"Welcome to the machine"

DAO - Decentralized Autonomous Organization

'The DAO is a decentralized autonomous organization that exists as a set of smart contracts?that resides on the Ethereum blockchain'. >>> Don't know about you, but this does not tell me a lot. Let me try and search for another definition. 'A DAO is an entity that lives on a network and exists independently, but also relies heavily on the human person to perform certain tasks that it cannot'. >>> Clear as mud. Here's another one.

'DAO is a strange way, it’s a digital system that lives on top of Ethereum. Decentralized autonomous organizations blend “decentralization”, “autonomy” and economic incentives, tokenized blockchain elements, in order to maximize organizational effectiveness and value flow'. >>> I am still confused about what this is. Another search is in order.

"A DAO is an online community that jointly controls a cryptocurrency wallet to pursue common goals, such as running a business or charity'. >>> Or this one; ' A DAO is formed when people make binding decisions together regarding mutually owned assets'. >>> Hmmmm ... some veils are getting lifted. Let's do another search. 'A DAO is a member-owned community without centralized leadership, a safe way to collaborate with internet strangers and a safe place to commit funds to a specific cause'. >>> Ok, that is getting a little more clear.

I poured over many attempts to define a DAO, most of them are pretty obscure :-) . Are we witnessing the latest thinking in organizational theory or is this merely a cypherpunk's dream? Whatever it is, the technology exists today to think about new ways of working, decision making and organizational structure. Let's explore the Distributed Autonomous Organization, or DAO.

Internet Native Entity - "A saucerful of secrets"

Let's get our heads around this thing and review some key characteristics of a DAO. We can unpack all that later.

1. There is no company, in the sense that there is no legal entity. No offices needed
2. There are no employees, only token holders. Token holders have digital wallets
3. Since there are no salaried and contracted employees, there is no need for HR or Legal departments
4. There are no shareholders, as shareholders become token holders as well
5. Token holders work on behalf of the DAO and are community based volunteers without a contractual relationship. No need for a Technical Support or an IT department
6. DAO's are funded via governance tokens, stored on the Blockchain and payments are made to digital wallets. Nobody is managing a P&L. There is no need for a Finance department
7. Products are open source. Everyone can see, follow and copy. Generally products are made available for use by anyone at no cost. There are no product managers, no central development organization
8. Productivity & collaboration is managed via a website containing discussion forums with voting procedures and smart contracts to execute upon agreed decisions
9. The governance or the organization is largely achieved by Smart Contracts, a rather complex set of instructions that translate the end-result of the voting process into actions

A DAO is an organization but it is not a company. The internet created unprecedented capabilities for working together in a decentralized way. Organizational theory has cycled through many models to accommodate changes in the way we work over the decades, to date settling on the matrix organization. But the matrix organization is not optimized to deal with what essentially are community based organization models. The DAO allows us to think about collaboration, economic value chains and decision making in a different way, especially relevant if you are operating on a global scale with products in the digital domain.

The DAO is transparent - everything is built on open source software - and the organization is controlled by its members and not by a central management team. Governance happens online, ie proposals get tabled in discussion groups or forums, voted upon and decisions are ultimately automatically executed via smart contracts, or programmable actions.

According to Wikipedia a smart contract "is a computer program or a transaction protocol which is intended to automatically execute, control or document legally relevant events and actions according to the terms of a contract or an agreement".

Smart Contracts - "we don't need no thought control"

Smart Contracts play a central role in DAO governance. They hold the treasury and allocate funds based on community decisions, plus they contain the business logic of the organization. In other words they represent the rules and processes of the organization. The blockchain serves in this case as an immutable ledger of contracts. The 'smarts' of the contracts are in the ability of instant (and practically cost-free) execution of transactions between parties, dispute resolution without involving a trusted third party (relying on the transparency of the blockchain) and automatic conclusion of contracts without human intervention.?

Let's look at an example in the insurance sector. Smart Contracts have certain characteristics that make them ideally suited to create insurance products that automatically pay out when certain events occur (so-called parametric insurance). Parametric insurance solutions comprise of roughly 15% of the insurance market, so there is room to grow. In this segment of the insurance market innovation can make a big difference. It's mostly used when natural disasters occur.

