The Moloch DAO: Collapsing The Firm.

Organisations come in many shapes and sizes. The blockchain allows us to experiment with radical new ways to organise around collective goals. We’ve seen the ICO boom (and bust, for now). For many, it was a novel way to re-imagine how certain projects can come to fruition and exist. ICO’s, however, are only the start and tip of the iceberg of what’s to come. In this article, I will detail thoughts around the Moloch DAO. It’s a new type of organisation (developed by Ameen Soleimani, Arjun Bhuptani, James Young, Layne Haber & Rahul Sethuram) that blurs and redefines the definition of a firm.

Moloch DAO

“referring to a person or thing demanding or requiring a very costly sacrifice.”

Imagine if a company worked as follows:

Its stock does only 2 things:

  1. allows you to vote on issuing new stock.
  2. allows you to destroy your stock to get access to its capital.

Unlike traditional organisations, the stock is NOT used to continuously control & manage the capital of an organisation. Instead, the only way to get access to the organisation’s capital, is to destroy stock along with its rights to vote on issuing new stock.

In other words: if you have 10% of the stock and you destroy your 10%, you get 10% of the capital that the organization currently owns. Under no other circumstances can the underlying resources be distributed & managed. You can only get the capital if you destroy your ability to vote on who gets access to the capital. There’s no director. There’s no employees. There’s no specific human deciding where to send money in the organisation.

In order to acquire stock in this organisation, you have to ask the existing stockholders, through a vote, to create new stock for you (ideally in exchange for resources into the organisation). The supply of stock and the supply of capital will thus grow and shrink in time.

That’s the gist of Moloch DAO: A novel organizational design aiming primarily to more effectively coordinate resources for issuing development grants for Ethereum.

The first version is likely launching soon & I’ll be watching it closely.

Incentivizing Coordination.

An organization is only effective if cost to coordinate using its tools is less than the value in coordination it brings forth. In another framing, an organisation will keep growing if:

Value of coordination > cost to coordinate.

I’ve covered these ideas in a previous blog post, before. Reducing coordination costs through smart contracts allows us to build new forms of coordination mechanisms that weren’t possible before.

Moloch DAO incentivizes coordination by collapsing traditionally separate parts of a company into one process, and by creating additional incentives for defectors to defect and exit. The latter is meaningful since it keeps the core owners more gainfully committed.

It posits the hypothesis that in reducing the steps & processes involved in managing its capital and making it easier for people to leave/defect, it reduces coordination costs. This trade-off comes at the cost of having a less flexible organisation with less nuanced control over its resources.

Collapsing Concerns

Traditionally, to invest in a company, it meant that in exchange for capital, the investor would get some percentage control of the company. Depending on how the company is set up, it usually just correlates in being able to vote on various things. It’s usually more nuanced & flexible. For example, in a traditional organisation, you can employ someone who is responsible for distributing the capital efficiently.

Moloch DAO removes a lot of the usual deliberation involved in an organization. There’s no voting to employ people, there’s no voting to decide what to do with resources. There’s only voting to issue new stock.

If someone wants to participate, they need to give a “tribute” to organisation in exchange for requesting new voting shares (which is non-transferable). This proposal is then voted upon by the existing voting share holders. One can submit any tribute (in the form of ERC20 tokens), even zero, in exchange for any amount of voting shares.

Incentivizing Defecting

Moloch DAO always leaves a door open. Every time there is a vote, one can decide to exit (“ragequit”), turning non-transferable voting shares into transferable “loot tokens”. If you destroy your loot tokens, you can exit with your proportional amount of the organization’s resources (“treasury”).

I’ve written about the value of having profitable defecting before:

Making it beneficial for early defectors to defect not only rewards those defectors in believing their new opportunity is a better choice, it also strengthens the value of the focal point of the existing group (think: “All the non-believers left. Thus, I can believe in those that are still here, more”).
When no other options present themselves, humans are pretty good at assuaging themselves of their predicament. When no other doors are open, it’s easier to argue that the metaphorical room you are stuck in isn’t too bad after all.
When we have many options available on the other hand, exiting also becomes a stronger signal for those who actively does not. This is apparent in countries that are in decline. Over time as people emigrate, those that stay are actively signalling that they aren’t exiting. It thus reinforces the bonds of the groups who are staying. This is also apparent in relationships. Those who stay when they have options, is a strong signal to the partner of the commitment.

