Organizational transformation for dYdX
Decentralization, outsourcing and venturing
Research funded by the dYdX Grants Program, 2022
Through a combination of ambitious protocol engineering, legal innovation and aggressive investment in its own community, defi trading platform dYdX is on the path towards decentralization. With the release of dYdX v4’s fully decentralized orderbook and matching engine, slated for the end of 2022, the protocol’s founding team, dYdX Trading Inc., will no longer be a central point of control over the protocol. As announced in January 2022, V4 will not only be “open source [and] fully decentralized” but also “entirely controlled by the community” such that “the future of dYdX will be in the community’s hands.”
The building blocks for the community control for dYdX are beginning to take shape through the activities of the dYdX Foundation. The independent Swiss-based foundation was formed in August 2021 with the directive to “foster participation from others who seek to support and grow any aspect, technical or otherwise, of the [dYdX] ecosystem”. Concretely, this led to the introduction of the DYDX governance token, also in August 2021, and in March 2022, an innovative framework to mitigate the manifold legal issues faced by DAOs through the creation of a Guernsey purpose trust. The dYdX Purpose Trust offers a “suitable structure for funds transferred from DAO community treasuries that are earmarked for… growth and development” that was subsequently adopted by the dYdX grants program via community governance. The dYdX grants program, first formed in November 2021 also via community governance, stands apart from other grants programs in the defi ecosystem due to its willingness to deploy large amounts of capital in service of growing “a self-sufficient development program that builds and maintains itself”.
While these ambitious goals of decentralization, participation and self-sufficiency, as well as foundational governance, legal and funding structures are well defined and communicated, the pathways towards these goals via these structures is less clear. This is true of the broader crypto ecosystem. How does one move from a centralized organization to a decentralized one? Crafting a successfully decentralized organizational structure is a painstaking, slow, experimental and above all, hands on process that will require a shared vision and coordination between dYdX Trading, the Foundation and the Grants program.
Currently, the strategy for organizationally decentralizing dYdX is in its nascent stages. Both the Grants program and the Foundation have their own initiatives working towards creating new centers of coordination. The final phase of the grants program aims at creating “a fully autonomous organization of dedicated working groups led by qualified teams acting on behalf of the community to grow and maintain the protocol” on a timeline of the next 2-5 years, with the first working groups already in formation. Similarly, the dYdX Foundation has also begun to experiment with working group formation as part of its Burrows initiative for community ambassadors. However, questions remain as to how the Grants program and the Foundation might coordinate their respective working group initiatives. And in the case of dYdX Trading, no public statement has been made on its own intentions for organizational transformation in the service of its own decentralization. A cohesive strategy for all three organizational cores to collaborate on is not only possible, but necessary if dYdX is to make good on its goal of becoming “one of the biggest exchanges in crypto, period” in the words of the founder Antonio Juliano.
The following organizational design research for dYdX compiles insights from an eight week investigation, comprising of interviews with staff, members and contributors within the dYdX community, Foundation and Grants program, as well as with core contributors of protocols that have successfully decentralized their organizations or contributed to the organizational decentralization of others—Gitcoin, ShapeshiftDAO, the Token Engineering Commons, Llama DAO and GFX Labs. It also incorporates insights from ongoing public and private conversations with thought leaders debating the strengths and weaknesses of different organizational design models for protocols at large, and draws where relevant on knowledge from traditional and web2 organizational design theory and practice. The report shares organizational design lessons relevant for each of dYdX’s three organizational cores: For dYdX Trading, insights into successfully transitioning a centralized core team to decentralized working groups; for the dYdX Foundation, best practices for handling outsourcing to service DAOs and other service providers; and for the dYdX Grants program, learnings on how to build out a service DAO incubation program, acting as a venture DAO for an economy that can be built around dYdX.
Contents
Success factors for decentralized working groups: Considerations for dYdX Trading
Structural Continuity
Service Orientation
Accountability with bonding and social presence
Preventing abuses of power in flat hierarchies
Outsourcing to service providers: Learnings for dYdX Foundation
Identifying core and auxiliary competencies
Bringing together talented internal contributors with service providers
Avoiding common pitfalls in service provider relationships
Corporate venturing for DAOs: Insights for dYdX Grants Program
Embracing exploration over exploitation
Balancing knowledge transfer with operational autonomy
Final Discussion and Summary
Success factors for decentralized working groups: Considerations for dYdX Trading
In discussions of subDAOs, the organizational structure that is most often being referred to is a core or founding team that has decentralized into different, more autonomous working groups. If executed successfully, this process allows the company or foundation that initially stewarded the development of a protocol to cede their control to a DAO. To date, only a handful of founding teams have embarked on this journey of organizational transformation from centralized core team to decentralized working groups as part of a DAO, such as ShapeshiftDAO, MakerDAO, Gitcoin and Yearn. Based on their learnings, what are key success factors for decentralized working groups?
