Costly Signalling in DAOs

TL;DR

This paper explores how Decentralised Autonomous Organisations (DAOs) use costly signalling strategies to overcome information asymmetry issues in their unique blockchain environment, proposing institutional solutions to improve signaling.

Contribution

It applies costly signalling theory to DAOs, analyzing their strategies and proposing improved mechanisms for signaling true quality in a permissionless, pseudonymous setting.

Findings

DAOs employ specific costly signals to demonstrate trustworthiness.

Certain signaling mechanisms are more effective in the blockchain context.

Strategies evolve to address the unique challenges of pseudonymity and global scale.

Abstract

Decentralised Autonomous Organisations (DAOs) are a new type of digital organisation that uses blockchain infrastructure (e.g. smart contracts, tokens) to coordinate a group of people around a shared mission. Like all organisations, DAOs must attract sources of funding and other resources, and discover and retain a talented community and workforce. To do this, they must signal their true quality. Yet the characteristics of the environment that DAOs operate in (pseudonymous actors, global scale, permissionless entry and exit) makes this difficult. We apply costly signalling theory to explore the information asymmetry problem in DAOs and some of the strategies (behaviours and investments) and institutional solutions (including better signalling mechanisms) that have evolved to solve this problem.