How DAOs like D-ETF Harness the Wisdom of Crowds

“Wisdom of crowds” is a long-held principle that posits that many minds are greater than one. It has been tested and studied since the days of Aristotle — and popularized in the world of finance through James Surowiecki’s 2004 breakthrough book “The Wisdom of Crowds.”

Throughout history, experts have discovered that not every crowd makes wise decisions. Harnessing that wisdom requires a set of characteristics. The crowd must be diverse, independent, decentralized, aggregated and trustworthy. Humans have been attempting to develop governance models around those characteristics for centuries. Today, through the power of blockchain technology, we can enshrine these characteristics in code. We sat down with the DAO behind D-ETF, one of the first decentralized ETFs, to learn how its governance aligns with these characteristics.

Diversity of Opinions

In Surowiecki’s understanding of the diversity of opinion, every person must have a private source of information when forming an opinion.

The inability to source information privately generates the opposite of diversity. It creates group think. D-ETF has taken intentional steps to ensure that the DAO (decentralized autonomous organization) avoids that classic pitfall. It does this by keeping the proposal process open. They explain that,

“Any D-ETF token holder with 10,000 or more D-ETF tokens can make a proposal to swap any existing token in the protocol — partially or fully for any other tokens.” 

Because participants are submitting proposals on their own accord, each one uses its own information source. And because the votes are anonymous (no one can see who voted which way and why), voters aren’t subtly influenced by the information sources of others. 

The DAO went on to explain the voting process in greater detail, 

“The only technical requirement from the D-ETF protocol is that the token is ERC-20 based and is available on the 1inch automated market maker. Once the token pair has been decided (e.g., USDC for LINK), the proposer will have to choose a slippage tolerance, as the total voting period is 48 hours, it’s important to give room for price fluctuations. Once the 48 hours have passed, the proposal is either passed or denied. If passed, the proposal goes into a 24 hour time lock period, which was put in place for security reasons. After the 24 hours has passed, the token swap will automatically be executed by the D-ETF bot,” the DAO said.  

“If the DAO community decides to remove an asset, it’s mainly because the project no longer has the expected future potential and intentions as firstly initiated. Or if the asset has simply over- or underperformed, and the majority of D-ETF holders agrees that change is required,” the DAO said. 

Independence

Not only does each member need a private source of information, they also need to form their opinion independently from everyone else. This requirement is another safeguard against groupthink. D-ETF explained how anonymity plays a critical role in this:

“It’s only possible to see which addresses have voted ‘for,’ ‘against,’ or ‘abstained,’ because there is no know-your-customer connected to a voter.”

This anonymity forces participants to come to their own conclusions on proposals. Yet, it’s important to note that despite being independent actors within a DAO structure, the independent token holders are aligned through the same goal — the DAO’s growth. This shared economic incentive may prevent what is known as a “race to the bottom” scenario. 

Aristotle uses a potluck dinner as an analogy. The dinner as a whole can go wrong if guests bring grocery-store-bought dessert instead of the cake from the local bakery. Aristotle refers to these actors as free riders. The free riders create a situation known as a race to the bottom. A race to the bottom happens when a guest opts to bring something poor while anticipating that others will bring something premium. If every person fears the group will leave them with a bad bag, a race to the bottom ensues, resulting in the common dinner being bad. 

D-ETF DAO’s structure essentially guarantees the equivalent of premium dinner guests because of a small gas fee.

“A proposer is paying a small gas-fee for submitting the proposal to the ERC-20 network. The small fee ensures that proposers are serious. To encourage D-ETF holders to vote, airdrops will be given to both voters and proposers from time to time,” the DAO said.

When guaranteeing that token holders meet this premium (the equivalent of ensuring the dinner guests bring premium food upon entry), then the potluck dinner would be a diverse group of constituents who would be considerably better company than yourself. The gas fee and the usage of a Web3 wallet further ensure the crowd’s intelligence. 

This approach aligns with Aristotle, who argues that success is more common when a group has a shared economic incentive. In other words, when the constituents of a group have a desirable outcome that they all want, then the group participants are likely to act more for the benefit of the group. However, having a shared, common incentive is just one hallmark of a strong group. 

The gas fee further guarantees independence and creates incentivization while minimizing freeload opportunities. 

Decentralization

Surowiecki defines decentralization as the localization of knowledge. In other words, the crowd’s collective wisdom is represented by first-hand knowledge instead of a centralized repository, such as a library or the internet. 

For example, an Aave developer will better understand the protocol than someone who read the whitepaper online. For an organization to capture as much of that local knowledge as possible, membership needs to be decentralized and open. If it is only available to friends of friends, then most members will pull from the same knowledge base.    

D-ETF explained that its membership has been open and decentralized from the onset — without reliance on a single individual. This structure helps source the most local knowledge possible. 

Aggregation 

Surowiecki establishes that an intelligent group’s aggregation comes from its ability to transform private opinion into a group decision. One example of how D-ETF carries out this principle is how proposals are shared. 

“All new proposals will automatically be shared on Twitter, Telegram and Discord where community members can discuss and communicate about their opinions, which can also lead to new proposals. It is a good idea to engage fellow community members before making a proposal, to ensure sufficient support to make a proposal valid through a minimum of 4 million D-ETF votes,” the DAO said.  

Furthermore, D-ETF DAO has integrated automation technology to transform private opinion into a public vote.

The team has created the D-ETF DAO to avoid “single point of failure” situations, which could be situations where one or a few people are making decisions on behalf of the majority of people,” the DAO said. “Democracy has proven itself historically to be a well-functioning model of decisions, and it is slower than autocratic leadership, but you ensure the opinion of everyone. That being said, the D-ETF is unlike traditional democratic voting, as one D-ETF token equals one vote, which means more tokens will give more voting to the individual.”

“All other DAOs that we are aware of, are solely “opinion tools,” meaning there is no automated execution behind the outcome of the decisions, and at the end of the day, it’s one of a few people physically carrying out the decisions. We wanted to make D-ETF truly decentralized, by giving complete power to the community,” the DAO said.  

Trust 

Trust is one of the most ground-breaking elements that DAOs offer in governance structure. For all distributed ledger technology, trust is in the tech. 

In conclusion, the DAO underlined the importance of trust: “The D-ETF DAO has no human interaction behind the scenes. It only has one function — token swaps. We created a completely self-operating ETF…hence the name “D-ETF.”

This content is sponsored by D-ETF.

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