The road to building a working DAO — part 1

We’ve been teasing Wetonomy — the system for establishing your own flavor of DAO for a couple of months now. In our spirit of transparency and with its first version coming out very (very) soon, we decided to include everyone interested in its progress and the challenges we solve daily developing it. In a series of blog posts, we will unveil Wetonomy’s capabilities, features and what they mean for entrepreneurs, established business owners, and DAO enthusiasts. The first post aims to give context to those who hear of Wetonomy or (god forbid) DAOs for the first time and why we believe they are the next logical step in the evolution of business.

Where did we screw up?

Tao or Dao — ‘path’, ‘road’ or “principle’, “holistic science’.
In Chinese philosophy “Dao” — the absolute principle underlying the universe, combining within itself the principles of yin and yang and signifying the way, or code of behavior, that is in harmony with the natural order.

I’ve been thinking of Decentralized Autonomous Organizations (DAOs) and even tried to create one long before I’d even heard about the term and the technology that later enabled it. In fact, I have a very long history with this concept. If I trace back my first steps leading to the team working on Wetonomy today, it has been a 10-year journey to reach this point.

For me, it began back in 2008, when three major events coincided in the space of three months. I would later find out that they were crucial for me to build a working DAO. The events in question — the global financial crisis, the announcement of bitcoin and the first company I founded.

At the age of 23, with 12 years of writing code behind my back, I left the company I was working for back then. It felt wrong being just a cog in a wheel, with no say in company matters, despite being the most experienced developer on staff. “There must be more to work”, I thought. So I started Obecto — a software company “passionate about software and people”. The idea was simple, to form a technocratic community, ran by the programmers rather than a board of directors. We would experiment with different democratic models, transparent governance and bonus systems. Everyone would be properly incentivized so that people would work because they want to, not because some boss said so. We wanted to build our little utopia, where we were inventing and building together just because we love to do so. And so we did. For a while.

Obecto has grown into a very successful company over the years. With its open practices, it has become a local benchmark for a happy workplace. We were steadily growing both in terms of staff and profits. But as we grew so did the realization that we were slowly becoming a company, subject to the will of a board of directors. Focusing more on quarterly profits and less on innovation and sustainability. Which brings me to the second event of 2008. The lessons from which helped me evolve the idea behind Obecto and Wetonomy even further.

For me, the financial crisis happened as suddenly as for most of us back then. But as its consequences were spreading, enveloping one country after another, I started to pay more attention. I wanted to understand how the failure of three US banks could drag the world economies in stagnation of unseen proportions. And being the engineer that I am, I decided to break down the problem until I found its roots of “where did we screw up”?

The problem with centralization

Centralization means one thing is owned by another and the higher you go up the chain, the fewer “owners” you find. In other words, at the end of the chain, the control is held by a single authority. Much of the business world we know today is structured in this hierarchical pyramid. From companies with a board of directors to a single department and its managers. In essence, the problem in a centralized system is that there is a single point of failure. There is also that we have to trust these single points that they have our well being (not just their own) in mind. Last but not least, further down the chain people become less engaged with the agenda at the top. From here the realization came that the organization I wanted to create shouldn’t depend on me as this single point. Everyone involved had to be an equal owner.

Engineers know that this problem could be solved by the construction of a network. For example, in a distributed computer system, all nodes communicate with each other and even if some of them fail or are compromised, the network would keep functioning. So the logical thing was to build an organization with these properties embedded from the grounds up. This is how we started the Comrade Cooperative. A decentralized organization where all the original (sixteen) founders are owners with equal votes on company matters.

However, a decentralized system, although more secure, is harder to implement and manage. Issues arise, such as the CAP theorem, governing that it’s impossible to achieve simultaneously Consistency, Availability and Partition Tolerance in a distributed system. Another hard to achieve property is Byzantine Fault Tolerance since in a connected system it might be impossible to tell whether there is a compromised node or not.