Structural Continuity
Though it might be tempting to wipe the slate clean and decentralize by creating an entirely new, distributed organizational structure, decentralizing core teams may benefit from structural continuity with the organization’s previous, centralized form. As Joshua Forman, the former Head of Engineering at ShapeShiftDAO who oversaw the organizations decentralization process, explained:
“The beginning vision was an organization of anarchy where people would be left to self-form and dissolve as they wanted, bounty work, project work. What wound up happening is that people needed more structure. To function, we needed to look a little more like a centralized company than we thought”
The shift from centralized to decentralized is a drastic one for an organization. One key way to minimize disruption and ensure a smooth transition is to ensure that decentralized working groups inherit their scope and mandate from the departments or teams that were part of the centralized organization, such that, for instance, an engineering department in a centralized organization becomes an engineering working group as part of the decentralized organization. This was the case at ShapeShiftDAO, which “created the working groups [so as to] mirror the departments of a company - engineering, product, operations, support.”
Maintaining structural similarity to the centralized organization and focusing on intentional organizational design at the beginning of the decentralization process both serve to create a secure base from which to start experimenting with more radical changes in leadership and hierarchy. For working groups transitioning to decentralization, hierarchy remains indispensable and should not be completely eliminated but instead reduced by strategically collapsing some of its layers. Unlike corporate departments, DAO working groups and their leaders are not overseen by C-level executives and a board of directors. Instead, a working group leader may be the primary interface between the team on the one hand, and the protocol’s governance community on the other. Rather than organization-wide directives and decisions that emerge at the C-Level and flow top-down through the organization, leaders of each working group can come together to coordinate and ensure strategic alignment, bringing with them the deeper knowledge that comes from their embedded roles within each working group. This is the case at Gitcoin, where working group leaders give structure to the otherwise low hierarchy organization by making decisions together as part of a Stewards Council: “[We created the Stewards Council because] there hadn’t been so much of a cross-view, or a high level view of the organization. It creates a way for stewards to come together and coordinate across all of the working groups.”
Service Orientation
This hierarchical flattening can in turn be supported by the adoption of a servant leadership approach by working group leaders. Servant leaders “put other people's needs, aspirations and interests above their own.” Their primary motivation is “to serve first, as opposed to lead”, with the long term goal of helping their followers become “freer [and] more autonomous” (Sendjaya & Sarros 2002, pp.57-8). In the Gitcoin DAO, for example, working group leaders are known as ‘stewards’ whose goal is to act as a “servant leader” and “lift up other people in the working group”. Their role is not one of supervision and control, but of simultaneously “respecting people’s autonomy and sovereignty, [while] still making sure they are supported.”
In addition to servant leaders, working groups can also benefit from servant specialists who support teams in key maintenance tasks, from accounting to analytics and HR. Rather than having subject matter experts and technicians working in specialized teams that are siloed off from the rest of the organization, the Gitcoin DAO works to embed specialists in working group teams where their know-how is needed. Again, the aim is to “respect [working group contributors’] autonomy and sovereignty, but still make sure they are supported.” Specialists themselves in turn receive support, mentoring and guidance from more senior specialists in their field:
“At Gitcoin, accountants are embedded in different teams, but they also receive mentorship and guidance from a core, more senior person inside the relevant operational group… [For example,] one senior accountant pledges their time to support and coach the accountants in each of the five working groups.”
The servant specialist approach can also prevent unhealthy dependencies and information bottlenecks from emerging: Rather than submitting a task to a separate accounting department and dealing with information asymmetries and delays as they arise, working group contributors and leaders can work closely with their own dedicated accounting specialist, who supports their projects on a long-term basis, develops a deeper understanding of the working group’s projects and needs, and stronger relationships with the contributors themselves.
Accountability with bonding and social presence
Structural changes aren’t the only shifts that employees of a decentralizing team will have to grapple with. At a personal level, contributors may be even more concerned about the vulnerability and exposure that comes with the higher levels of transparency that are expected in DAO operations. While transparency is an important ideological commitment in the crypto space, for individual employees the prospect of having to engage in workplace conflicts, face criticism or even be fired in a public forum is nerve-wracking. As one dYdX contributor writes, the exposed setting of a transparent DAO is
“a strange environment and I can see why people might be deterred from it. [But] it’s a new way of working, I think people will have to adjust. I hope that community vibes would support the transition, and that we all remember that we’re all humans.”
The interviewee touches on a powerful strategy for balancing transparency and accountability with employee privacy and psychological safety in the workplace: By marrying accountability processes with processes that create a positive and healthy organizational culture. At the Token Engineering Commons, for example, accountability is created through a fortnightly retrospective that doubles as a ritual for celebration and bonding between contributors:
“We take some time as a group to look at all of the things we have done well, our successes—whether these are personal, as a working group, or as a community. Another part of the retrospective is sharing what didn’t go so well. People often share these on a personal level, allowing us to develop intimacy with each other as remote teams, and across working groups.”
