Invoking Arrow’s Impossibility Theorem from social choice theory28, the NIE-based literature on dynamic regulation (see Appendix 3), and other results such as the Folk Theorems from repeated game theory, we argue that no static constitution of rules can be created for running a DAO which eliminates all possible arbitrage opportunities. Gaming by naturally selfish parties is inevitable whenever an open democratic system with rigid and complicated rules determines who is rewarded with power and profit. Such a collection of rules needs to be extremely rigid in a distributed autonomous setting involving “code is law” smart contracts. And the set of rules will need to be complicated, in order to prevent the many possible group-damaging behaviors while ensuring enough flexibility for users to act in group-enhancing ways. Given such rigid and complicated rules, and sufficiently patient and powerful users, there will always be openings for arbitrage. Therefore any effective governance system must be designed to be extremely flexible from the start, and must afford members the opportunity to re-evaluate past actions.
Semada proposes an evolutionary system for enforcing families of governance protocols for DAOs using reputation tokens and automated validation pools. These regulatory protocols can be separated into two categories: hard and soft.
In each DAO, the hard protocols are programmed rules for how the organization performs its functions. For instance, each DAO will automatically share profits with its members, where the core program will automatically calculate each member’s salary in proportion to their sem token holdings relative to the entire group. As a second hard protocol example, each DAO will determine how sem creation, distribution, and policing are handled—for instance the level of approval required before sem tokens are granted. As a third example, references to past work-evidence posts will revaluate member reputation. Precisely how does a reference reward the author? The many possible options provide many diverse choices of incentives with which to motivate DAO members, as will be examined throughout the paper. Such hard protocols determine the programmed reward/punishment structure of each DAO.
The soft protocols, on the other hand, form a socially developed system of rules that DAO members use to police other pseudonymous members of the distributed organization in regularvotes on the value of each work-evidence post. Such soft protocols are intended to be algorithmic, in the sense that anyone honestly following them will automatically choose the correct vote, which drives the system to unanimous consensus. The most efficient applications of Semada should be automated, so that honesty is defined as running the algorithm the organization has agreed upon, unedited. These are called soft protocols, because the posts which supply the latest algorithms are not hardware which limits users to specific actions; the posts merely suggest users should use the algorithms, or they will very likely lose their sem tokens in the validation pools.
These hard and soft protocols entail an on-chain regulatory governance structure for any DAO.
Next, how can we develop new protocols in a completely decentralized system with potentially anonymous members? We need effective on-chain legislative governance if we want to achieve complete decentralization, anonymity, and autonomy. Protocol development is contentious, however. If unanimous consensus is strongly incentivized by every validation pool, our DAOs will degenerate quickly, as alternative options will not be raised by members with minority opinions for fear they will lose all sem tokens. So the basic functioning of validation pools described above is inadequate. One more tweak is needed—loosely coupled votes.
In order to adapt to changing market threats and opportunities, DAOs need on-chain legislative governance. This will involve contentious debate posts for developing new regulatory protocols. Such debates will be recorded on the blockchain and subjected to a validation pool with loosely-coupled votes. “Loosely-coupled” means sem tokens cannot be lost during such validation pools, but can still be staked on contentious posts to register each owner’s opinion. Loosely-coupled votes allow the DAO to gauge member body opinion without upsetting the balance of power with disruptive token transfers. Such debate posts encourage authentic deliberation on protocol development, in order to 1) efficiently explore the most effective modes of behavior for the organization, and 2) ensure authentic and thorough consensus on all protocols.
In order to force consensus in a timely manner, the debate can gradually move to tightly-coupled votes, where part or all of the sem tokens staked on a losing bet will be redistributed to the winners. When a protocol development debate finally moves to a perfectly tightly-coupled vote (where all sem tokens staked on a minority position in a validation pool are lost), proof is given that the outcome has become precedence, the protocol becomes non-contentious, and unanimity is ensured until a new contentious debate opens.
Reputation must allow review of its value based on each new action and development. Semada gives a mechanism to revalue past posts. A new post may reference an old post and add or subtract value proportional to the value of the new post if the new post is upvoted in the validation pool.
Review gives users the opportunity to reward or punish past actions, such as positive protocol development or subtle patterns of corruption. Along with an evolutionary structure for adapting to the inevitable strategies which will arise to subvert the system, review allows the platform the possibility of conquering the problems identified in the Folk Theorems of game theory that guarantee successful strategies for sufficiently powerful and patient corrupt participants for any static protocol. Turning the Folk Theorems against the attackers, we are also guaranteed the existence of a strategy for sufficiently patient and powerful police, which eliminates the incentive to attack from any fixed malicious strategy.