The Unbundling of Value Creation
Are DAOs the answer to better decision making?
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The creation of DAOs was fuelled by the idea that democratic processes are broken, and that there is a need for collective governance. Organisations such as the United Nations, World Health Organisation, and even World Bank are not inherently democratic, and have not been designed to collect intelligence or effectively respond to complex problems.
Problems with such control have become extremely evident with the current pandemic crisis, and it could even be argued that on almost every level, citizen interests have been placed on a back burner for interests of big corporations, political heavyweights and even foreign interests that capture our biased media.
Even just dialling it back to individual corporations, Mailchimp was sold to Intuit for US$12 billion last week after the founders repeatedly told their non-equity compensated employees that they would always remain independent.
DAOs seemingly solve this issue, removing control from a select few, and placing power in the commons, a shining alternative to the current systems that seem inadequate to meet complex international challenges. However, with crypto prices going to the moon, does that lock out a vast majority from accessing DAOs and taking part in the unbundling of value creation?
What is a DAO?
DAO stands for Decentralised Autonomous Organisation. Breaking this down, Decentralised refers to smart contracts which serve as the 'legal' backbone of these organisations. Autonomous is in reference to the ability to self-govern or automated decision making. Organisation simply means a collective group of humans with a common interest or goal.
DAOs are easiest explained by an example:
Imagine you were in a situation in which you wanted to purchase a business. We all know businesses are expensive. To get enough money to buy a business, you put out an open call for people to chip in and buy it with you. While the group collectively has enough to buy this business, you're now left to deal with a few coordination issues.
1) How do you decide which business to buy and how to run it?
2) Who's in charge of the entire operation? Is it you, because you started it?
3) How do you know if you can trust your partners and be certain that they’re in it for the long haul?
Typically, in the past people may have started syndicates or investment groups to accomplish this. However, as more individuals get involved, the messier it becomes to coordinate the group and the greater the likelihood that the organisers get too flustered to continue with the paperwork.
Fortunately, with the advent of blockchains and smart contracts, a DAO can solve these coordination and governance problems quite easily. DAOs can contain governance provisions that define the role of each member in the DAO and what powers they may have. You can implement different tiers and assign different roles to DAO members.
They can also help members make decisions effectively using algorithmic based frameworks. Going back to the example above, by detailing rules around what sort of business to buy, the DAO can automatically execute the transaction.
Most importantly, DAOs incentivise participation by leveraging monetary rewards. A DAO can stipulate a minimum number of DAO tokens needed to join the organisation. As the DAO achieves its stated goals, theoretically the value of the tokens should appreciate (like a stock) and attract more people who are serious about the project given there would be a significant monetary barrier to entry.
DAOs are internet native institutions that create more transparency and enable greater access for anyone to participate from anywhere in the world. DAOs are powerful because they enable people to organise into collectives without the need for formal roles or hierarchy. The autonomy of DAOs also makes it appealing in the sense that it can make decisions guided by humans without the 'in the moment' subjectivity often tied to human decision making.
The future of value creation
Can too many cooks in the kitchen spoil the broth? If done haphazardly, almost certainly. DAOs aren't infallible.
In fact the first DAO, aptly named The DAO, launched in 2016 raising US$150 million in Ether to act as an investor-directed VC fund. Less than three months after launch, it was hacked due to a technical vulnerability and over US$50 million was stolen. Fortunately (or maybe unfortunately for some decentralised maximalists) the Ethereum blockchain was forked, rolling back the transaction history and effectively negating the hack. (If interested, you can read more here)
To mitigate and potentially prevent bad actors from exploiting the decentralised nature of crypto startups, Jesse Walden lays out a robust framework for progressive decentralisation, including a three step process in order to create a "sustainable, compliant and community-owned product." as outlined below:
Product Market Fit
As with any early stage startup, the earliest stage of building a crypto startup faces the same issue of finding product market fit. Rather than opening it up to the influence of a community, a small, opinionated and focused team is crucial in building a great product.
Walden notes that at this stage "there should be no pretense of decentralisation". Whilst seemingly counterintuitive when building a DAO, a strong direction and frequent product iterations are required to test hypotheses and update assumptions. At this stage, the foundational layers of decentralisation should be put in place i.e. smart contracts and auxiliary code.
As the product gains traction, community involvement should ramp up. Open up the doors to greater community input and involve them in the product development process. Transparency and the ability to voice dissent is key here. Additionally, at this stage, as the community gets more involved, the founding team should start to think about incentives to ensure members stay engaged and dedicated to the product.
Walden splits the incentives into two categories: Tokens and Fees.
a. Tokens serve as instruments to test governance dynamics amongst its community members. At the early stages teams can issue tokens to a small group of "power" members whilst still retaining a bulk of the control themselves. This should be done with transparency and guardrails to support the collection of feedback on the operating model. It is important that token distribution is fair but effective in rewarding both past and future contributions.
b. Fees form the economic incentive for participating in the community. Depending on the business model, distributing fees to contributors can align everyone's interests around the project's success. It should be noted however, the open source nature of Crypto makes it more likely for someone to fork (copy) your project and create a fee- free version.
The final step to creating a sustainable, compliant and community-owned product is to transition it to the members. Once the first two steps are complete and the initial tokenomics (the economics behind the token including lock up periods, incentives etc) are laid out and stress tested, the project can evolve into a fully fledged DAO by triggering a smart contract. These smart contracts should've been built with transparency and should lay out rules defining who gets how many tokens today, how tokens will be distributed in the future and what rights you have as a token holder.