With DAO work being primarily remote and online, accountability processes that are facilitated primarily through online, text-based environments such as Discord and Discourse risk creating hostile interactions because of the lack of social presence, or “the subjective experience of being present with a “real” person and having access to his or her thoughts and emotions” (Biocca, 1997). When designing accountability processes, DAOs can minimize behaviors associated with a lack of social presence online, from antagonism to trolling, by reintroducing elements of social and personal intimacy. An accountability process that is designed as a social, interpersonal ritual is more likely to achieve the positive outcomes associated with higher social presence, including “trust, enjoyment, and perceived usefulness” (Oh et al. 2018).
Preventing abuses of power in flat hierarchies
In addition to working on actively building a positive organizational culture, efforts should also be made to actively prevent the emergence of a toxic workplace. One of the the unexpected sources of organizational design wisdom for a decentralizing team comes from an influential 1972 essay on power structures within feminist collectives. In The Tyranny of Structurelessness, feminist writer Jo Freeman describes the way that loosely structured, informal and seemingly non-hierarchical organizational structures can actually serve as “a way of masking power” rather than evenly distributing it:
“Contrary to what we would like to believe, there is no such thing as a structureless group. Any group of people of whatever nature that comes together for any length of time for any purpose will inevitably structure itself in some fashion… As long as the structure of the group is informal, the rules of how decisions are made are known only to a few and awareness of power is limited to those who know the rules.”
A discussion on Hacker News on this same essay makes this point even clearer within the context of low-structure organizational frameworks and their shortcomings:
“Holacracy doesn't get rid of your managers. Rather it just prevents you from knowing who your manager is. Instead of having clearly defined priorities (e.g. I need to handle requests from person A before I handle requests from person B), you have to do a subtle political calculation, evaluating the relative social capital of person A and person B before choosing who to listen to or follow. And if you guess wrong, then you end up marginalized and fired, often without knowing precisely why.”
In the context of a core team decentralizing into autonomous working groups, the challenge of hidden hierarchy takes the form of power structures that linger on after decentralization. For example, a founder or previous team leader may have stepped down from a position of authority officially as part of the decentralization, but the internal politics of the decentralized organization continues to revolve around them and the influence that they continue to wield. In some cases, this can be a useful, soft solution to resolve difficult conflicts as a last resort. At Gitcoin, for example, “if [founder] Kevin Owocki says something, people will listen. Some people have that power and should use it.”
In other cases, influential figures may abuse their power in ways that are disruptive to the normal functioning of the organization. One interviewee raised concerns around this possibility, pointing to the example of the controversial governance proposal by MakerDAO founder Rune Christensen that sought the firing of facilitator Sébastien Derivaux. Though Derivaux and other commenters expressed concern that Christensen was “quite in control of MakerDAO lately”, Derivaux ultimately chose to stop down to “avoid drama”—illustrating the way that contributors tend to acquiesce to the demands of influential figures even if they don’t hold official authority, and even when they believe their demands are not justified. Former contributor Ashleigh Schap’s perspective on the conflict presents a plausible explanation of Christensen’s behavior as a classic example of the tyranny of structurelessness in action, where real power diverges with the appearance of a flat structure:
“The understanding was that it was a flat hierarchy–that we were out to build something that wouldn’t be controlled by any one entity, that would be stateless. The project had a kind of a renegade culture. In 2018, something changed. Rune began to feel that he needed to take control of the project.”
It may not be possible to prevent conflicts of this nature from arising, but an active strategy that can be taken is to build a culture of zero tolerance towards workplace bullying, and equip leaders and contributors with the tools they need to deal with high-conflict personalities. While the Token Engineering Commons has an emphasis on non-violent communication and mediation (they even have their own conflict resolution subDAO), these frameworks are arguably not robust enough to be successfully applied to more serious abuses of power. Evidence-based approaches and resources can be found at the Workplace Bullying Institute, led by social psychologist Dr. Gary Namie. Management scholar Andrew J. DuBrin’s book Narcissism in the Workplace: Research, Opinion and Practice also offers guidance on strategies and policy based on empirical research.
Transforming a centralized team into decentralized working groups is no easy task, but with dedicated, intentional work, it can pay off. But is it always necessary to build up fully-fledged working groups inside a DAO? As we’ll explore in the coming section, there is another strategy that requires much less organizational design up front and can still achieve winning results when applied while following best practices—outsourcing.
Outsourcing to service providers: Learnings for dYdX Foundation
Alongside core teams transforming themselves into decentralized organizations, another organizational design trend has been gaining momentum in DeFi. This is the growing number of both service providers and service DAOs, or, “organizations that aggregate high-quality practitioners under one community to provide services to third parties (engineering, audit, design, legal, research, treasury management, etc.)” Hiring external service providers allows DAOs to access the same benefits that a traditional firm gains through outsourcing, namely, cost-savings through service providers’ economies of scale, better use of time and resources by internal employees, and, importantly, access to knowledge, skills and expertise that would be too costly to build up in-house. But in working with service providers, DAOs must also take care to avoid well-known mistakes that hamper outsourcing efforts.
