO ecosystem. He can continue to experiment and build, while not having to completely segregate himself from his greatest success.
Will subDAOs work? Yes.
Spark Protocol, the first subDAO spun off by Maker, has already amassed over 1bn TVL as people borrow agains their assets for DAI. Rune is onto a new way of organizational structure that might be the defining trait of DAO's going forward.
