Blockchain Summer and the Future of Governance

?????I am sure we have all seen the headlines—“Crypto is dead!” “Crypto is a Ponzi scheme!” “SBF is worse than Bernie Madoff!” I don’t care if these statements are true or false—there is one thing I do know, while it may be Crypto Winter, it will soon be Blockchain Summer. Let’s be clear, I do not mean your Dogecoin will jump in price. But the widespread integration of blockchain throughout our everyday lives has just begun. Understanding distributed ledger technology (DLT) and its applications will be as critical to navigating the new economy as working with AI. I am no blockchain expert, but I am obsessed with governance. Importantly, the future of governance—between individuals, organizations, markets, and even societies—will be on the blockchain. To participate in this future, you need to first learn what blockchain technology really is, its most prominent application in the form of the smart contract, and how that contract can be abstracted into a governance body, known as a Decentralized Autonomous Organization (DAO). Once you understand what a DAO is, you start to see how they can be used to transform the way we manage any type of structured interaction—covering everything from a family time share in Florida, to a decentralized, global government.

?

Blockchain / Distributed Ledger Technology (DLT)

????????“Blockchain will do for transactions what the Internet did for information.” Blockchain, or Distributed Ledger Technology (DLT), is a shared, decentralized ledger for all transactions made on that ‘chain.’ For example, today when a furniture manufacturer buys inputs from a supplier, both the manufacturer and the supplier have their own ledgers---often just a spreadsheet---where they keep a record of that transaction. This system made sense before DLT, but has a few clear issues—effort is duplicated by all organizations or individuals involved, there are huge opportunities for human error, and trust is based purely on the relationship or facilitated by a third-party. Blockchain architecture enables us to have a shared ledger for all transactions—a single source of truth. Each time a transaction occurs between participants in the network—the manufacturer buys 600 units from the supplier—the shared ledger is updated and cannot be changed. Both parties can view the ledger and see the updates. The transaction is final and the money is transferred automatically as the resources are. So then, what are the benefits to DLT?

1. We no longer need to waste time validating or verifying the authenticity of a transaction at each step.
2. Less oversight is needed of those participating in the network, and no need to duplicate effort keeping your own ledger, saving money.
3. Much tighter security, as humans cannot make self-interested changes to the ledger.

This is why people describe blockchain as a ‘trustless’ technology---you don’t need to trust the other participants you transact with, you just need to trust the technology that enables the transactions.

There is a lot more as to what makes blockchain work from a cryptographic standpoint—i.e. why cryptocurrency has that name in the first place—and if you are interested, check out IBM’s blockchain for dummies.

?Okay, so that was an extremely simple example, and a very high-level description of DLT, but hopefully it was enough to dive into the next level of abstraction: Smart Contracts.

?

Smart Contracts:

?

????????Today, there are billion-dollar companies whose role is to serve as a third-party facilitating transactions between others while providing oversight on their validity. Similarly, companies spend billions tracking and verifying transactions, or communicating with individuals and firms updates to their ledger. The inefficiencies that necessitate these oversight activities are known as ‘transaction costs.’ Through smart contracts, these costs can be minimized, and money and time can be spent on activities that create more value.

?

????????Smart contracts are pretty straight forward—its in the name. Rather than having a physical contract, with faxing, emailing, signing, and resigning of documents, contracts can be digital. To be clear, I do not mean having your contract in pdf. Smart contracts are an agreement or set of rules that govern a transaction or set of transactions, coded and stored on a blockchain. The contract is executed automatically when the conditions specified in the agreement are met. For example, imagine the travel insurance you bought for your most recent trip was a smart contract. The terms and conditions specify that if your flight is delayed more than six hours, you would receive an agreed upon compensation. When this occurs in the traditional system, you have to waste time going through the insurers customer service system, and the insurance company wastes money on employees to liaise with customers and manually input which ones have experienced delays. Then the company also spends time verifying the delay and figuring out how to send you the money. With a smart contract, these processes would automatically execute, and you would be compensated once the conditions were met. The insurer saves money, you save time, everyone wins as transaction costs are decreased dramatically. This is just one example, but I am sure now that you are equipped with a cursory understanding of smart contracts you will begin to see use cases in your everyday life.