Identifying core and auxiliary competencies
Discussions of subDAOs tend to focus on the messy, time-consuming process of building up a decentralized organization’s internal structure. Against this backdrop, outsourcing areas of work to external entities is, in theory, an appealing option for achieving the same results for less organizational design work. One interviewee from the dYdX community demonstrated an intuitive understanding of this, referring to outsourcing and “subDAO-ing out” interchangeably:
“For a decentralized marketing subDAO, I would look into an agency model. I would get a great marketing firm to drill down what dYdX is… Any area can be farmed out. You would subDAO everything out. That would be one of the highest value-per-dollar approaches.”
However, not all areas benefit from outsourcing, and not all areas are easy to outsource successfully. The decision of what to outsource at a DAO should not be taken lightly, but rather based on a structured evaluation process that considers the decision from the perspective of business-value, operations, financials and risk (see Bonifazi et al. 2006 for a detailed explanation of this process). When deciding whether to insource or outsource, mapping the strategic value of areas of work is an important starting point.
Areas of work with high strategic value constitute an organization’s ‘core competencies’. These are “the combinations of special skills… knowledge, information,… processes and procedures” that directly impact products and services offered, and differentiate the organization from competitors (Bonifazi et al. 2006, p.41). Areas of work with lower strategic value are the DAO’s auxiliary competencies. These are the “peripheral, support or operational capabilities…[that] help keep the business afloat by aiding the completion of daily operations”, but “do not directly impact the organization's products and services” (ibid., p.43). Against this backdrop, the interviewee’s idea of outsourcing marketing is a viable one, as marketing is an auxiliary competency for dYdX that does not directly differentiate or shape the products and services offered by the protocol.
At times, evaluating the degree to which a competency is core or peripheral can become complicated and pedantic, but Bonifazi et al. recommend a few simple questions to ask as a rule of thumb. If a DAO can answer these in the affirmative, these competencies are not good candidates for outsourcing:
“1) If you were to start your business today, would you still conduct this process internally?
2) Are you so good at the execution of this process that other companies will hire you to do it for them?
3) Will most of your top executives likely come from this function or have made their name or have extensive experience in this function?” (ibid., p.73)
At dYdX the distinction between core and auxiliary competencies is already mirrored in the division of work areas between the mandates of Trading Inc. and the Foundation. Developing the “software that powers the dYdX protocol” and operating “the off-chain orderbook and matching engine” are clear examples of core competencies handled by Trading Inc., (with the latter to be ceased following the release of v4). The foundation’s mandate consists primarily of auxiliary competencies, from the supporting work of funding R&D activity, promotion and education, engaging in partnerships and organizing conferences, to peripheral activities in governance, handling IP rights and licenses and managing digital assets. The same is true of the areas of work defined by the Burrows, a working group initiative led by the Foundation: Analytics, governance, marketing, content and media, risk analysis, student onboarding, user onboarding and education.
By outsourcing these auxiliary competencies, dYdX DAO can maximize its cost-savings and benefit from access to knowledge and expertise of service providers, without losing ownership of the core competencies that differentiate the protocol against its competitors. However, a degree of ownership of the competencies that are outsourced will remain necessary for dYdX DAO. Outsourcing is not just about channeling resources and talent towards core competencies and relying entirely on external providers to make the arrangement a success. Successful outsourcing also requires “high-performing internal candidates to form the core of the outsourcing team” (Bonifazi et al. 2006, p.25).
Bringing together talented internal contributors with service providers
Successful outsourcing requires the engagement of internal contributors that deeply “understand the organization’s culture, marketplace, products, processes and procedures” (ibid., p.26) to work in close collaboration with the service provider. As one dYdX community contributor described it, the task is one of “connecting insourced to outsourced talent.” This is the approach taken by Llama DAO. When working with AAVE, Gitcoin and PoolTogether, 5-7 Llama DAO contributors formed temporary teams with client DAO contributors who responded to their proposals. This allows the service DAO to leverage their “solid understanding of [the client DAO’s] governance and community”, preventing knowledge asymmetries between service provider and client DAO that may hamper the success of the engagement.
In a traditional firm, managers would ideally “recognize, compensate and articulate the organizational importance of these positions [within outsourcing initiatives] in order to attract high-performance candidates” and ensure that “these candidates believe their involvement… will be a career enhancement and not a management wasteland assignment” (op. cit.). Motivating factors are similarly important for DAO contributors, but may be less about prestige and (financial) rewards and more about securing good working conditions in the often chaotic environment of a DAO.
One incentive to participate in outsourcing initiatives may be that it “reduces the transaction costs for an individual to work for a DAO” by helping a contributor “to find work, determine scope, negotiate wages, have recourse with DAOs”. In the interview, Llama DAO founder Shreyas Hariharan described how client DAO contributors were “happy [doing their work] through Llama rather than just as individuals”; one contributor who participated in Llama DAO’s grant proposal for analytics work at dYdX was also supported by Llama DAO in pitching appropriate payment for herself commensurate with rates in crypto. In this way, service providers may not only benefit the client DAO through cost savings and access to expertise, but can also enhance the contributor experience within the client DAO, offering the supportive scaffolding that contributors may lack in a decentralized environment.
