Recently, there has been a lot of discourse around the idea that highly decentralized DAOs do not work, and DAO governance should start to more closely resemble that of traditional corporations in order to remain competitive. The argument is always similar: highly decentralized governance is inefficient, and traditional corporate governance structures with boards, CEOs and the like evolved over hundreds of years to optimize for the goal of making good decisions and delivering value to shareholders in a changing world. DAO idealists are naive to assume that egalitarian ideals of decentralization can outperform this, when attempts to do this in the traditional corporate sector have had marginal success at best.
This post will argue why this position is often wrong, and offer a different and more detailed perspective about where different kinds of decentralization are important. In particular, I will focus on three types of situations where decentralization is important:
One way to categorize decisions that need to be made is to look at whether they are convex or concave. In a choice between A and B, we would first look not at the question of A vs B itself, but instead at a higher-order question: would you rather take a compromise between A and B or a coin flip? In expected utility terms, we can express this distinction using a graph: