#27 - Integrating Bureaucratic Principles into Decentralized Governance

A Conceptual Framework for Advancing DAO Governance with Bureaucratic Organizations

Oct 16, 2023

Stanford Blockchain Review
Volume 3, Article No. 7

📚 Author: Poramin Insom – Stanford University
🌟 Technical Prerequisite: Low

*Image Source: https://medium.com/nexus-mutual/dao-governance-a-pragmatic-approach-27d529ad0819*

Introduction

Decentralized Autonomous Organizations (DAOs) represent one of the most fascinating innovations in collective organization enabled by blockchain technology. As interest and adoption of DAOs grow, these leaderless digital communities need to continuously prove their effectiveness and sustainability.

While DAOs are decentralized by design, there may be valuable lessons to learn from traditional bureaucratic governance models known for stability, efficiency, and accountability. In this article, we explore a theoretical and conceptual framework for how integrating certain bureaucratic principles into DAO governance could address some of the challenges facing DAOs today.

The Anatomy of DAOs

DAOs, or Decentralized Autonomous Organizations, allow groups to self-organize and make decisions collectively through smart contracts on the blockchain. DAOs have no central leadership - governance and operations are managed through pre-coded rules enforced on the blockchain.

In order to facilitate governance operations, DAOs usually issue a token, in which the protocol sells tokens in exchange for governance rights for users. Oftentimes, these tokens are also able to be exchanged on secondary markets and exchanges [1]. The Uniswap protocol, for example, has a UNI token which allows its holders to be able to vote on governance decisions.

*DAO Voting Procedure. Source: https://cointelegraph.com/learn/types-of-daos*

Typically, during the governance process, voting delegates will propose ideas on internal governance forums or tools like Snapshot, and will proceed with rounds of temperature checks and requests for comments with other voting members. Once the proposal has been finalized, this will then proceed to an on-chain vote, during which all DAO members holding the governance token are able to express their preferences [2].

Although there are a large variety of DAOs across the blockchain industry, ranging from protocol DAOs such as MakerDAO, to NFT DAOs such as NounsDAO, to grants DAOs such as GitcoinDAO, there are several questions common across many different decentralized governance protocols [1].

One of the main responsibilities of DAOs is to ensure collective asset management. As a DAO grows in terms of users and treasury resources, whether that is through token sales, or through successful operation of the underlying protocol, the DAO needs to manage the treasury capital much like a company to be successful in the long run. Furthermore, because usually a DAO’s assets on its balance sheet are often composed of risky assets such as tokens, NFTs, and other digital assets, a DAO needs to implement risk management operations to ensure that it can stay solvent and operational. A third governance area typically found in DAOs is in asset curation, acting as art and culture curators for its digital assets, such as in the case of PleasrDAO. Essentially, DAO members will vote for whether new items should be added to its collection, or existing assets should be removed [3].

Despite their growing importance in decision-making in the blockchain space, DAOs today face challenges like decision-making gridlocks, lack of accountability, and difficulties handling conflicts. Thus, exploring how principles of traditional bureaucratic governance can allow us to better understand how to make DAOs more efficient and effective as decentralized governing bodies, both in the blockchain space and beyond.

An Overview of Weberian Bureaucracy Theory

To understand how to augment DAOs with principles of bureaucracy, we need to first understand the defining characteristics of bureaucracy. In this aspect, German sociologist Max Weber was one of the first to formalize the study of bureaucracy and define its main characteristics [4].

Within Weber’s ideal bureaucracy, there are clear hierarchical structures, specialized roles, established procedures, and clear lines of control and command. This allows bureaucracies to carry out complex tasks efficiently.

Some of the key principles of bureaucratic governance include [5]:

Hierarchy - Clear chains of command with higher levels overseeing and directing lower levels.
Division of labor - Activities are divided into specialized, routine tasks assigned to different positions.
Formal rules and procedures - Operations follow pre-defined, documented protocols.
Merit-based hiring and promotion - Selection and advancement are based on technical qualifications judged through standardized criteria.
Impersonality - Applying rules uniformly without bias or favoritism.
Regulatory - All related decisions and the capabilities of authorities are required to comply with regulations.

Today, we see bureaucratic structures prevalent in coordinating organization in large-scale entities, including governments, militaries, and multi-national corporations, through its ability to establish rigorous and orderly systems of operation.

As DAOs grow in both size and complexity, integrating these principles of bureaucratic governance and organization may allow DAOs to effectively coordinate larger numbers of people and larger amounts of resources. However, bureaucracies also have downsides like rigidity, red tape, and difficulty adapting to change. Thus, we need to carefully consider which elements of bureaucratic operation we are able to integrate into processes of decentralized governance.