How should dYdX DAO go about sourcing the internal talent that can make outsourcing initiatives a success? The ongoing Burrows initiative, which sees community members take on ‘ambassador’ roles and gain valuable work experience in one of the seven auxiliary competency areas (analytics, governance, marketing, content and media, risk analysis, student onboarding, user onboarding and education), may serve as a funnel to identify and foster talented contributors who may later be capable of supporting outsourcing initiatives in these areas with their deeper understanding of dYdX in combination with their relevant professional experience.
However, the low pay (relative to crypto) of $25/hour for ambassadors may fail to attract top talent to the Burrows, reducing the quality of the pool of candidates who might go on to direct outsourcing initiatives for dYdX. It may be that the role of the Burrows initiative is to train ambassadors to cover auxiliary competencies in-house, but in this case it should be evaluated whether this approach of ‘building’ rather than ‘buying’ talent is cost-effective when compared with outsourcing. The dYdX grants program, with its record of competitive funding rates over previous rounds, may be better placed to attract high quality talent, but these candidates (as is the case with recipients across many DeFi protocol grants programs) are more likely to be focused on building their own projects. This, however, does make the dYdX grants program well-placed to steward the process of vendor selection for outsourcing.
Avoiding common pitfalls in service provider relationships
As with deciding what to outsource, the process of deciding who to outsource to should be conducted in an intentional and comprehensive manner. Mistakes made during the vendor selection process may jeopardize the outsourcing initiative.
One error DAOs are just as fallible to as traditional firms is choosing a “glamorous” service provider with a well-known brand, in anticipation of good press and positive response from tokenholders. But publicity following outsourcing is a double edged sword. Brand-name reputations of service providers do not guarantee a successful outsourcing initiative, and as Bonifazi et al. point out, “if you had an alliance with a brand-name vendor that failed, this bad news will be circulated more prominently in the business media” (Bonifazi et al. 2006, p.108). This is especially the case in DeFi, where news travels at an accelerated pace and tokenholder backlash can be make-or-break for a DAO. Reputation of the service provider may be a selection criteria, but the needs of a DAO should always be kept first priority.
Another common mistake that comes with serious risks for both DAOs and traditional firms when outsourcing is insufficient risk assessment of the vendor. Bonifazi et al. advise that “it is better to… keep the work in-house, even if it is inefficient and costly, than to hand over work to a vendor that an organization does not completely assess” (ibid., p.109). The exploit of bridging service provider Wormhole in February 2022 illustrates this principle clearly. Against this backdrop, a risk assessment of a service provider should cover:
Strategic risks — Are the goals of the two organizations compatible or do they reflect conflicting interests? Have both parties previously conducted successful outsourcing relationships?
Operational risks — Are the roles, responsibilities, processes, talent and training levels of the vendor team well-defined, robust and reliable?
Technology risks — What risks arise in relation to “regulatory compliance, security, reliability, testability” as well as the protection of sensitive data and intellectual property?
Financial risks — Can we confirm the financial stability of both the client and the potential vendor? What risks do we uncover through a detailed financial assessment considering direct and indirect costs, current and future costs, as well as the appropriate type of costing method? (ibid., pp.62-5).
Given the complexity and level of detail required of a robust vendor risk assessment, the dYdX grants program or another responsible entity should take ownership of this due diligence process, even if the ultimate decision on vendor selection is carried out via governance. An external auditing firm may also be engaged to support the risk assessment component of the vendor selection process.
After a vendor is selected, client DAOs should take care in the way that they structure the outsourcing relationship, and the corresponding outsourcing contract. If the outsourcing engagement is inappropriately structured and scoped, DAOs run the risk of vendors draining their treasuries through bloated outsourcing engagements that add little value. As service providers proliferate in DeFi, DAOs may put themselves at a disadvantage by accepting outsourcing arrangements where a larger team is engaged to provide a service when the competency could have been handled by one individual or a smaller group. One interviewee noted this tendency in the organizational structure of MakerDAO, where:
“a number of core units that do external work…are funded by a lump sum of cash that is derived for a headcount that they want to hire for. If there is one person who can do that work, then that would make more sense [to just hire one person].”
