Isomorphism in DAO Governance

The term ’institutional isomorphism’ refers to similarities in the structure and processes of independent organizations. In the past, the spread of information and the adoption of similar practices was slower and often limited to organizations within a single country or region. But in the newly emerging institutional field of blockchain networks and decentralized autonomous organizations (DAOs) [1] that benefit from near-instant global communications via the Internet, isomorphism develops much faster.

In their 1983 paper titled “The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields,“ DiMaggio and Powell [2] discuss three forms of isomorphic change: normative, mimetic, and coercive.

  • Normative isomorphism is driven by professionalization, reflected in specialized vocabularies, job descriptions, educational requirements, and other shared norms and standards that guide individuals in a particular field to think and behave in similar ways.
  • Mimetic isomorphism is driven by imitation. Organizations are often faced with uncertainty, both in terms of their external environment and a lack of clarity about internal goals and strategy. A common way of dealing with uncertainty is to mimic other organizations, especially those that are perceived as successful or otherwise exemplary.
  • Coercive isomorphism is driven by external forces. Organizations may be pressured by an external authority to conform to certain expectations. Typical examples include legal or regulatory mandates, reporting or supervisory obligations, and pressure from entities that provide organizations with funding or other essential resources.

The extent of isomorphism in DAO governance [3] needs to be empirically studied before claiming that, despite many surface-level differences between independent DAOs, the field as a whole is converging on a relatively small number of core ideas and practices. Some similarities in the governance of DAOs are technologically determined. For example, all DAOs rely on digital information and communications technology (ICT), especially blockchain networks and innovative cryptographic protocols, but also more traditional digital infrastructure and services such as the Internet, social media, and online collaboration platforms (most notably Github, Discourse, Discord, Twitter, and Telegram). But there is additional evidence suggesting that the ’Cambrian explosion’ of blockchain-based economic and governance experiments is increasingly counterbalanced by all three forms of institutional isomorphism discussed by DiMaggio and Powell. Here are three examples of each:

Normative isomorphism:

  • Blockchain industry has ideological roots in the cypherpunk and open source software movements. This affects how different ideas and practices are received within the industry and contributes to the reproduction of specific design preferences, social norms, and intellectual dispositions. An example of that is decentralized applications adopting the principles and ethos associated with their underlying networks. [4]
  • Thought leadership and recommendations from reputable individuals or organizations are a key source of normative guidance on DAO governance. Although by no means universally adopted, examples include the preference for software-based automation over human involvement and the use of delegation mechanisms to counter voter apathy. Similarly, concepts such as ’social scaling’, ’governance minimization’, ’credible neutrality’, ’progressive decentralization’, and ’protocol politicians’ have been normatively relied on in designing governance mechanisms for a variety of different DAOs.
  • In addition to technical specialization in network operation, software development, and cybersecurity, other areas of DAO governance are also increasingly professionalized (e.g. treasury management, financial analysis, or coordinating the governance proposal and voting procedures). Professionalization of DAO governance encourages homogenization. In the future, this trend may be amplified by the growing importance of professional networks, trade associations, and industry-specific educational and training programs.

Mimetic isomorphism:

  • Many DAOs have adopted governance mechanisms pioneered by the earliest public blockchain networks. Most importantly, these include the use of network-specific coins or tokens to incentivize work and assign access or voting rights, and a standardized process for suggesting changes to the system (usually following the example of Bitcoin Improvement Proposals, itself inspired by BitTorrent Enhancement Proposals).
  • Founding documents describing the core features of a given DAO often include an (explicit or implicit) ideological position on the relative merits of formal vs. informal and ’on-chain’ vs. ’off-chain’ governance. [5] Based on that initial position, many DAOs have modeled themselves — consciously or not — either after Bitcoin and Ethereum (limited on-chain governance combined with semi-formalized off-chain governance) or the early pioneers in token-based voting and treasury management (e.g. Decred and Tezos; more expansive on-chain governance).
  • Faced with high technological uncertainty and not much experience to go by, DAOs often integrate battle-tested code, operational procedures, and tools for governance that other DAOs are using. Compared to traditional organizations, this is much easier for DAOs because many blockchain projects are committed to open sourcing their software which is also highly composable if created for the same platform, as is the case with decentralized financial (DeFi) and governance applications on Ethereum. Examples include broad adoption of the Gnosis multisig wallet, Compound’s governance contract, and the Snapshot tool for off-chain voting. In other ecosystems that enable interoperability between different networks and DAOs, some mimetic isomorphism will inevitably result from the use of common development frameworks such as the Cosmos SDK and Substrate. [6]

Coercive isomorphism:

