You can find my original blogpost for the BitPrime blog here.
Smart Contracts revolution
Back in 2013, Vitalik Buterin published the Ethereum whitepaper, and the world of Bitcoin expanded to new levels. This introduced a new Blockchain no longer confined by a restrictive programming language, instead, Ethereum has a fully turing-complete programming language, allowing for a wide variety of use cases.
Smart Contracts are the greatest innovation after Bitcoin. They program how, when and what is distributed over the Ethereum network. They cut out the “middle-man” in many industries and revolutionise the structure of the traditional economy. Between the many disruptions we are discovering, there’s one that will change forever how humans and organisations interact with each other, this will be the “Decentralised Autonomous Organisations” or “DAOs”.
For as long as we can remember, humans get together to accomplish their goals. Whether hunting to feed families, creating a government to organise resources, or building an enterprise to help push the human race forward. In all of these endeavours, there’s always a governance aspect. A single person or a group, leading the venture and dictating how things should be.
The definition of an organisation is:
“An organised group of people with a particular purpose, such as a business or government department”.
Organisations helped society to progress and create amazing things, we would never have come this far, without an organised effort. Nevertheless, the fact that an organisation, at its core, is ruled by humans, means that it’s subject to human flaws. Greed, vanity, misunderstanding, jealousy and the never-ending list of things that make us human, they are also stopping us from reaching the full potential of organisations. Furthermore, at times the hierarchical structure of organisations can lead to inefficiencies, missed opportunities and miscommunication.
With the introduction of Blockchain technology and Smart Contracts, a new era for organisations has been unlocked. Blockchain allows organisations to reach a potential never seen before, by automating a lot (if not all) of the decisions an organisation has to take at their governance level.
What is a DAO
DAO stands for “Decentralised Autonomous Organisation”, meaning an organisation or a business on which the decisions are automated by computer code inside a Smart Contract or subject to vote from the organisation’s token holders. It’s a system for an organised effort to decide on the steps that should be taken to accomplish its goals in the most decentralised way, with no single point of control or hierarchical structure.
Through the capabilities of Blockchain and Smart Contracts, DAOs automate most, if not all, of the critical and non-critical processes and decisions of an organisation. It aims to reduce the human inputs and increase the automation and collaboration of organisations.
DAO’s have associated tokens. The tokens can represent the right to vote on different matters, similar to a company’s stocks, or can be used for different use cases (spent by the organisation, reward users, etc.). Every DAO has voting capabilities and a reward system tied to the success of the endeavour; this flattens the traditional hierarchy of organisations and ensures collective decision-making to reach a consensus within the participants. Some DAOs can also open the voting to non-token holders for certain matters. The possibilities are infinite as the rules of the organisation are coded into the Smart Contracts.
Also, some DAOs allow stakeholders to make proposals regarding its future. Monetary deposits can be enforced in these cases in order to prevent the organisation from being spammed with useless proposals.
One good way to get an idea of how a DAO functions, is to imagine a vending machine that takes your money, gives you your requested snack, and then is able to create a new order to refill the snacks. This is optimised by calculating the average amount per snack that the machine sells, then from this calculation, an order is made from the money accumulated from the purchased snacks. This machine can also order cleaning and maintenance services. Furthermore, you can put money into the machine and get voting rights on the type of snacks it has, how often it should be maintained and where it’s placed. The machine runs completely on its own, with no human interactions, all day long, 365 days a year. All the rules are coded into a Smart Contract in the blockchain and can be seen by everyone.
The Power of DAOs
As you can see, DAOs are powerful, cost-effective and reliable. There’s no human point of failure like greedy managers or unaligned stakeholders interests, and all important decisions can be voted between the invested parties.
The potential to reshape governance in organisations is huge. Because DAOs are still in an experimental stage in blockchain, we can only see some of the possibilities that they could bring us. But one can easily imagine DAOs in which customers of the decentralised company can vote on expenditures the company makes, who to partner with or where to invest. Not to mention how profit should be distributed. All of this makes the invested parties more actively engaged with the goal of the organisation, as they now can be customers and stakeholders at the same time.
DAOs will bring more freedom to individuals, as there’ll be no limit or regulation in how many DAOs someone can participate in or from which part of the world. This means that individuals all over the world can decide which global organisations to invest in, being fair and non-exclusive. The power of on-chain transactions also simplifies the process of selling shares in a DAO without the technical and financial complexities that exist nowadays.