To avoid this situation, DAOs should be discerning about when individual, functional and competency outsourcing arrangements are appropriate, and whether these should be project or process-based, as outlined in the table below (adapted from Bonifazi et al. 2006, pp.13-4):
Finally, a major common pitfall seen in outsourcing initiatives is that of vendor lock-in: continuing with an outsourcing arrangement even after poor performance. Why would DAOs choose to rely on one vendor? This tendency, seen in the calls for selecting a “canonical” bridge provider or a single bridge technology partner in protocol governance, may reflect the desire to reduce the already high transaction costs of choosing a vendor through DAO governance. But the risks of continuing a dysfunctional outsourcing arrangement ultimately lead to a high cost of switching, such that the longer you rely on one vendor for a process, the more expensive switching to another vendor and onboarding them into your business will be (ibid., p.79). A long relationship with one vendor may also “result in your being blind to other novel, and possibly more viable alternatives that exist in the market” (ibid., p.110). This may be disastrous for the client DAO that works with service providers that are skilled in leading “unsophisticated clients down a path that maximizes their own profits while creating huge barriers to exit” (ibid., p.25), while clients themselves fall prey to the sunk cost fallacy (ibid., p.173).
The question of whether to exit an outsourcing relationship will always be difficult, but it can be ameliorated by ensuring outsourcing arrangements are supported by benchmarking data and measurable goals defined in the outsourcing agreement against which the initiative can be evaluated against, as well as a defined exit strategy before the contract is signed. The exit strategy should, at a minimum, have answers to the following questions (these answers may change and evolve over time):
“Should things go bad, how will the business relationship end?
Who will be paid what?
How will the assets be returned?
How will work-in-progress be handled?” (ibid., p.134).
One challenge that is uniquely pressing for DAOs considering outsourcing is that the number of established service providers is still limited, with the current crop of vendors facing little competition in the current blue ocean market for DAO service providers. In the case of an unsatisfactory outsourcing arrangement, a client DAO may have little or no choice for alternative vendors. This represents a key pain point for DeFi at present:
“Capital itself is abundant, valuable services are not. Despite the abundance of capital flowing into the tech and crypto ecosystem, high-value services have remained scarce.” (Peter ‘pet3rpan’, 2022)
The solution for DAOs that require certain services for which there are currently no vendors could be found in incubating their own service DAOs and dogfooding. As these service DAOs evolve, they might also become fully-fledged, profitable businesses in their own right, much in the same way that corporations and universities have successfully spun-out new ventures from the larger organization. Supporting the creation of these new ventures could be a key activity in dYdX’s decentralized organization, and one that could be ideally stewarded by the dYdX grants program. The following section considers the advantages and challenges of conducting exploratory, external corporate venturing through the dYdX grants program and the ideal operational conditions needed for subDAOs working towards full autonomy.
Corporate venturing for DAOs: Insights for dYdX Grants Program
When asked about which organizational design problems they anticipated to become more problematic over time, multiple interviewees pointed to the relationship between a DAO and a subDAO seeking higher levels of autonomy: from departing from the established DAO strategy and processes in their activities or ultimately becoming their own DAO, independent of the parent organization and working with other DAOs as clients. At Gitcoin, a former C-level executive described the process of learning to work with a workstream that was seeking greater autonomy in is operations and mission:
“They are very passionate, very caring, but also a little ‘get off my lawn’… How can we help them maintain their sovereignty? Sometimes collaboration is conflated with control.”
Importantly, the emergence of autonomy-seeking subgroups like the workstream at Gitcoin is inevitable—this in turn raises the question of how, or whether, these groups should be aligned with the original DAO. As a steward at the Token Engineering Commons reflected:
“How do working groups stay aligned while growing in a different direction, taking on other influences, other missions, and working with people joining from other organizations? You can’t prevent the growth of a group of people.”
These are precisely the questions that have concerned large firms engaging in corporate venturing strategies. Corporate venturing, generally defined, is “the overall activity of building new businesses within an established organization” (Keil 2000, p.9). This process is distinct from business development, another key area of work for many DAOs. While business development sees the establishment of “new technologies, products, or services…within existing product-market frameworks,” corporate venturing “is geared to developing new product-market frameworks” (ibid.).
Within corporate venturing itself, we can distinguish between two types: internal corporate venturing, where ventures reside within the target organization, and external corporate venturing, namely, “the creation of semi-autonomous or autonomous organizational entities that reside outside the existing organization” (Sharma & Chrisman 1999. p.19). These may take the form of “venture capital investments, alliances, acquisitions and spin-offs” (Keil 2000, p.10). In this organizational mode, external corporate venturing can function as “a mechanism to extend the search space of the firm” which is “particularly important in industries that are characterized by dramatic change” (ibid., p.iii). DeFi is a paradigmatic example of a rapidly-changing industry, and many protocols are supported by an organizational structure separate from the core team to facilitate this extended capability search even before DAOs and subDAOs are formed—namely, the grants program.
While grants programs can be treated as structures that create avenues for community participation and fill gaps left open by an overextended core team through one-off projects, a more strategic approach might recharacterize the grants program as a venture arm that uses its existing independence from the core operations of the protocol to identify, fund and develop new product-market frameworks. In the context of organizational decentralization, grants programs could be responsible for creating and supporting autonomy-seeking subDAOs as they develop new service provision business models, and ultimately become independently operating service DAOs. The dYdX grants program, this role is already reflected in its relationships with Xenophon Labs and Chaos Labs, small, early-stage teams that have been funded to develop projects for dYdX as a first step towards building out their products and service offerings in mechanism design and simulations for software testing respectively. Which key principles for external corporate venturing are most useful for a grants program like dYdX’s?