In other words, while our decentralized organization was immune to a single point of failure it would be sluggish in terms of governance, automation and keep us all moving in the same direction simultaneously. We needed an upgrade. And here comes Wetonomy, influenced by the third major event beginning in 2008.

On October 31st, 2008, a guy (or a group) named Satoshi Nakamoto proposed a protocol that seemingly solved the Byzantine Fault Tolerance problem. This new method, dubbed blockchain, allowed computers to connect in a trustless manner, so everyone was able to start a node, but no one could manipulate the system. And even if a node was managed in a malicious manner, this wouldn’t break the consensus and the whole network would keep running consistently. An elegant solution that enabled trustless decentralization on a whole new scale. And while the early majority of people will remember this technology with the rise of Bitcoin, the early adopters will for another innovation that followed.

The DAO — the more important reason we have Ethereum

The DAO was the first fully digital decentralized autonomous organization. Much like us, It had the objective to provide a new decentralized business model for organizing commercial and non-profit enterprises. The DAO raised more than $150 mln worth of Ether during its record-breaking crowdfunding campaign in May 2016. Because of its full transparency, automation, autonomous governance and flexibility, The DAO was considered “a paradigm shift in the very idea of economic organization”. It seems strange to me that many people have forgotten that this concept was actually one of the most exciting use cases for Ethereum in its inception.

Unfortunately, its fortunes quickly turned when a couple of weeks later users exploited a vulnerability in the code to drain $50 mln of The DAO’s recently raised capital. Despite its short-lived success, The DAO proved to our team the collective desire for such a paradigm shift. It also gave the world an example of what is possible with this new technology. It all becomes possible thanks to the concept of “smart contracts”, which made it possible for one to build an autonomous wallet, where certain rules govern how the money can be drawn out of the contract. It also guaranteed stakeholders a say in the governance of an organization. Today, thanks to smart contracts, organizations ran by code are entirely possible for everyone to set up.

The ingredients of a DAO

From the legacy of The DAO and following projects, we now can synthesize the recipe for a DAO:

1. It is building open-source software. It has to be open-source, in order to be decentralized. The software is not provided as a service, but users are responsible to host it or chose a hosting solution.
2. Storage is decentralized, too. Instead of on a single server or a data center, data is kept on a distributed repository like IPFS or locally, on the devices of users. This helps in sense of security, as there is no single failure point where the data could be stolen from if hacked.
3. There should be a community behind the organization.
4. There is a token economy that gamifies the interactions between the system participants by incentivizing certain actions.

Also, there are people who contribute to and represent the DAO itself. There is a faint line between these contributors and the aforementioned community and these two often blend, although the community is more often consumer-oriented.

So how would a DAO compare to the good old company format?

1. A company’s structure is defined by written arrangements, like contracts with clients, suppliers, employees, etc. All of those exist in a DAO as smart contracts.
2. The equivalent of a company’s ownership is a DAO’s token economy. Since a DAO is decentralized, there’s no equity, but rather each participant is rewarded, according to their contribution.
3. A company keeps its money in bank accounts. A DAO might use cryptocurrency in wallets, instead.
4. Bookkeeping in DAO would then happen on a decentralized entity, like a blockchain.
5. In a typical business, legal issues are taken to court. In terms of jurisdiction, a DAO might use its community to solve such problems.

Often the terms DAO and token economy are used almost interchangeably. But they are not the same thing and it’s important to clarify the differences. The token economy is a network, where users execute transactions with each other. The participants of this game are rewarded with tokens. The DAO, on the other hand, is an organization and as such it consists of people, who perform coordinated work to achieve a common goal. A token economy might also exist within the DAO and it rewards contribution, not mere participation.

