What DAO Governance Has in Common With the ‘Eggheads’ Who Call a Recession

There are two stories I want to talk about that are related, but not directly. The first: it seems possible that the U.S. economy is in or will soon enter a recession – but officials who make that call are hesitant to say so. Second, a popular Ethereum-based staking protocol overseen by a decentralized autonomous organization, aka a DAO, is preparing for a down market.

Every story is a macroeconomic story now. Inflation is roaring. Wage growth and disposable income are dropping. Asset prices are depressed. And on Thursday, a preliminary reading of the second-quarter gross domestic product is due to be released, with the hope that the data can answer whether we’re in a recession.

This article is excerpted from The Node, CoinDesk's daily roundup of the most pivotal stories in blockchain and crypto news. You can subscribe to get the full newsletter here.

See also: The Market Indicator Flashing 'Recession'

The White House made a statement this week that even if the number shows the economy is shrinking, it wouldn’t use the “r” word. Typically, a recession is defined as two consecutive quarters of negative GDP. We’ve already had one. Economists are expecting 0.4% annualized sequential growth, but it could be negative (and either way it’s likely to be revised).

Consequences in the crypto world

For crypto, a worsening economic outlook could mean an acceleration of job cuts, slowed hiring and delayed launches. Choppy markets, and rate hikes by the Federal Reserve will also prompt people to take capital out of the markets and make safer investments.

Some crypto projects are preparing for all of that. Last week, leadership of Lido, a critically important Ethereum staking protocol, proposed selling some of the project’s treasury assets to the venture capital firm Dragonfly Capital. The deal was to sell 10 million LDO for 14.5 million in DAI dollar-denominated stablecoins.

The governance proposal was rejected, primarily because the sale of $1.45 per LDO token was below the market price and there was no token lockup. That second point is important, because even though the deal was pitched as a way to strengthen the connection between Dragonfly and Lido, there were real concerns that Dragonfly would dump tokens at a time convenient for the fund but inconvenient for holders.

If this seems like a win for crypto governance, you have to take a closer look. The deal was set to go through – despite community objections to giving venture capitalists “free money” – until an anonymous whale wallet holding 17 million LDO tokens voted to scuttle it. (The Defiant reported this address has transactions linked to Alameda Research.)

Token concentration is a real problem for the notion of democracy in DAO land. Many organizations messed up token distributions and ended up with plutocracies that can sway governance votes.

Lido has 75 employees and needs to find a way to ensure solvency in case of a multiyear bear market. Its treasury is primarily denominated in LDO, ETH and stETH. The proposal to cash out for stablecoins was made after a community member’s “back of the napkin” calculation that the protocol was staring down bankruptcy at current burn rates.

Lido’s leadership intends to issue a revised proposal, taking in the communities’ comments. Cobie, the mega-popular Crypto Twitter personality who said he used to work for Lido and still has significant exposure, floated the idea that the DAO hire a chief financial officer.

Whale watch

But the prospect of whales is concerning – a separate Lido holder with 15 million tokens voted in favor of the initial deal. Governance in a market where motivated parties can literally buy voting tokens on the open market may always be suspect. But at least it’s somewhat transparent.

Bloomberg’s Steve Matthews wrote a great piece about the “obscure panel of ‘eggheads’” from Stanford University who will get the say on whether the U.S. is in a recession. Indeed, even if everyone feels like we’re in a recession, the ultimate call goes to the National Bureau of Economic Research.

See also: ENS and the Limitations of DAO Governance | Opinion

That means, on Thursday, if data shows the U.S. GDP has shrunk for the second consecutive quarter, we may not officially be in a recession. In a way, this could be a good thing. In these “narrative-driven” times, (the same trend that gave the world meme stocks and dog tokens), beliefs about the economy matter. And a single word could have an outsized impact.

The political implications here are odd. Is it right that a single entity gets to define a trend that affects everyone – potentially bucking common sense? What about if they’re voting for the greater good, and give people what they ultimately want? In either case, these machinations are everywhere.