Insurance claims payment still largely rely on an adjuster’s subjective assessment of damages and loss. Most people can’t afford to challenge a large insurance company in court, so most regular customers are ultimately forced to trust their insurance providers to pay out fair claims. This is especially true in developing nations.

While the concept of parametric insurance has been around since the late 1990s, it has been slow to gain adoption because no reliable infrastructure existed for quickly and securely settling contracts. Blockchain and smart contracts have changed that dynamic.

I also invite you to check out the governance section of the MakerDAO website. You will get an impression of the variety of decisions that are being tabled and voted on, as well as how that translates into rules - contracts - that will be automatically executed. In one example, an August proposal is tabled to allocate budget across several line items to further develop the protocol. There will be a vote, a 48 hour reflection delay and if the proposal does not pass within 30 days, it will expire and can no longer have any effect.

Benefits - "Money"

Knowing the above, what are the major benefits of a DAO:

1. No overhead to manage an organization (no IT, HR, Legal, Finance, Compliance etc)
2. Free access to global talent. Anyone can sign-up and once accepted get paid in tokens (peer-to-peer) so no legal or jurisdictional limitations to onboard and pay people
3. No hierarchical structure. Complete decentralized decision making which prevents organizational squabbles, departmental powerplays, kingdoms and other such behavior (not that there are no politics in online forums, but that is for another day :-)
4. Complete transparency at product level, economic value distribution and decision making
5. A DAO is completely autonomous, it exists in cyberspace only and has no need to be a legal entity (this opens an entire legal can of worms which I intend to keep the lid on for the purpose of this article, it's long enough as it is :-)

Not for everybody - decentralization is a process - "High Hopes"

Some organizations started out life as a DAO, whilst others are migrating slowly towards a decentralized team, possibly ending up with some hybrid form.

Companies using DAO structures to automate certain parts of their business can achieve fast scalability and be leaner without sacrificing quality of service. However, there are a few obstacles. An organization dealing with physical products will always require human labor until robots can entirely replace human workers for some tasks. Furthermore, a self-governing system has its own challenges. It's complex. You do not have the level of control and speed of decision making one is used to in a well functioning traditional team. This is new, people will discover pro’s and con’s along the way.

DAO's with large amounts of voters and proposals to consider could benefit from some custom forms of artificial intelligence. Instead of requiring users to vote on proposals an AI-based DAO could autonomously consider the preferences of large amounts of individual stakeholders simultaneously and distill some meaning from the crowd response. This is another interesting angle to explore at some other time.

DAOs as a widely accepted form of organization are still years away in my view. The transition process to become a functioning and completely autonomous native internet entity is complex, but it is clear that we have a brand new way of organizing a business or parts of it. The Shapeshift case study is an interesting one to follow in this regard (various entries for further info in the Sources and Inspirations section below).

What businesses are suited to a DAO - "Another brick in the wall"

What sectors are most likely to adapt this model? It looks like this organizational model is most popular in the Decentralized Finance (DeFi) sector, but some research easily uncovers many other use cases and businesses. We are seeing DAO's in open source software development, gaming, worker collectives, energy, freelance work, sports, healthcare, art auctions, virtual world applications, asset management, trust funds, fan communities, media, politics and insurance, for the latter I have an example below. Communities everywhere are learning how to manage themselves through DAOs. Below I will look at a three different businesses which have chosen the DAO route; Maker, a stable coin platform, Shapeshift, a crypto management platform and Nexus Mutual, an alternative insurance.

Starting a DAO - "A momentary lapse of reason" ?

Starting a DAO or moving a traditional company structure to a DAO is a non-trivial exercise. It's not for everybody and of course there are downsides. Organizations are complex and success often breads more complexity as the organization grows. Look at the Maker website, it's hardly a model of simplicity. Same with dOrg.

