In the last post of this overview series, I will give a conceptual introduction to a new type of organization: the Decentralized Autonomous Organization (DAO). I will further provide some intuition on its potential as a new governance system.
Conceptual introduction to DAOs
A DAO by definition is ‘headless’. It doesn’t have a single government or management team deciding on what to do. Instead, its members and broader community agree over a set of foundational principles including defining a goal and precise rules on how to cooperate towards it. Therefore unlike governments or companies that are hierarchical, DAOs are networks of stakeholders cooperating around common aspirations.
- Open — anyone can come, contribute by the rules and be rewarded
- Inclusive — stakeholders are aligned through incentives and network design
- Trust-less — trust required for members to cooperate is minimized
- Scalable — low marginal cost for each additional member
- Transparent — all the rules, technology and mechanisms is available for public scrutiny
How can a headless organization be governed?
In a decision process, Governance is minimized in a dictatorship setting and maximized in absolute decentralization. In a dictatorship, governance is non-existent, concentrated in a single point, the same entity that takes all the decisions. On the contrary, in a decentralized setting governance mechanisms are very developed. They transform the will of distributed stakeholders into decisions. The traditional model of a company is an intermediary setting, where the management is elected through governance mechanisms and then makes daily decisions in a centralized fashion. Same thing in traditional public governance.
Therefore in a DAO, the role of the central decision maker is minimized and replaced by governance processes. Governance processes happen in the form of votes, polls, review committees, reputation and influence granted to members etc. And broadly all the interactions between stakeholders leading to an effective decision. A successful governance process should lead to a consensus and provide legitimacy to the decisions implemented.
In a DAO, governance processes can be tuned in function of its goal. Therefore each organization may have a custom set of governance mechanisms. It is usually one that fits both the goal and the philosophy of the community of stakeholders. This flexibility is something unachievable in traditional organizations.
How does this enable stakeholders to run DAOs?
Projects are submitted as a proposal by any stakeholder. These are pushed through the governance mechanism and may be later implemented in case of validation. The nature of the proposals may be of two categories. First, core improvements and modifications brought directly to the organization, for example, its governance mechanisms and its technical design. The second category includes initiatives and projects which benefit the organization and its goal in the current form, for example, an evangelization project.
The Bitcoin example
While this can remain abstract, the world already sees more DAOs up and running everyday. In fact the concept has already entered mainstream consciousness. The most well known DAO is Bitcoin.
Set of foundational principles
> Common goal: secure and censorship-free digital currency enabling an exchange of value without intermediary
> Rules for cooperation:
- Coordination of actors for network security and maintenance (consensus algorithm)
- There is a well-defined formatting and processing of transactions
- Miners contribute to secure the network using their computer resources
- Nodes maintain a record of transactions, verifying transactions and mutually checking each others’ work
- Specification of a predetermined economic policy
- Max number of bitcoins in existence will be 21,000,000
- They will be issued gradually at a predetermined rate as a reward to miners who secure the network
> Governance process:
The main stakeholders in the Bitcoin network are miners, developer groups, and the community of users. However, as the first DAO, Bitcoin has no formal governance tools (ex: voting) other than its consensus algorithm. Therefore, in order to take a decision, stakeholders merely discuss online and offline and eventually try to come to an agreement based on the general discussion sentiment. This process is called ‘rough consensus’.
For this reason, Bitcoin will never be able to implement decisions quickly, or even undertake important side projects. But one could argue that Bitcoin’s governance is aligned with a potential goal of becoming the ‘digital gold’. Just as gold reserves sit and wait in the bank, Bitcoin doesn’t have to move fast but to remain secure.
TL:DR; In decentralized autonomous organizations, stakeholders can cooperate freely around a common goal, without knowing or trusting each other. Governance mechanisms transform the will of stakeholders into decisions with no centralized intermediary.
Governance in decentralized organizations, a theoretical approach
In the previous post were presented some limits of traditional organizational models. Considering the characteristics stated above: how would DAOs go beyond and enable large scale cooperation more efficiently?
As seen previously decentralized organizations are fully transparent. Anyone can access their source code. This means that it can be copied and pasted to create a similar organization. This is the heart of stakeholder equilibrium in DAOs.
From the moment a sizable group of stakeholders thinks that the governance settings are unfair they can leave, copy-paste the organization and clone it into a competing network doing the exact same thing. While the barriers to exit are not zero, they are incredibly lower than within traditional organizations. Nobody could exit and copy paste Coca-Cola’s secret recipe or recreate another identical state of California.