Further evolving this idea, smart contracts empower us to the point that we could create a completely autonomous reward system for contributors and investors alike. Just like in games like Monopoly or Catan, participants are rewarded with tokens depending on their actions. Since our game is essentially a system of smart contracts on a blockchain, it is decentralized, i.e. no one owns it. Such a system would allow a group of people to work together towards a common goal in a productive manner, without any management, without the need to trust or even know each other.

Before digging deep in Wetonomy, it is worth mentioning other major projects, exploring the DAO space. Some of which inspired our work as well.

The state of DAOs

Over the past few years, there have been some exciting projects in the field of DAOs. Among which are the cryptocurrency Dash, MakerDAO, and Colony, aiming to allow decentralized management of tasks. There is also DAOstack and Aragon which should serve as a DAO-building framework.

Futarchy

It’s worth noting that DAOstack has teamed up with GNOSIS, an organization that is behind one of the largest prediction markets platforms. In fact, prediction markets are the core of a concept called futarchy. In short, it is a voting system where voters bet money on their beliefs. And if a voter’s bet has turned upright, they would be rewarded. This system requires a goal and a reliable way to measure success. Futarchy eliminates problems such as vote-buying or mindless voting as people are required to put ‘skin in the game’ and everyone is held accountable for their decision.

Here is a short example of how would futarchy work: Say, there is a financial crisis and it has to be decided whether to bail out the banks or not. The measurement of success would be the country’s GDP. And the goal would be to reach a certain GDP amount in 10 years.

Two prediction markets are created. One sells tokens for the YES decision and the other sells NO tokens. Voters would then purchase (or sell) these tokens, depending on their beliefs how the problem should be handled. For example, a person who is adamant that the banking system should be saved and this decision would help achieve the GDP goal in 10 years, they would purchase the YES token, and probably, more than once.

After a certain period of time, both markets close and the voting finishes. The market that has generated a higher price for its token gets the respective decisions implemented, because, obviously, people value this decision more. The other market is erased and all transactions are reversed, meaning every voter on the losing market, receives its money back. Ten years pass and the GDP is calculated. If the goal has been reached, voters on the winning market are rewarded pro-rata their investment. Otherwise, they get nothing.

This system hasn’t been implemented yet and could maybe work one day, but it is certainly not applicable to every organization. It might be a solution for huge communities and countries, but it would never work for small organizations with a few people, where decisions have to be made every day.

Aragon

You might think of Aragon as a platform for building decentralized applications. Its architecture consists of the Aragon OS, Aragon.js, Aragon Core, Aragon UI, and Aragon Network.
Aragon OS is a smart contract framework. Thanks to its upgradeability, you can easily evolve the code, if needed. Also, permissions can be distributed across certain roles for better management of the system.

Aragon.js is a JavaScript library that can interact with the smart contracts from the OS via Web 3.0. Aragon OS is accessed via a web console, called Aragon Core. Aragon UI is a React.js-based framework allowing users to build their own Aragon Apps with consistent controls. These apps use Aragon OS and can be accessed through the user interface (UI) of Aragon Core.

All this is built on top of Ethereum & IPFS, hence the whole system is completely decentralized. Once Aragon instance is deployed, it can’t be altered or stopped unless there is a consensus between the members. There is also the Aragon Network, which is the exact sort of a decentralized jurisdiction we mentioned earlier.

In short, Aragon gives you the foundation to deploy your own DAO on the blockchain. This is also the exact foundation that Wetonomy uses. Still, it leaves some questions unanswered. Like, how can you construct a business model on it?

Wetonomy

Our Comrade Cooperative has found several business models for decentralized organizations. In our next post, we will examine those that can allow for a real-life DAO to function in a self-sustainable way. We will also explore our proposed High-Risk Automated Debt system — a fundamental concept for decentralized organizations, as it gives a way to incentivize contributors to the future success of a DAO. Last but not least, we are experimenting with Wetonomy prototypes internally and soon we’ll be ready to share some updates on that too.

UPDATE: Read more in Part 2.

Originally published at the Comrade Coop blog on July 26, 2018.