Embracing exploration over exploitation
Balancing the activities of exploration and exploitation is crucial for any firm’s growth and competitiveness: “The unknown needs to be discovered or explored, and the known needs to be exploited, to generate more rents for the organization” (Sinha 2015). Exploitation is concerned with “the refinement of existing products, resources, knowledge and competencies” through “single-loop learning” along an existing trajectory to produce returns that are “certain and achievable in a shorter time frame” (ibid.). Exploration, on the other hand, “involves activities such as search, variation, risk taking, experimentation, discovery, and innovation” through double-loop learning along new trajectories for returns that tend to be “less certain and more distant in time” (ibid.).
For crypto grants programs, which operate at high levels of budget transparency and are answerable to both the core team, tokenholders and the public, it may be tempting to focus funding on exploitation-type activities, seeking out grantees from the community with a single-minded focus on optimizing a protocol’s existing offering so that the grants program can in turn point to concrete outcomes and clear ROI in the event of public scrutiny. At the same time, however, it can be challenging for community members to conduct exploitation-type activities effectively due to knowledge asymmetries between the core team and community. The dYdX grants program has exercised “some restraint with the grants [they] are issuing” because at times, the community gets “caught up in the weeds” and may fail “to see the bigger picture”. Well-meaning community members “will try to get too involved and slow things down when we are trying to optimize things for the greater benefit.” This reflects an interesting challenge faced by grants programs at large. In order to refine existing products and systems, one needs both an in-depth understanding of how they already work, as well as a firm grasp of the strategic trajectory they are progressing along—knowledge that is difficult to transmit to community members even with effective transparency, documentation and communications. Even though both grants program administrators and community members may both want to pursue exploitation-type activities, the latter may not be well-equipped to do so because of the structural separation between community members and the core team that built out the protocol, which in turn produces critical technical and strategic knowledge gaps.
This knowledge gap can be ameliorated or circumvented in various ways, from education efforts and transparency around strategic goal-setting, to greater scaffolding of funding opportunities through RFPs that explicitly indicate exploitation-type activities that align with the existing strategic trajectory of the protocol that has been set by the core team, as well as simply funding initiatives that concern the refinement of more generic, non-core competencies discussed in part II such as marketing and onboarding, where knowledge from other protocols and contexts translates well to the context of dYdX. However, these knowledge gaps can also be treated as a strength by grants programs. Community members may not have the same technical or strategic understanding of dYdX’s current offering, but their external position and involvement in other protocols and communities may allow them instead to think more laterally, identifying new opportunities and strategic directions that are challenging to conceive of for a team member that has worked closely on the core product. In this way, grants programs may in fact be better suited to supporting exploration-type activities led by community members. In external corporate venturing, “exploration should play a greater role than exploitation” (Keil 2000, p.207). For grants programs, this may also hold true.
Against this backdrop, we can return to the question raised by the steward at the Token Engineering Commons of how working groups can “stay aligned while growing in a different direction, taking on other influences, other missions, and working with people joining from other organizations?” and answer it with another question—is it necessary or desirable for all community initiatives to be completely aligned with the core team or core subDAOs? Rather than enforcing the need for strategic alignment across the board, a larger number of grants-funded initiatives and working groups could be allowed greater flexibility in their pursuit of exploration-type activities. How can this flexibility for autonomy-seeking subDAOs be maintained while also maximizing the benefits for dYdX as a DAO?
Balancing knowledge transfer with operational autonomy
Optimizing for exploration as a grants program is not as simple as throwing funding at moonshot ideas and letting autonomous working groups develop these independently. Recall that external corporate venturing is a mechanism for extending the search space of a firm that “supports the creation of new knowledge and capabilities” (ibid., p.4). To do this, “external corporate venturing activity [must be] set up so that information can influence the corporation at large rather than being limited to a narrow part of it” (ibid., p.208). In other words, there must be a conscious effort to integrate or bridge the activities of more-autonomous working groups exploring new product-market frameworks with the activities of working groups operating at the core of the organization, so that knowledge transfer and organizational learning can occur. At the same time however, a certain degree of structural and operational separation is necessary, due to the differing needs of working groups at the core (pursuing exploitation) and periphery (pursuing exploration) of an organization. As Sinha writes:
“Units pursuing exploitation are usually less decentralized, are large-sized and have less flexible processes. Alternately, exploration units are usually smaller in size, have relatively loose processes and are more decentralized. Conflicting demands of these antagonistic activities are carried out in separate units. The integration of these two units [can be achieved] through a strong shared organizational culture and coordination by the TMT.”
