Blockchain developer Martin Krung has proposed replacing decentralized autonomous organizations (DAOs) with what he calls a decentralized hierarchical organizations (DHO). Specifically, he proposes elected leaders and hierarchical decision-making as a compromise between pure decentralization or centralization.
Krung acknowledges that DHOs are more appropriate for general organizations like hobbyist communities rather than financial applications like decentralized exchanges (DEX). Regulators like the Financial Action Task Force (FATF) and the Securities and Exchange Commission (SEC) will most likely claim jurisdiction over financial platforms, forcing them to choose between complying with regulations or becoming fully decentralized.
Krung admitted, “for money protocols, hierarchies are difficult because many can’t be compliant, so total decentralization is the only way.”
DAOs not working. Many are way too unstructured.
What we need is on-chain org with clear hierarchies, clear rules and accountability for every member.
DHO = Decentralized Hierarchical Organisation
In ancient times kings have been elected, not born.
Anyone working on this?
— Martin Krung 🦇🔊 (@martinkrung) August 30, 2023
Working on decentralized hierarchical organizations.
ShapeShift DAO: Would a DHO have been a better choice?
Indeed, many financial platforms don’t comply with regulations. For example, one of the oldest crypto exchanges, Erik Voorhees’ ShapeShift, chose to become a DAO during the summer of 2021 after financial regulators forced Voorhees to implement know-your-customer (KYC) and anti-money laundering (AML) checks.
Ultimately, ShapeShift decided to avoid many KYC/AML requests under the guise of allowing its FOX governance token holders to decentralize the platform.
However, in practice, a dwindling number of people care about governing ShapeShift. The FOX token has lost 98% of its value since April 5, 2021.
Voorhees was once a proponent of Bitcoin, calling it the opening move toward “an open, immutable financial system” that would be difficult for any government to control. Nowadays, he spends most of his time promoting a ShapeShift competitor, ThorChain. He recently recommended an explanation of ThorChain that concluded, “ThorChain loans provide free money. Free Money. F*cking fantastic. Go go ThorChain.”
Perhaps a DHO would have been a better choice than a DAO for ShapeShift.
Community chimes in on DHOs
People began to suggest various types of decentralized hierarchical systems (DHS). For example, some called for decentralized autonomous corporations that would allow eligible voters to periodically elect senior officials. Each position’s duties and authorities could be coded.
Others, meanwhile, seemed skeptical that any system allowing elected officials could function well. Mirroring their cynicism around real-world “democratic” governments, they doubt the long-term viability of a DHS.
For his part, Krung seemed to think some issues could be solved with checks and balances, like a Kleros-like decentralized arbitration system. Nimble adjustments to the code could simply kick someone out of the organization. The organization could also make voting anonymous to protect voters in case of a controversial topic.
Others suggested “reputational weighted voting,” in which voters would have more clout if they had a higher reputation score. It could also provide an alternative to favoring wealthier voters who can afford more governance tokens. Delegations have also become an issue in blockchain governance, whereby token holders convince community members to delegate their votes to an ally, which has become an issue for UniSwap and many other DAOs.
In summary, Krung has suggested a new type of blockchain community that’s neither decentralized nor centralized. His so-called DHOs could solve some of the issues with DAOs struggling with autonomy. Any organization needs a way to make decisions; sometimes, those decisions must occur quickly. Naturally, the idea of DHOs was not universally popular, with plenty of comments in support and contention.