As there is no intellectual property neither corporate secrets, the large majority of the organization’s value lies in the activity of the community of stakeholders and the goodwill of its members.
This unique trait of DAOs allows keeping influential stakeholders in check. The latter are often the most invested and deeply rooted in the current organization. They wouldn’t want to see other stakeholder groups leave because each of them is essential for the DAO to keep operating and generate value. If Bitcoin developer groups leave, it is likely that its value will decline against other alternative currencies. If Bitcoin holders leave, its value will decline with them selling it. If Miners or validation nodes leave, the security of the network would decrease and it would become worthless.
This special game theoretical setup pushes for the governance mechanism to be satisfying to all the stakeholders. Eventually, the balance of power between stakeholders may reach equilibrium by adjusting until a fair governance setting is found. As a result, the cooperative aspect of networks is enhanced in decentralized organizations thanks to a guaranteed certainty over bargaining/power relationships.
The equilibrium may vary depending on the goal set initially by stakeholders. In some cases, a more centralized balance may be required. However, as traditional organizational models do this (centralization) quite well, one can expect that DAOs will enable use cases requiring new, more decentralized equilibriums (like the one displayed above — i.e governance equilibrium point is equidistant from each stakeholder group).
The nature of the equilibrium, the stakeholders, their governance relationship is an emergent property of the purpose of a DAO. It depends on the goal or use case it addresses. Above is illustrated a certain type of DAO with certain types of stakeholders. In other DAOs, the stakeholder groups and their role can both be different.
For a multitude of use cases exist a multitude of equilibriums. Therefore, DAOs need to provide unprecedented flexibility compared to traditional organizations. Fortunately, the digital nature of DAOs makes them a great field for experimentation. This environment is fit for the creation and iteration of new governance tools. New mechanisms and settings are implemented on the basis of new and former research. These mechanisms range from the basic rough consensus model to the implementation of different types of democracies and voting.
DAOs to the rescue of traditional governance limits
A more balanced equilibrium in the distribution of power through governance may help to overcome some human and organizational limits presented in a previous post.
With proper governance tools and processes, inputs for governing may come from every part of the organization. Therefore decisions are based on the consciousness of the whole organization rather than on the one of a small group of individuals. Something we lack when undertaking societal or environmental challenges.
Another powerful aspect of DAOs governance is that it is long term oriented. The consensus going on among stakeholders and their alignment behind the foundational principles imply that the DAO shall pursue its goal or cease to exist. Its decentralized nature implies that the leadership doesn’t have to be renewed or elected, eliminating any waste of resources in competition for leadership, short term orientation and lack of cohesiveness between mandates.
Here is a bullet point summary of governance limits theoretically solved:
- Age and obsolescence — A DAO is a digitally based organization able to interact with important quantities of data. It can grow and shrink as needed. Its governance is adaptable to an evolution of needs
- Centralization and the limit range of human consciousness — In a DAO all stakeholders’ input their conscious decisions in governance mechanisms
- Short term thinking — In a DAO there is no 5y mandate, no single CEO, just a ballet of stakeholders which come, contribute and may leave if they want like bees. The mission stays the same and isn’t biased by a profit motive
- Lack of alignment among stakeholders (and all subsequent harms) — Solved by a stakeholder inclusive governance, a common goal and transparent foundational principles to cooperate with
- Barriers to accessing governance — Anyone can come up, contribute and thereafter participate in governance. The barrier to buy a seat and vote shall remain low
- Moral hazard and personal bias — Is minimized in a DAO as no single entity has too much power to affect the rest, and every stakeholder is controlled extensively
TL;DR: Governance advantages in a DAO
- The ability to exit helps create a governance equilibrium among stakeholders
- Alignment through common interest and incentives, solving for opportunistic behaviour
- Fewer risks linked to the centralization of power in the hands of a few
- High flexibility in governance models and tools
- Harness crowd intelligence and consciousness
- Long term orientation
A last word
In order to find their governance equilibriums and blossom, DAOs need to have a complete set of tools to govern them. 2019 is the time part of these tools will be implemented and experimented while new ones will be built.
Real-world projects are working and solving issues in order to make Decentralized Autonomous Organizations accessible to all. The Aragon Network is a digital jurisdiction, where anyone can come up, create a DAO and invite people to join and cooperate around real-world use cases. Teams working on the Aragon project innovate every day to operate in a decentralized fashion while creating DAO tools at the same time!
At the start of Q1 2019, the Aragon Network stakeholders voted on the allocation of the Aragon DAO funds to many new projects and teams all of which contribute to bringing this new organizational paradigm to society. Anyone excited by the project can join the discussion and share with the community.