Heading to dystopia? Why DAOs could shake up the way companies are run
Authored by Kevin Jenkins, originally published by the NZ Herald on 17 January 2022
The music industry is often at the forefront of disruptive change.
For a recent example look no further than Audius, a challenger streaming service that has looked to benefit from a mash-up with a broader-based social media app by partnering with TikTok. It allows songs to be used in TikTok videos, and for viewers to link back to the artist on Audius.
All very interesting, but it’s the Audius governance model that caught my eye.
Welcome to the world of “DAOs” — or “decentralised autonomous organisations”.
I first heard about DAOs in 2019 when I attended the New Frontiers conference organised by the Edmund Hillary Fellowship. There I heard people in their 20s talking about experimenting with a whole new form of organisation, including a completely different approach to governance and decision making. One example is a group of developers using voting on a blockchain to decide what new venture to back, and who will do what tasks.
When Audius popped up, it looked like an example of that revolutionary type of organisation. CNBC blogger Taylor Locke explains the DAO angle (CNBC, August 17):
“Unlike Spotify or SoundCloud, which are not blockchain-based, Audius is built on the Ethereum and Solana blockchains and is run by a community of token holders, rather than one centralised entity.”
But who are these “token holders”?
Well, you can become one if you buy some “AUDIO”, the “native governance tokens of Audius”, the price of which doubled when the TikTok tie-up was announced. Or you can earn AUDIO by being a top artist or user.
Next question: what are the tokens for? They’re not for transactions as such, like say Ether on Ethereum, but rather for voting and control over decisions.
Yep, that sounds like an organisation that’s decentralised and autonomous — a DAO.
The first attempt at a DAO
“The DAO” — branded with a stylised ”Đ” — was an investor-directed venture capital fund launched in April 2016, after a crowdfunding campaign where people bought tokens.
According to the CoinTelegraph website it was “the most successful crowdfunding campaign in history, having raised over $150m”. But the DAO was defunct by September that year.
The DAO’s Wikipedia page explains its brief existence as “a set of contracts that resides on the Ethereum blockchain; it did not have a physical address, nor people in formal management roles. The original theory underlying The DAO was that by removing delegated power from directors and placing it directly in the hands of owners the DAO removed the ability of directors and fund managers to misdirect and waste investor funds.”
In the public’s mind, blockchain technology equals cryptocurrency. But blockchain advocates have been thinking much more broadly for some time.
Ethereum, for example, is a platform for people to run blockchains on, and the expectation was for it to have all sorts of emerging applications, like identity registers for example.
Those wider uses have been happening (along with debates about whether blockchain is significantly better than other solutions), but they don’t seem yet to have caught the attention of the general public in the same way as Bitcoin and the like.
The DAO was a further extension of the blockchain idea, with a new business model for commercial and non-profit enterprises. Token holders voted on investment proposals, with voting rights proportional to the level of their investment, but didn’t hold the investment funds. The code was open-source, with the intention that all decisions would be transparent and auditing would be a breeze.
It also was stateless, and investors could send money from anywhere in the world without identifying themselves. That last point might explain why they chose Switzerland as the base for their company, “DAO.Link” — a necessary add-on established to deal with real-world legal structures.
The first two potential investments were Slock.it (a German blockchain venture), and Mobotiq (a French electric vehicle start-up).
There were lots of concerns expressed at the time, many of which might be raised with any decentralised autonomous organisation. As with cryptocurrencies, being stateless presents big challenges for regulators. For example, the US Securities and Exchange Commission concluded in 2017 that the DAO tokens sold on Ethereum were securities and so involved potential violations of US securities laws.
Also, while all the transactions might be transparent, those seeking investment could still be bad actors and promote dodgy deals.
The DAO gets hacked
What caused the demise of The DAO though was more prosaic. People had been pointing out security problems since soon after The DAO was set up, but before these were addressed a hack on June 9 shifted about $50 million of tokens to another account.
They were eventually returned, thanks first to the hacked tokens having to first go into a holding room with a delay before they could be moved on. But getting them back took a deliberate intervention into the workings of the system — a “hard fork” in the Ethereum blockchain.
The Ethereum fork led to a lot of debate about whether this was an assault on the fundamental principle of a blockchain. “Forks” are a kind of existential disaster in blockchain world, whether unintended or intended, because they show something has gone wrong with the technology and that human intervention is needed to get everything back on (a single, unforked) track. These interventions undermine the theory that blockchains are a solid-gold technological solution to a problem of human behaviour and social organisation. As a platform, you’re supposed to be able to just set them and forget them.
