A living organism, exploring DAO components and their relationships
This post aims at digging a bit deeper in the concept of Decentralized Autonomous Organizations (DAO) introduced in a previous post. Covering the following questions: what is a DAO made of? How does it come to life?
What is a DAO made of?
- A decentralized blockchain infrastructure
- At least one native token
- A network of different stakeholder groups
- A set of governance processes enabling efficient decision making by stakeholders
An analogy could be made between the blockchain infrastructure in a DAO and the flesh and bones of a living organism. Its health and quality will determine the long term stability and resiliency of the whole structure. The decentralized blockchain infrastructure is the blockchain in which the DAO’s fundamental smart contracts are rooted. For this reason, this infrastructure has to be especially secure and stable in order to process transactions and execute smart contracts with consistency. At the start of 2019, the Ethereum Blockchain remains the standard infrastructure for DAOs, although its future ability to handle the task is not certain. Qualities of infrastructure Blockchain that may impact the DAOs functioning on top of them are decentralization, scalability, interoperability and flexibility. In the end, a blockchain infrastructure maximizing this set of qualities should be the best alternative.
An analogy could be made between the token of a DAO and the blood of a living organism, carrying nutrients and oxygen. A DAO will generally have at least one native token. These tokens are vehicles of value and information transacted on the underlying blockchain infrastructure. Different designs will grant them different purposes within the DAO. For example, tokens can be used to pay fees to the DAO in exchange for a service, as a proof of ownership over an asset, or bear governance power (voting rights) and reputation. To this day ‘token engineering’ (the science of designing tokens) is still in its infancy. Many existing token models haven’t yet been proof tested while new ones emerge frequently. Token quality in DAOs is a matter of fulfilling an economic, utility, and user experience function.
Going on with the analogy, the stakeholders are the vital organs of a DAO, each of them has an essential function. These stakeholders groups have different roles in the DAO, they contribute differently and extract value differently. Tokens might have a role to play in distributing roles to those who hold them, but also to reward stakeholders for their work. Here is one trivial example: Developers develop and are paid with the DAO token for their work, investors get a governance token and vote for directives while benefiting from the value encapsulated in the token, users buy the token so they can use the product and bring increasing demand through network effects. Ideally, each category has a specific type of work and reward. Quality here is about generating a diverse, resourceful and resilient ecosystem of stakeholders, starting from the individual.
Finishing with the analogy, governance processes are the set of biochemical mechanisms enabling the whole organism to communicate, make a decision and execute it. While the quality of component (1), (2), and (3) is very important for a successful DAO, the governance component is a meta-component that will be able to change both itself and other components. This could mean, switching to another blockchain infrastructure, modifying token economics, or even modifying core stakeholder functions. In addition, the governance process is in charge of the direction of day to day operations. Therefore, I consider it the most important component in a DAO. The power dynamics established through governance processes will have a dramatic impact on the life of the DAO over time. Quality here is about finding the right compromises which will allow power dynamics to find an equilibrium which fits both the goal of the DAO and the nature of the stakeholders participating (check my post here, more to come)
Based on the above, here is a theoretical definition that emerges
D — a DAO is Decentralized because it is built on a decentralized infrastructure blockchain where power isn’t concentrated in the hands of one stakeholder
A — it is autonomous because stakeholders taking part in the organization self-organize, self-assign tasks and collectively make decisions thanks to the governance processes in place
O — DAOs are a new type of organization where stakeholders operate not as a strict hierarchy but as a flexible network of stakeholders with well-defined roles and power dynamics
Components interactions
In this post, I refer to these different parts as components and not layers because each of them interacts with all the others. The nature of the influence of each component over the others can vary. Here is a guess on what they can be.
Note: the table has been made based on my sole understanding of the different components. This is a narrow view in a vast space. I expect that the table can be expanded, modified and filled in a much more exact and comprehensive way.
Formation process of most DAOs in existence:
- White-paper and fundraising — at this stage the global picture of components (1), (2), (3) and (4) if there is one are laid out
- The product is worked on
- Product components (1) and (2) are tested, then released on the main net of the infrastructure blockchain
- Component (3) is added to the mix, stakeholders come and go to use or contribute to the DAO services
- Stakeholders use component (4) to make the organization grow and evolve
Note: for major DAOs such as Bitcoin or Ethereum, component (4) does not really exist or could be considered trivial
The DAO formation process described above doesn’t feel optimal and it is very possible that it changes substantially over the years to come. As for computers, we may have to wait for the Apple and Microsoft of DAOs to bring them to the mainstream. Before Apple and Microsoft, computers were complicated machines sold in B2B by companies like IBM. In the same fashion, it is possible that we’ll have to wait for projects to simplify and dramatically increase the accessibility to DAOs as a form of organization. Also, new fundraising mechanisms (ex: bonding curves) and governance processes (ex: new types of voting) are currently being built. Each of these can have a high impact on how one brings a DAO to the world.
Conclusion
DAOs are based on a complex set of components. Each component has its own characteristics and questions that can be treated separately: power dynamics at blockchain infrastructure level, token engineering, community generation and governance tools implementation. But overall the DAO will be the result of the multiple interdependencies between all these systems and how they end up working together. The creation of the DAO is an important process in the determination of these components where the flesh and bones, blood, organs and decision-making system of the organism are put together. Creating a successful DAO depends on the symbiosis between DAO components which is itself determined by the formation process.