At GitcoinDAO, a practice to balance the need for organizational integration with organizational independence for more autonomous subDAOs has emerged in the form of what is internally referred to as the ‘Collaborate or Defect Model.’ With this model, Dcompass, a more autonomous workstream that is building its own protocol based on Gitcoin’s Quest product, is able to define when they want to participate in DAO-wide processes and communications, and when they want to opt out. The choices to participate or opt out, or collaborate or defect, each come with their own trade-offs.
Workstreams are eligible to participate in Cross Stream DAO Ops (CSDO), “the day-to-day governing team of the Gitcoin DAO”. Membership in the CSDO requires that workstreams adopt the policies that are ratified by the group, from budgeting to onboarding. The event attendance policy, for example, gives access to travel support funding for members that work more than 25 hours weekly. Dcompass has opted not to participate in the CSDO and instead structures their operational processes independently. They lose the decision-making power and benefits like the travel support policy that come with CSDO membership, but create their desired level of operational autonomy: “They run their own Discord, have their own payment structure, they do show up and conform to our seasonal budget requests but they run almost everything else exclusively outside of the core Gitcoin DAO and community”. Having their own payment structure means that Dcompass is subjected to more scrutiny from the Gitcoin board in their budget than workstreams that conform to DAO-wide compensation policies, but again, this cost is deemed to be worth the greater flexibility and autonomy. “Our goal,” Gitcoin’s former executive explained, “is to make sure that the DAO is investing in their project like a VC firm is—hands off.” However, in addition to allowing workstreams to choose their own level of operational independence and empowering them to weigh the tradeoffs of autonomy vs. integration for themselves rather than forcing them to confirm to rigid policies, a bridge between leadership of the core Gitcoin DAO and more autonomous workstreams is created through informal mentorship and advising relationships to “make sure they are still being supported and still being heard.” Arguably, the benefits of this relationship also flow in the other direction too: by maintaining informal personal and cultural ties to more autonomous workstreams, the DAO at large can stay in touch with the knowledge produced within these exploration-focused units and reap the benefits of external corporate venture activity as a cognitive extension to the core organization.
Final Discussion and Summary
This research report has discussed modes of organizational decentralization of relevance for dYdX Trading, dYdX Foundation, and the dYdX Grants Program. The success factors for the transformation of a centralized founding team into decentralized, but still interdependent and mutually accountable subDAOs was explored through learnings of other protocol DAOs that had embarked on this journey. Ensuring structural continuity between the centralized and decentralized organizational forms, fostering organizational cultures of servant leadership, leveraging interpersonal relationships and social presence for accountability in remote work environments, and engaging seriously with the risks of abuses of power in flat hierarchies all emerged as important goals for founding teams looking to decentralize. While it is not clear whether dYdX Trading will choose this path, as learnings and best practices continue to accumulate as other protocol core teams decentralize, core team decentralization could be undertaken safely and effectively and should be at least raised as a topic of discussion within the dYdX community in the coming months.
At dYdX Foundation, where organizational decentralization is already being engaged through the Burrows working group initiative, the cost-saving trend of protocol DAOs outsourcing certain activities to service providers should be considered as the Burrows initiative is evaluated and further iterated upon. Key learnings from service provider DAOs and from outsourcing literature in business management scholarship included the framework of core vs non-core competencies to identify which areas should be insourced or outsourced, the benefits of creating blended teams where internal community members and contributors can collaborate with and learn from external service providers, and the critical importance of avoiding common pitfalls in outsourcing relationships through rigorous vendor selection processes, risk analysis, choosing the right type of outsourcing relationship based on organizational needs, as well as taking steps to prevent vendor lock-in through effective evaluation and exit planning. Future iterations of the Burrows initiative by the Foundation could explore a greater emphasis on developing outsourcing relationships rather than building out new working groups from the ground up.
Finally, growing discussions around developing DAO native approaches to venture capital and increasing the number of DAO service providers lay the foundations for a conceptualization of the dYdX grants program as an external corporate venture division, supporting working groups that explore new opportunities, innovations and product-market frameworks while benefiting from a supportive, yet largely autonomous relationship to the rest of dYdX as an organization. Depending on the decisions made by dYdX Trading and dYdX Foundation with regard to organizational decentralization and outsourcing, the dYdX Grants Program could explore what it would mean to shift its mandate to incubating ‘moonshot’ ventures that take advantage of its relative structural separation from the core team and close ties to community members with unconventional visions for the future of dYdX.
In summary, the model proposed here is one where the core team decentralizes into interdependent working groups focused on core competencies such as an engineering and product, blended working groups that bring together existing contributors with external service providers cover non-core competencies such as marketing and hiring, and the incubation of working groups as new ventures. This proposed tripartite structure reflects an emergent pattern of organizational transformation seen at both Gnosis and Cosmos, and may well be replicated by other protocol DAOs in the near future. By strategically optimizing its organizational transformation based on learnings from other protocols, best practices identified by management scholars and tracking closely with organizational innovations in Defi unlocked through outsourcing and DAO-native ventures, dYdX Trading, Foundation and the Grants Program can each do their part to create genuine decentralization.