But rather than the deliberate fork showing that The DAO was critically flawed in conception, perhaps it’s better seen as a potentially good and still untested idea where the founders just forgot to lock the front door properly — with the result that looters made off with much of its resources before it could really get to work. Perhaps a few tweaks of The DAO’s coding at the outset to make it fully secure would have enabled a real test of this bold new form of organisation.
Either way, not a great start for DAOs.
Some DAOs today
Since “The” DAO in 2016, there seems to have been plenty going on in this area. Ethereum continues to be keen to promote DAOs, with their flat, democratic structures, in contrast to traditional, usually hierarchical organisations.
With DAOs, says Ethereum, any changes require voting by members, with votes tallied automatically and changes implemented automatically. In traditional organisations, by contrast, if voting is permitted at all it will always be handled manually. The services offered by DAOs are also both automatic and decentralised, whereas in traditional organisations this requires either human handling or centralised automation, which can be manipulated. Finally, all activity is transparent and public.
As “famous examples” of DAOs, Ethereum promotes MakerDAO, another cryptocurrency, and also MolochDAO, which funds various digital projects. Another blogger on the subject of “Decentralised Tech”, BountyBase, also points to Credits (peer-to-peer financial transfers).
MolochDAO isn’t shy — its website claims it “has an absolutely brilliant system for evaluating grant proposals for projects and grants” (and even higher up the quality meter, it describes its Guilds, one of the main elements of its set-up, as “f***-ing siiiiiiiick!”.)
The figure of Moloch, the sacrifice-demanding Canaanite god, has sometimes been used, by writers from Marx to Beat poet Allen Ginsberg, as a symbol for money or capital or modern industrial civilisation generally. The general implication I take from the name MolochDAO is that modern capitalism/Moloch is the problem, and that MolochDAO and DAOs generally are a solution.
Grappling with governance
Corporate governance is a perennial topic, often getting elevated into our everyday sightline when there’s some major failure where a board seems to have been asleep. But 21st century debates around governance now also focus on the question of whose interests a board should be acting in.
The old-school view is that they owe allegiance only to the shareholders. But this is being challenged by the notion of the “triple bottom line” — of social, environmental, and financial concerns (or some variant of this, such as the “ESG” framework, for “environmental, social, and governance”).
There have always been business co-operatives in New Zealand, like the Co-operative Bank and Fonterra, and we even have a co-operative of co-operatives, Co-operative Business of New Zealand, along with lots of membership organisations.
But are New Zealand firms ready for the DAO model, with totally transparent governance and even management by stakeholders?
Taking the trust out of governance?
The Binance Academy, which offers training in blockchain and crypto, has pointed to the possibility that blockchain technology, with its properties of trustlessness and immutability, could potentially not just radically transform our financial system but also enable “entirely new types of organisations that can run autonomously”.
In the absence of a hierarchy, DAOs use economic mechanisms, like aspects of game theory, to align the interests of the organisation with the interests of the members.
Members aren’t tied by contract but by a common goal, and network incentives are tied to transparent, open-source consensus rules. Once launched, a DAO cannot be controlled by a single party.
Binance argue that the transparency and incentive properties of DAOs address the principal-agent and information asymmetry problems. Governors or managers of a company inevitably have more information than shareholders, and this overlaps with the risk that they will act in their own interests rather than those of the shareholders.
There’s another thread to this resistant movement. Once opened to the public, much of the internet was decentralised by its nature.
BountyBase is one of many who seem frustrated by the “Digital Dictatorship” where just a few Silicon Valley companies have ended up running the internet. BountyBase’s answer is “Web 3.0”, and they see DAOs as part of that, “where some blockchain companies are taking back the internet not for themselves, but for the betterment of everyone, everywhere”.
Risks and problems
Good governance will always require well-designed governance rules. The DAO model raises questions about how flaws or changed circumstances are addressed –by the members voting presumably, but will that be quick enough?
But blogger Mayank Sahu notes that decentralisation can mean token holders take a long time to vote, delaying decision making. Other risks with the DAO model include the possibility of a massive withdrawal of contributions if members lose faith. Fixing bugs in the code can also be complicated (the “The DAO” example).
There are also the usual risks of unintended consequences — the incentives may accidentally drive undesired behaviours — and poor execution (The DAO again, with its susceptibility to being hacked). The highly uncertain regulatory environment is another concern.
