Arbitrum's DAO Governance is the Next Step for Democracy- but its Sorely Lacking Some Key Elements

The American Political Scientist Francis Fukuyama posited in his famous book ‘The End of History’ that the world had reached the peak of its socio-economic and political development in the form of democratic capitalism.

The thesis has been criticised multiple times, and its efficacy has been called into question as well. But there is at least some prima facie truth to his idea that humanity continually develops towards systems that enable greater freedoms.

Nowhere is this more evident than in the financial and internet sector, where blockchain technology is revolutionising what roles we as consumers can play.

Under the paradigm of Web2, while we as consumers used products, we were never really in charge of it, nor did we own what we used, especially if they were offered on a Software-As-A-Service basis.

But now, with the Web3 world, that promise seems to be coming to fruition.

Web3 services like Audible offer much the same as their Web2 counterparts, but offer creators and consumers a far larger stake, effectively cutting out the middleman.

And now, Arbitrum, the leading scalability solution for Ethereum-based Dapps, has announced that it will be switching over to DAO governance. The airdrop for Arbitrum’s governance tokens will take place later this week- but while many have been asking what this means for Arbitrum and the Web3 world in general, there is a more fundamental question that should be asked: Is Arbitrum truly ready for DAO governance, and would DAO governance truly be democratic?

Democracy, DAOs, and decentralisation
What do we think of when we consider a country or an organisation democratic? For most people, this would be the presence of elections and the ability to vote for or against policies.

DAOs, on a fundamental level, provide this. A DAO is empowered to make decisions and fulfil the role of governance, without the need for a central figure. Instead, tokenholders vote on proposals placed before them, and enact the outcome of such a vote.

In this way, DAOs are analogous to direct democracy- where citizens vote directly on policies that are placed before them. The theoretical underpinning of this type of governance is that citizens are concerned with policies that will affect them, and that they therefore take an active interest in such policies, voicing opposition or support according to their views and interests.

Indeed, this would suggest that DAOs are pushing the forefront of what ‘democracy’ and ‘democratic organisations’ mean. Even the most democratic countries in the world today practise indirect democracy, where citizens do not vote on policies, but instead delegate that power to representatives, who then vote on policies on their behalf.

In an indirect democracy, since citizens often do not have the power to vote on specific policies, power is concentrated in their representatives, who, barring extreme circumstances, will be the only ones who have a say in which policies pass and which do not.

The DAO theoretically does away with such centralisation, and allows for decentralised governance, where ‘the people’ have control of the outcome of their future, or in this case, their organisation’s future.

Arbitrum’s DAO, however, is slightly different- instead of token holders directly voting on policy, token holders will delegate voting power to individuals that they view as effective stewards of their values. These delegates will then be the ones who vote on proposals, with the power to control decisions from how the blockchain is upgraded, to how revenue is used- effectively the fiscal policy of Arbitrum.

Certainly, this shows a certain enlightenment in its design- direct democracy is a bad idea for many reasons. Citizens may not always be engaged enough to make informed decisions, or only make short-sighted decisions. In large organisations, ensuring that everyone is on the same page, especially in terms of having all the facts, is not always an easy feat.

An indirect democracy, as Arbitrum’s DAO will be, may well be more suitable to allow those who are more involved and better informed to have a greater say in the blockchain’s future and resource allocation.

The electoral fallacy
But while democratic structures often include elections, almost any political scientist will reject the idea that a country is democratic just because it has elections- this is known as the electoral fallacy.

The quality of elections, the procedures and due processes, and the checks and balances that exist in the system are also important in determining if a country is democratic.

North Korea holds elections- albeit with only a single party and a single candidate each time. Yet few of us would consider it democratic.

The same checklists should be applied to a DAO- these organisations may allow their users to make major decisions by voting. But we should also examine if the Arbitrum community is ready to shoulder that responsibility.

Even democratic systems often have some unelected elements- often judges and central banks that are responsible for taking decision-making power away from the people.

These unelected institutions act as a check and balance against the popular vote.

For the uninitiated, this may seem like a strange concept- is not the point of democracy to ensure that the will of the people is respected? Why then would we reserve certain aspects of policy to the purview of unelected institutions, that the majority of people will not have a say in?

But we should also remember that an angry mob crying for blood does not a democracy make.

Unelected institutions are present in order to prevent the worst excesses that democracies make possible, and stop the electorate from turning small mistakes into system-wide catastrophes.

These unelected institutions exist to turn electoral systems from a tyranny of the majority into a democracy. It is ironically the lack of elections, rather than the elections themselves, that defines democracy from majoritarian rule. While elections may be a necessary condition for democracy, they are not, in themselves, a sufficient condition to define a system of government as a democracy. A democracy must include checks and balances against pure majoritarian rule as well.

Yet, these institutions are clearly absent in Arbitrum’s DAO- decisions made by the DAO are absolute, and decisions made by the DAO are self-executing.

What this means is that once votes are cast, there is little that can be done to stop it from going through. There are no veto players, and not even the founders or the security council can stop it.

This may seem like an ideal situation at first- it means that the voice of the people will be heard loud and clear.

But in times of division, when demagogues preach the politics of hatred, will this ‘democracy’ still survive? Will Arbitrum’s DAO survive the populism that has become so common in Western democracy, without unelected institutions that keep these forces in check?

Perhaps not. History records the fall of republics as much as it does empires- Rome had the Gracchi brothers and Ceasar, and the Weimar Republic had the Nazis. The threat of populism and mob rule must not be underestimated. No less than Thomas Jefferson argued as much, arguing in The Federalist Papers that “In all very numerous assemblies, of whatever characters composed, passion never fails to wrest the sceptre from reason.”.

The power of the people must be felt- but it must never become too strong as to render it unstoppable.

Towards a democratic DAO
In order for the DAO to become more democratic, it is therefore necessary to make it less majoritarian.

And one way to do this is to allow the security council, or another institution, to intervene on proposals, either halting a vote or vetoing a proposal if they believe that the community is not ready for such a vote to proceed or if the proposal is not in the interests of the community.

Of course, critics may argue that this would come with the risk of abuse- if the security council or any other institution has the power to stop a vote from proceeding or to veto popular decisions, will they not use this trust to centralise power onto themselves, and therefore defeat the point of a DAO?

Perhaps. But this is why we must also question if communities and countries are ready for democracy- will the security council, if granted this power, use it responsibly, to send a message that a proposal should be given some serious reconsideration? Or will it devolve into a tool akin to the filibuster, used merely to support momentary political gains?

Ultimately, the answer to that question must be found in the culture of the community in question- in this case, within the Arbitrum community itself.

Only time will tell if the Arbitrum DAO collapses under the lofty ideals that it holds- but if the design of the Arbitrum DAO is anything to go by, perhaps it is time to reexamine the theoretical underpinnings of a DAO and how it can be better modified to better reflect democratic values.

Democracy has developed a great deal since its inception in Athens more than 2000 years ago- from direct democracy, to indirect democracy, and then now to DAOs- but we must also heed the lessons of the past if we are to progress.

They say that those who do not learn from history are doomed to repeat it- and right now, Arbitrum could be making a fundamental error in designing a DAO that is not really democratic, but simply majoritarian.