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How to think about DAOs

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How to think about DAOs

Digital Nation or Internet Corporation?

Vaughn McKenzie-Landell
Sep 30, 2022
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How to think about DAOs

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I’m still not entirely sure what a DAO is. I am sure, however, that what I think it means is not the same as whatever you think it means. For example, I think Bitcoin is a DAO and I’m sure many people would disagree. I have a lot I’d like to say about DAOs but I’m not sure I can until we agree on some principles, my principles at least. This is an attempt to establish those principles.

By comparing and contrasting nation-states, corporations, and DAOs, I hope to tease out a set of common principles for organisations and identify what separates DAOs from their organisational predecessors.

Principles of Organisations

As DAOs are a relatively new type of organisational form, their standard features and scope are still poorly defined. However, for the sake of making progress, I’ve attempted to outline principles I believe are uncontentious—which means I’m sticking to broadly-accepted ideas from economics.

Considering Nation-States, Corporations, and DAOs as three types of organisation, it follows that:

  1. Organisations compete for resources, including labour, capital, land, raw materials

  2. Organisations reallocate resources from lower productivity activities to higher productivity activities to produce goods and services, from private to public

  3. Organisations tend toward growth as a strategy, as this improves their standing in the competition for resources

  4. Organisations are composed of (among other things):

    1. an allocation mechanism (how the organisation allocates resources), e.g., capitalism, entrepreneurship

    2. a governance mechanism (how to update the organisation’s properties), e.g., democracy, board of directors, token voting

    3. a standardised store of value (how to represent the value of the organisation’s resources), e.g., currency, equity, tokens

  5. Stores of Value are fungible and can be considered to represent a claim on some future resources or economic rights, i.e. 1 unit of the Store of Value can be exchanged for 1 unit of value in Resource A, 1 unit of value in Resource B, or 1 unit of the Store of Value

These principles allow us to compare DAOs to Nation-States and Corporations by considering how resources flow through them, how they allocate those resources, how they make decisions, and how they store value, while holding that all have a requirement for growth.

Delta

Interestingly, we stumble upon an obvious difference between the three when we consider how they achieve growth:

  • The value of a nation-state’s total resources is captured in its currency, e.g. Gross Domestic Product, and governance rights are distributed equally among citizens, i.e. a democracy. Currency, for our purposes, carries no governance rights and is the primary instrument used by Nations to finance growth

  • The value of a corporation’s total resources is captured in its equity, e.g. Market Capitalisation, and governance rights are distributed among shareholders according to the amount of shares owned, i.e. a plutocracy. Equity is both an economic and a governance right and is the primary instrument used by Corporates to finance growth

  • The value of a DAO’s total resources is captured in its token, e.g. Market Capitalisation, and governance rights are distributed among token-holders according to the amount of tokens owned, i.e. a plutocracy. Tokens are both an economic right and a governance right and are the primary instrument used by DAOs to finance growth

Why organisations bundle or unbundle governance rights and economic rights tells us something about the risks associated with centralising power in the hands of a small group of stakeholders for each organisational structure.

Reflections

We expect DAOs to produce public goods, a task historically fulfilled by the state, but they’re financed like corporations, i.e. through the sale of governance rights.

Perhaps there is something for DAOs to learn in the separation of governance rights and economic rights. By using currency, whose supply the state controls, the state can raise financing without giving up control of the state to its financiers. Unfortunately, this decoupling often ends in disaster as money printing becomes the proverbial hammer to which all problems are nails.

It appears that DAOs have adopted the worst of both nation-states and corporations. They’ve taken on the difficult task of providing public goods and services from nation-states, where the risks of centralisation are high, and hamstrung themselves with the dilutive financing mechanism of corporations, where plutocracy is the expected outcome. In some senses, this is like slamming one foot on the throttle while the other is firmly pressed on the brake—lots of smoke and noise, very little progress.

On balance, I believe DAOs, and decentralisation more broadly, offer a high resolution design space for organisations and institutions, plus some handy new economic tooling to tackle some of the more pernicious coordination problems that plague public goods and public finance. But it’s clear they need a few more iterations and to borrow a few ideas from political science and institutional economics before they really hit their stride.

Rune probably agrees.

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