There is serious study going into these issues though. Three academics from the University of Canterbury, Robbie Morrison, Natasha Mazey, and Stephen Wingreen, examined the story of The DAO in a May 2020 article. They relished being able to see inside the workings of a trustless organisation, and describe The DAO as “a unique case of a company whose corporate governance consists entirely of information technology (IT) governance.”
It all seems a long way from the Four Pillars of Good Governance the Institute of Directors promote.
DAOs in politics
When I first heard of DAOs the concept reminded me of anarcho-syndicalism, the strand of anarchist political philosophy that was once influential on the left and in the labour movement, particularly in Spain in the first half of the 20th century, and also for example in Chile in the pre-Pinochet early 1970s.
Anarcho-syndicalism advocated for the abolition of the state because its purpose is to protect private property, and for direct democracy in factories — worker self-management.
(Maybe there’s a faint echo of this idea in the 2000s trend of “leaderless teams”.)
There’s a sense in which DAOs can be seen as continuing a long historical search going all the way back to Pierre-Joseph Proudhon (arguably the first anarchist) in the first half of the 19th century — a search for new flat-structured forms of social and political organisation that will make decisions democratically and achieve good things for the human collective.
Of course one of the key demographics driving the new DAO movement is youngish digital entrepreneurs, rather than, say, impoverished Spanish labourers. But that aside, the qualitatively new twist with DAOs is a promised technological fix to age-old problems of social conflict and dodgy human behaviour.
The way of the DAO
To get more specific though, it’s easy to imagine DAO principles being applied to referendums or local versions thereof, or applied even more deeply into our democratic machinery.
Democracy DAO is an example of an attempt at executing DAO in the political sphere, and is targeted at NGOs, unions, activist groups, and political parties.
Some DAO types are exploring a link to “liquid democracy” too, a form of direct or delegated voting.
NZ election turnout
Blockchain New Zealand’s August 2021 newsletter recounts that it talked recently with Kiwi entrepreneur Tim Goggin, who says his firm Horizon State already has a blockchain digital voting system, suitable for both central and local government elections.
Blockchain New Zealand points to the increasingly poor turn-out in local elections in Aotearoa, and says: “With so much reform currently happening in the local government sector, with substantial water reforms and potential council restructuring, it’s important for democracy that there is good representation across the country and across all eligible age groups. A blockchain technology voting solution puts voting power into the hands of voters, by way of a mobile device and provides a high level of transparency that builds trust with voters, while preserving their privacy and security.”
I guess it’s important we use the technologies that best support our democracies, but it also seems fraught with risk and certainly not something I know much about nor have the space to explore here. For a start, I’m sure there would be questions about the risk of hacking, about the risks of majoritarianism, and, in Aotearoa, the related question of Māori representation.
However, it is worth knowing that blockchain thinkers are exploring how to disrupt our democracies, and to stay watchful if and when these ideas emerge into more mainstream debate.
And now a little more music
Tech Cathy Hackl notes that DAOs are being used “for many purposes” like investment, charity, fundraising, borrowing, and of course buying Non-fungible Tokens — and this take us back to the music industry.
“Jenny DAO acquired its first NFT, an original song of Steve Aoki and 3LAU,” writes Hackl.
“This DAO is a metaverse organisation that provides fractional ownership of NFTs. Its members will be able to oversee the purchase of the NFTs and…smart contracts control the vault where these NFTS will be added.”
With the metaverse now gaining momentum, there’s a sense of us moving into a whole different world.
You can hear it in this manifesto by Universa Blockchain back in 2017:
“Presently a DAO structure could completely replace the functions of companies such as Dropbox, Kickstarter, Uber and Amazon and get rid of their ‘inefficient’ human managers… The creator of Ethereum, Vitalik Buterin said ‘There is a lot of intermediaries that end up charging 20–30 per cent, if the concept of decentralisation takes off and does well, those fees are going to decline to almost zero’. Not all humans are in agreement with possible change but it is undeniable that a DAO is a business model of the future.”
Its hard to predict where DAOs might end up. You could argue that a DAO isn’t much more than an automaton, even a windup clock with pre-set rules for action and members acting merely as clock winders by (in the venture-capital type of DAO) injecting new funds and choosing new ventures. Some might dismiss them as the latest revival of a utopian dream, others as the latest version of a dystopia ruled by mindless machines. Whichever way you see them, they are a big sandbox for fascinating experiments worth paying attention to.