What’s more is that Moloch DAO reputation plays a big part. In order for existing members to evaluate whether you will work together, having knowledge of the applicant helps their case. One of the key principles of Elinor Ostrom’s work on commons management is the concept of graduating sanctions. In commons management, reputation is important.

(An aside: It’s perhaps why in Bitcoin, for example, even though it is rationally profitable to commit selfish mining, miners don’t do it, because they have their reputations on the line. The irony is, is that some centralization in mining hardware is actually beneficial. ;).)

Because you have to apply to receive voting shares, if you defect/exit into acquiring loot tokens, and you want to join again (getting new voting shares), you have to prove you made a worthwhile contribution with the capital you left with. It’s why it is important to make sure that whomever is allowed access capital will actually work towards the shared goal of the specific Moloch DAO.

Reasoning about Moloch DAO.

Assuming there’s no external revenue coming into the treasury, if Moloch DAO is to succeed in capturing value, it will have to do one core thing: attract members who will use the capital towards its shared goals.

Why? It’s beneficial to attract new members because it increases the capital of the organisation, making it more profitable for its owners. When users defect/exit with capital, they are either leaving with profit for themselves, never to return, or taking resources to build towards the shared goal of the organization. In the case of Moloch DAO, the goals are to improve the public ecosystem of Ethereum.

Those who leave to build need to utilise the resources well in order to be allowed back in, perhaps even at a discount (for tribute <-> voting shares).

It essentially posits the question: can an organisation grow effectively only by being quite diligent on who is allowed to be a member of it? In other words, the fund distribution capability is an aggregate of the various members, their reputation & ability to choose new members effectively. It’s fund distribution capability is a combination of actors & their personal interests, not a handful of people.

If the organisation grows, more will be at stake and it needs to keep ensuring that new members are actually going to provide value. It could start enacting out-of-band rules such as generally increasing the tribute required for voting shares (which it would have to do eventually).

These rules creates a clear focal point and agreement.

Another way to frame it, is to think of it as manual token bonding curves.

Essentially: Moloch DAO is similar to a token bonding curve where every buy has to be vetted by the current token holders.

Extrapolating

Of course, no post is meaningful without extrapolating a bit on what might happen if it succeeds. ;)

I think what’s interesting, in technicalities of Moloch DAO is that the tribute can be *any* ERC20 token. This is unlike any other form of crowdfunding that’s previously been proposed in the blockchain space. In other words, to join, new members can give a tribute of *anything* they want: whether it’s token projects on Ethereum, Ether, DAI, p3d, anything.

You can even decide to create IOUs and commit it as tribute. eg, I will create 10 Simon Mentoring Hours (SMH) and commit as tribute. If someone exits with the capital, they might exit with 1 SMH, and if I still honour it, it’s meaningful.

Conclusion.

By creating clearly defined rules on membership in smart contracts, Moloch DAO is a novel way to collectively organise around shared goals. In sacrificing flexibility over resource management & allowing its members to readily defect, it reduces the transaction costs to coordinate. The hypothesis is that this trade-off could be a meaningful way to collectively distribute and organise funds. I suspect it will. At the very least it will be interesting to watch!

In general, these new forms of crypto-economic innovations are still very new. For example, Token-Curated Registries are live and being tested. We are learning from them. Never mind, other new innovations like Continuous Organisations or Liberal Radicalism.

We are only at the tip of the iceberg. Time to make some sacrifices.

P.S.

The naming is based off one of my favourite articles, called Meditation on Moloch by Scott Alexander. I highly recommend reading it. It’s an excellent explainer on game theoretic traps humanity falls into. In the article, Moloch resembles the “God of Coordination Problems”.