?

There are countless individuals smarter than me working on integrating smart contracts into almost every business process as we speak. I am interested in a specific type of smart contract, whose application has just begun—the decentralized autonomous organization (DAO).

?

Decentralized Autonomous Organizations (DAOs):

?

????????To take a step back to the analog age, constitutions are social contracts a society makes with itself. The American Constitution outlines the form of its government, the powers these bodies have, who can spend the state’s money, and processes to change these foundational rules—amendment procedures. In this way, constitutions are ‘contracts,’ outlining the rules of the game, sometimes even mandating things as specific as not drinking alcohol (The 18th Amendment to the US Constitution). Decentralized Autonomous Organizations (DAOs) are essentially smart constitutions, which automatically execute activities specified within the rules of the contract for those who are members of the DAO. As of February 2022 (I know that is dated), there were 2334 DAOs with over 26,000 active members. But what does this actually look like in practice?

?

First, an individual—or group—comes up with an organization that has a purpose, writing about it in a whitepaper or chatting about it with friends on Discord. Second, the organization’s rules—covering everything from what it takes to be a voting member, what the voting procedure is, how the organization’s funds can be spent, what the process is for changing the original rules, among endless possible others—must be created using code on a blockchain network. In 2022, 69% of DAOs are built on the Ethereum network, while 17% have been built on Binance. Third, once the organization is created, those who want to join the organization and meet the requirements for membership, ‘buy-in,’ acquiring the DAO’s token. DAO tokens can be used as compensation for certain activities, or as the basis for voting power. For example, in 2022, 15% of DAOs listed on DAO Analyzer impose an ownership threshold—if you don’t own X amount of the token, you can’t vote on proposals. Once the DAO constitution is coded, and funds are in the DAO ‘treasury’ through individuals buying tokens, the fun can begin. DAO members can write proposals, vote on them, and fund activities that the group agrees upon. Not only do these organizations empower all members of the organization, with no centralization of power leading to human-based problems, but they also minimize transaction costs in the same way smart contracts do.

?

The possible applications for DAOs are endless. Some real life examples so far:

?

• ConstitutionDAO: A single-purpose DAO that pooled over $40M to buy a copy of the US Constitution that was at auction at Sotheby’s. While they did end up losing the auction, the effort was one of the first compelling attempts at a decentralized acquisition of a high-value, real world item
• Gitcoin Grants: provides funding for open-source projects through a public grant program
• Nexus Mutual: a decentralized alternative to traditional insurance, allowing members to pool their resources to provide mutual coverage for risks.

????????Listen, DAOs will not replace traditional governments anytime soon. Maybe not even in my lifetime. I have faith in humanity, and have love for all, but I am not naive. Humanity is fundamentally human—and therefore flawed. The future of governance—be it an organization or a government—is decentralized. We cannot be beholden to the selfish whims of individuals, the political and social crises of today prove this to be true. DAOs are a tool to achieving this end.?DAOs will help us to overcome our individual shortcomings and empower collective action. Just as is the case with any human construct, these new organizations will be at times problematic, fail, and miss the goals they set for themselves. But they will still be so much better than the current tools for governance we have now—which in most places is a verbal agreement to a piece of paper backed up by force. I look forward to this future, and plan on writing about it as much as possible, so follow along if you are interested. Next up: Saving North America’s Labour Movement—the DAU-nion.

Sources:

Carlos Santana, Laura Albareda, Blockchain and the emergence of Decentralized Autonomous Organizations (DAOs): An integrative model and research agenda,

Manav Gupta, Blockchain for Dummies

Cristiano Bellavitas, Christian Fisch, The rise of decentralized autonomous organizations (DAOs): a first empirical glimpse