From here, all future decision making is based on community vote. Want to change how much fees you distribute? Or the rights of each token? Submit a proposal and the community can vote on it.
By building in public and encouraging community involvement slowly, crypto startups flip the script on typical centralised platforms. When a centralised platform starts out today, they open up everything in order to acquire users. By doing so, they attempt to achieve critical mass for their platform and make their services more valuable and sticky such that the users don't retain much power.
"For 3rd parties, this transition from cooperation to competition feels like a bait-and-switch. Over time, the best entrepreneurs, developers, and investors have become wary of building on top of centralized platforms. We now have decades of evidence that doing so will end in disappointment." - Chris Dixon
DAOs are singularly focused on maximising value creation. The users and members are the investors and owners of the organisation. Whilst this exists today through stockholder voting rights, the future of value creation lies with a broader collective, rather than a select few.
So how much value have DAOs created to date?
The DAOs of today
As of 22 September 2021, there was US$6.4bn held in 159 DAOs globally. 38 of these DAOs held over US$1M in assets, and over 1M token holders hold a DAO token. The largest organisation, UniSwap, has over US$3.3B in AUM with 256,882 members.
Whilst certainly impressive, let's explore what type of DAOs exist in the wild.
Uniswap is a decentralised exchange that utilises the Ethereum blockchain to facilitate transactions. Uniswap simply provides the infrastructure for users to trade crypto between each other. Uniswap doesn't decide what can be traded, doesn't provide liquidity and doesn't have a bank account. To read more about how UniSwap works read this article.
DuckDAO is a community-driven crypto incubator aimed at building out an ecosystem of yield farming, staking and NFTs. Using its token, the DuckDaoDime (DDIM), members can access different community tiers by buying a certain number of tokens. When joining the community, you get access to deals that have been curated and incubated within the DAO for success.
Indian crypto exchange ZebPay has launched the world's first female-led DAO with the purpose of engaging in projects that have a social impact. Currently, the DAO is working on a project to help rural indian women set up solar panels in order to mine bitcoin in order to achieve some financial independence. Whilst still primarily run by ZebPay, the goal is to issue its own token and transition the DAO across to its members.
Nouns DAO is a community focused project where every 24 hours for the foreseeable future, one ‘Noun’ NFT is sold. These Noun NFTs are colourful pixelated characters that give you exclusive access into the Noun DAO and each holder has an equal vote. The vision for Nouns DAO is grand: “We should fund and cultivate a community of builders by experimenting, taking risks, and ultimately funding every high quality proposal that could lead to interesting culture and software (especially ‘middleware’) on the Nouns protocol” and they definitely have the warchest to pull this off, with over US$20M sitting in the Nouns DAO treasury (after 46 days). Want to get involved? Either stump up 150-200 ETH to win a Noun auction or launch a PartyBid like what was used for Noun 11.
Decentraland ($MANA) claims to be the first fully decentralised metaverse, having sent the custody of its founding contract to a self-destructed Ethereum address. This means that the MANA contract is immutable, with no ability to mint more tokens or pause it. $MANA holders can vote on security council members, development grants and estate policy etc
The examples above are by no means exhaustive, as the DAO landscape is quite vast (and growing daily) as detailed below.
DAOs are great in terms of facilitating fair and equitable decision making, but it does raise the question of whether this is just compounding inequality. As more DAOs like NounsDAO or communities such as FWB pop up, will it become cost prohibitive to participate in these communities over time? Whilst advocating for greater equality, the early adopters of crypto have created exclusive clubs that have a huge barrier to entry in terms of traditional dollars.
With the speed of development of Web3 applications and the shift from traditional finance, it's important to be aware of the larger population who are not immersed in the crypto space. If all the corporations of tomorrow are DAOs and are effectively paywalled due to token requirements, does that isolate a large portion of the world from taking part? We're already seeing inflated asset prices globally, and even within crypto, NFTs have skyrocketed immensely. With many NFT collections offering exclusive communities for holders, the projects that come out of these communities will likely be exclusive and thus compound the inequality effect.
Furthermore, researchers such as Joy Buolamwini and Safiya Noble emphasise the social consequences of developing AI systems with embedded algorithmic biases. So what could it mean if DAO protocols are set up to cater to a specific type of user, if its early adopters are not diverse? Are we able to use DAOs as a governance tool on a scalable level if its systems are largely premised on the demographics of the early crypto adopters? The general public wants to see a more transparent and open way of decision-making, but is DAO really the way forward?
If DAO creators are not careful in checking their own biases, this could easily falter. However, the good news is that compared to starting your own corporation, starting a DAO is easier. Services such as Aragon and Syndicate allow anyone to create their own DAO. DAOHaus allows people to find listed DAOs easily and interact with these DAOs. Whilst the real problem lies in the dissemination of crypto news and how equitable that is (e.g. not much of it exists outside of select blogs and twitter), as more of these services are built out, it gives people who are late to the party a fighting chance to own their own value creation.
The future of organisations
While it's still early days for DAOs, they serve as the leading indicator for how corporations and organisations in the future will operate. Greater transparency and more equitable decision making will become the norm. Even going back to the Mailchimp fiasco, if Mailchimp was a DAO, then the employees would be able to have a say on what they think is the right way forward. That doesn’t mean everyone would be happy with the final decision, but it would have been more a transparent decision making process.
Will collective decision making lead to greater stakeholder value? Early signals point in the right direction, but as the space grows and more people get involved, this will need to be monitored closely.
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