Blending Bureaucracy into DAOs

While integrating bureaucratic principles into decentralized organizations may seem counterintuitive, a closer examination reveals opportunities for targeted adaptation. Through careful implementation, certain bureaucratic elements could enhance DAO governance and operations. While the below principles are not intended to be exhaustive, they may represent a starting point for exploration as to how DAOs can integrate principles of bureaucratic governance to increase operational efficiency [6].

Implementing Merit-Based Reputation Systems

Bureaucratic organizations often use merit-based systems for advancement. Similarly, DAOs could develop more nuanced reputation systems to reward those who create value.

For instance, reputation could be earned through long-term participation, technical contributions, or wise governance proposals. Higher reputation could grant increased voting influence. This incentivizes committed members while reducing apathy and plutocratic governance.

Formalizing Conflict Resolution Procedures

Conflicts frequently paralyze DAOs lacking structured resolution frameworks. Introducing graduated conflict resolution processes could smooth gridlocks.

DAOs offer a novel approach to accountability, characterized by transparency and an immutable record of actions on the blockchain. Within a conflict resolution procedure, on-chain actions and records may be used as evidence for arbitration.

Initially disputes could enter structured mediation between conflicting parties. If unresolved, a community vote could follow. For more serious conflicts, cryptographically secured arbitrations could provide final recourse.

This multi-stage framework would maintain community involvement while introducing procedural formality. It resembles bureaucratic structures balancing hierarchy with shared governance.

Balancing Structure and Decentralization

Integrating the above elements risks over-bureaucratizing DAO governance. Therefore, decentralization should remain fundamental. Bureaucracy could provide scaffolds to support DAO scaling while avoiding rigid centralization antithetical to DAO principles.

For example, working groups could form organically based on needs identified by the community instead of being mandated top-down. Merit-based reputation should not fully override the equality of members. Conflict resolution procedures could be ratified and amended by the community.

By thoughtfully balancing bureaucratic integration with decentralized principles, DAOs can evolve governance that draws on the best of both paradigms. This synthesis promises to unlock greater scalability and versatility for DAOs while retaining their core ethos.

Open Questions and Social Implications of DAOs

Blending bureaucratic principles with decentralized organizations ventures into unexplored territory. It will require experimentation and will likely produce unexpected challenges.

Critically, adapting bureaucratic practices cannot override the fundamental decentralization and transparency of DAOs. Imposing rigid, top-down structures antithetical to DAO ethos would be counterproductive. The objective should be judiciously supplementing DAO governance, not displacing it.

Close examination is needed around legal recognition of integrated DAOs. Regulators may show greater willingness to acknowledge DAOs exhibiting characteristics of mature governance through implementing recognizable forms of bureaucratic governance. But questions around enforcing contracts and resolving disputes will still prove challenging, as issues such as dispute resolution and contract enforcement are still relatively unexplored legal areas.

More broadly, the integration of bureaucratic principles into DAO governance has several potential philosophical and societal implications. This includes both a theoretical discussion in organizational theory of how organizational forms evolve and adapt to new technological innovations such as the blockchain, as well as practical applications in integrating blockchain applications into existing bureaucratic structures such as public administration and large-scale corporate governance.

DAOs, with their decentralized nature, pose fundamental questions about how we organize and govern collective activities. By investigating how bureaucratic principles can be applied to DAOs, we might contribute to a wider conversation about the future of governance in a digital, decentralized world.

The expanding realm of DAOs offers an ideal testing ground for pioneering new organizational systems, which can shed light on how principles of traditional governance can be reimagined in the context of digital communities, virtual worlds, and metaverses. It could provide valuable insights into how we can ensure accountability, equity, and democratic participation in these emerging digital landscapes.

Note: This work was originally written as a final research proposal for Stanford University’s CS 352B: Blockchain Governance class. This following article has been adapted with permission from the author.

About the Author

Poramin is pursuing his master's at Stanford, focusing on cyber policy and security. He co-founded Firo, a privacy-focused cryptocurrency, and Satang, the oldest digital asset exchange regulated under the Ministry of Finance, Thailand. He received a bachelor’s degree in computer engineering magna cum laude from the King Mongkut’s Institute of Technology Ladkrabang. He and his team from Firo created the platform using blockchain-based technology for one of the largest primary elections for the Democrat Party in Thailand. Building on that event, he foresees the importance of the policy side for technological advancement.