  • Many blockchain networks and DAOs aim to achieve meaningful decentralization and censorship-resistance, which presents a unique challenge from a regulatory point of view. Operating in a legal gray area — as is often the case with innovative technology — encourages regulatory arbitrage whereby the core entities participating in DAOs end up domiciled in jurisdictions that take a more permissive view of their activities. One way to interpret this is that existing regulations drive DAOs to adopt similar legal and organizational forms. As blockchain-related regulatory clarity and enforcement grows, this type of isomorphism is likely to increase.
  • Engaging in commercial activities and coordinating financial flows from the organization to its contributors or from its users to the organization means that economic entities participating in DAOs may be subject to various tax and reporting obligations. The administrative procedures for meeting these obligations are likely to standardize across a variety of DAOs, similar to how tax and reporting requirements drive isomorphic change in more traditional organizations. It is also possible that the ICT-native and inherently global nature of DAOs will eventually trigger a move towards a more globally unified taxation and recordkeeping regime in general. [7]
  • In addition to governments and regulatory bodies, blockchain networks and DAOs may develop dependencies towards other external entities. This may include sources of funding, hardware manufacturers, or other organizations (including other DAOs) that provide resources necessary for DAOs to remain operational. In some cases, such dependencies may grow large enough to allow these external entities to pressure DAOs to adopt certain practices. The degree to which decentralized network operators or other participants in DAOs are currently subject to such pressures is unclear and may remain unreported for long periods of time, especially in the case of organizations that have few alternatives but to quietly succumb to external force.

Many of the characteristics that lead to isomorphism in organizational fields already apply to DAOs. These include technological uncertainty, relatively few well-established organizational models, an increasingly professionalized labor force, and a growing number of interactions with agencies of the state. On the other hand, DiMaggio and Powell also suggest that isomorphic tendencies are greater when the resource supply of organizations is centralized or when organizations are dependent on support and legitimization by external entities. This is the exact opposite of what many DAOs aspire to achieve, namely maximal decentralization and sovereignty. And given that DAOs are often set up to run radically new experiments, growing isomorphism in DAO governance is not a foregone conclusion, even though that is what the anecdotal evidence discussed above seems to support.

Most DAOs are faced with a similar set of fundamental questions. What is the DAO’s purpose? How to incentivize contributions towards that purpose? How does the DAO allocate its resources initially and over time? What is the appropriate legal structure for participants in the DAO? How are decisions about the DAO made and executed? Varying degrees of isomorphism in DAO governance are simply a reflection of how different organizations are answering these questions. For any DAO, becoming more or less similar to others in the field should never be a goal in itself. Instead, each organizational practice — isomorphic or not — should be assessed independently before deciding whether it is something to be resisted or embraced.

Much more important than differences or similarities between organizational practices are the effects that these practices have on the people involved and the society at large. It is natural for humans to conform to the more popular views in their respective fields, or at least the views of those they admire or depend on. Regulators, investors, prominent commentators, and members of the most successful DAOs should therefore recognize the normative effect of their words and actions on how the majority of DAOs are likely to be structured and governed. Because once certain thought and behavioral patterns become widely adopted, it often becomes exceedingly difficult to reverse the systemic tendencies that these patterns generate.

As long as conditions are favorable for the free expression of human imagination, there will always be variation in how different groups of people organize and what they create. But humans also imitate each other, model their organizations after existing ones, and — whether they like it or not — live in a society where certain institutions have acquired the power to prescribe and enforce certain actions. The field of DAOs is fully embedded in this reality, characterized by the interplay between diversity and innovation on the one hand, and isomorphism and institutionalization on the other. The more transparent, communicative, and critically self-reflective this field becomes, the better its chances of avoiding the typical pitfalls of more traditional forms of organization that it seeks to provide alternatives for.

Footnotes

[1] Throughout the text, ‘DAOs’ is used generically to refer to all public blockchain networks, applications, and their respective communities, regardless of whether these have been previously described as decentralized autonomous organizations or not. The exact definitions of and differences between ‘blockchain networks’, ‘decentralized applications’, and ‘DAOs’ is an important topic to discuss. But for the purposes of this text, all are viewed as belonging to the same general category of organizing that combines open source software protocols and distributed computer networks with more conventional forms of both offline and online collaboration.

[2] DiMaggio, P. J. & Powell, W. W. (1983). The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields. American Sociological Review, 48(2), 147–160. Available here. (Credit to Nathan Snyder who first introduced me to the concepts of normative, mimetic, and coercive isomorphism which then led me to this classic paper by DiMaggio and Powell.)

[3] I define governance as the process of applying any design feature or control mechanism that maintains and steers a system. Importantly, this includes features that ‘permanently’ establish some mechanism within the system (institutionalization) or don’t require active human involvement to accomplish a task (automation).

[4] For example, the principles and ethos behind Uniswap (an automated exchange protocol and one of the most popular decentralized applications) are directly inspired by Ethereum. See Bankless Podcast interview with Hayden Adams, the founder of Uniswap.

[5] See theses number 4 and 5 here.

[6] Disclosure: The author’s work is funded by Placeholder, an investor in BTC, ETH, and DCR.

[7] As I’ve emphasized before (see here and here), blockchain networks (and ICT in general) are inherently bureaucratic technologies that enable the creation of an increasingly global and automated system for administering information and facilitating transactions connected to that information (a defining function of all bureaucratic institutions). Whether and to what degree should such a system integrate tax reporting or other regulatory requirements currently imposed on organizations by national governments or supranational institutions is likely to emerge as a major topic of debate and a challenge for global governance as the ICT Revolution matures.