History: The Fall of the DAO 2016
DAOs are getting a lot of attention right now, but they have a turbulent history, mainly due to complete failure on one of the first DAOs ever created, and the subsequent fork of Ethereum. “The DAO” as it was originally called, was launched in 2016 via a crowdfunded token sale. The main objective of “The DAO” was to serve as a decentralised venture capital fund on Ethereum’s blockchain to invest in different businesses and not-for-profit initiatives.
In June 2016, a hacker, or a group of hackers, found a vulnerability in one of the third-party libraries the DAO was using. They exploited this vulnerability, allowing them to empty the funds that the main Smart Contracts managed. In just a few hours, around 70 million USD was stolen from The DAO.
After the infamous hack, two possible scenarios emerged. One was that the Ethereum team could rollback the hack by forking the blockchain from the block before the funds were stolen, therefore giving back the funds to the people, like the hack never happened. This meant continuing Ethereum in another separate blockchain. And the second scenario was to accept what happened and continue with the same blockchain, as it should be immutable and once a transaction is settled, there’s no turning back. The community was divided, and the decision was put to vote, 89% of the community voted for forking a new chain and giving back the funds. This new blockchain kept the name of Ethereum and it’s ticker ETH, while the “original” blockchain was called “Ethereum Classic” with the new “ETC” ticker.
After the DAO hack, two new projects surged but these DAO initiatives weren’t very popular, nevertheless, they kept progressing in the shadows, and as the development in Ethereum matured, so did the projects. Now in 2020, the new DAO initiatives have learned from past mistakes, and are more robust and mature, hence the rise in user adoption.
The Current State of DAO’s Ecosystem
As mentioned before, DAOs have come a long way from the 2016 failure, but there is still an experimental feature, which is that it is mostly confined to the blockchain and cryptocurrency space. Nevertheless, 2019 was a big year for DAOs and DeFi (Decentralized Finance) which are related as some of the DeFi projects are DAOs themselves. MakerDAO is probably the biggest DAO right now, and it’s also one of the biggest DeFi projects. Aragon and MolochDAO are two other popular projects, mainly focusing on governance and funding. As with DeFi, there are continually more new projects coming into light. All of these projects are open source systems that can be copied, reused and rebranded, and this is key to drive the DAO space further.
Overall, we have seen a maturing and an increase in the ecosystem from the past, although we are still in the early stages, and to start talking of DAO massive adoption would be incautious, as these types of projects need time to mature and improve over time.
MolochDAO is one of the most popular and new DAOs. The goal of MolochDAO is to act as a decentralised funding entity for Ethereum projects, mainly to fund the development and public infrastructure of Ethereum 2.0.
From a wider perspective, it aims to solve (or at least significantly improve) the classic economic problem called the “tragedy of the commons”. This is where, in a shared-resource system, individuals act independently in their own self-interest which goes against the common good of all users by depleting or spoiling the shared resource. In general, collective public funding has struggled to find a way to incentivise any person to invest and find a way to benefit everyone more or less equally. Why spend money on something that somebody else enjoys for free?
How it Works
MolochDAO has a collection of tokens which represent membership units or voting shares inside the DAO. Each member’s voting power is proportional to his or her percentage of overall shares. Members cannot sell or transfer their shares. The only thing that happens on-chain is the voting that decides to admit new members. If a new member is approved, new tokens will be issued to the member. New members who want to join MolochDAO, need to negotiate with an existing member who will submit his or her proposal indicating the number of shares requested and the amount of “tribute” they are offering. Then, current members vote and decide on the proposal and if they all agree, new shares are created and a new member enters into the DAO.
This way MolochDAO ensures that all members are invested in the main goal, which is funding Ethereum 2.0. This means that Ethereum 2.0 will increase its value over time, creating a benefit for all invested parties.
The Future of Organisations
DAOs were originally envisioned to accomplish what Bitcoin did for centralised money, for centralised organisations. The DAOs aims to be “unstoppable organisations” with no central point of power nor failure. They run autonomously, apart from the inputs of the votes of invested parties. They are open, borderless and uncensored organisations, and it would be fair to say a more “democratic” type of organisation. This makes a lot of sense, but DAOs still need to prove to be a reliable and profitable way to evolve organisations.
The success or failure of DAOs is linked to the understanding of Blockchain technology as a whole, and a shift in mindset that people will have to make on how they see society and the economy. The revolution in finance has started with Bitcoin and cryptocurrencies, but we will see a major revolution when DAOs mature enough to take on traditional organisations. The traditional economy will change forever to a more decentralised economy where everyone can participate and have a say in the governance of the product or service they want. This will free us to pursue different goals, and hopefully make a better and more just society.