Products that are open source are somewhat more vulnerable to attacks from malevolent actors. A truly decentralized and democratic organization has its own complexities. Not all decisions need a community vote and decision making in a DAO can become rather slow and complex. Open Source development does not happen automatically. It needs a lot of coaching. Not all contributors are equal in stature, knowledge, available time and loyalty. n reviewing those DAO sites, one cannot escape the feeling that the sheer amount of information is rather daunting. Yes, everyone can join but there is a lot of guidance, rules and documentation to review before one can contribute in a meaningful way.

Metrics & data - "Is there anybody out there"

According to deepdao.io, a brand new research site dedicated to collecting data about DAO's, there are about 2000 DAO’s. In terms of members only two have more than 100K members, Uniswap and Compound. The third largest DAO in terms of member ship is Sushi wit 52K members.?Looking at Assets under Management (AUM) the largestDAO is Uniswap with approx. 4.6B and Compound comes second with 1.6N.?The third largest DAO is Fei with 1.5B and then it drops off to 400M with number four, Radicle.?

Deepdao.io allows us to sort by Voters and Voter participation, measuring how active the members of the DAO are. Sushi, Balancer and?Yearn Finance have the highest amount of number of voters. Sorted by the amount of proposals put forward by the community, we get a totally new DAO top 10. Diving in a little deeper and one can find information about voting record. Browsing a bit more and there is information about the content of what is being voted on - this of course varies greatly by project but one can see technical proposals, proposals to execute certain projects or even job applications. What I like about this data is that it helps to visualize the DAO concept, it illustrates for example what it means to function (almost) entirely transparently and I encourage you to take a look and play around with the data yourself - note that the site is in Alpha development stage right now.

Total Assets Under Management for all DAO’s: 8.6B USD as per 18 August 2021

MakerDAO - running a stablecoin

One of the first DAO's and still functioning successfully today is MakerDAO, an open-source project on the Ethereum blockchain, created in 2014. The Maker Protocol is one of the largest digital apps on the Ethereum blockchain and it evolves around the creation and management of DAI. DAI is a stablecoin, a decentralized, unbiased, collateral-backed cryptocurrency?soft-pegged to the US Dollar. There are over $5 Billion DAI in circulation and more than $8 Billion in assets locked in the smart contracts of the Maker Protocol (the protocol contain smart contracts that make it possible to generate DAI).

Designed by a disparate group of contributors, outside partners and others, it is the first decentralized finance (DeFi) application with significant adoption. Maker contributors hold its governance token, called 'MKR'. Through a system of scientific governance?involving Executive Voting and Governance Polling, MKR holders manage the Maker Protocol and the DAI stablecoin.

Go ahead and browse the MakerDAO website and get a feel for the community aspects of how a decentralized organization works. As we described earlier, decentralization is a process. It took MakerDAO about 6 years to achieve full decentralization (announced on July 21, 2021). This meant that their global community is responsible for every aspect of the Maker Protocol and the running of the DAO.

Shapeshift's transformation into a DAO

Shapeshift, a crypto management company started by one of the early digital asset influencers, is a recent example. They announced on July 14th (nicely timed with Bastille Day in France :-) that they would transform the company of +/- 65 people into a full DAO structure.?This is a process. They have to make decisions about how to migrate their current team from salaried employees to token holders, how to deal with existing contracts under the corporate name, unwinding the balance sheet and banking relationships and generally learn how to work in the new structure, what software tools to use to support the effort, etc etc.

There is no doubt that this will have a profound effect on the way of working. Let's use a simple example, someone wants the new DAO to participate in and sponsor a trade conference. Normally a marketing person would handle this. In a DAO there is no marketing department. A proposal has to be submitted to the community forum where it will be voted upon and if approved, actioned.?This sounds a bit cumbersome and I am sure that for some corporate decisions it is. All of this is a work in progress and it would not surprise me if a DAO decides that some decisions benefit from a more centralized process. Every DAO will need to find that out for themselves.

Decentralized & Autonomous insurance - Nexus Mutual

Not an insurance company in the traditional sense, Nexus Mutual is run entirely by its members. Only members can decide which claims are valid. All member decisions are recorded and enforced by smart contracts on the Ethereum blockchain.

There is a fair amount of unnecessary cost in the of running an insurance company. Let me borrow a couple of paragraphs from from the white paper.

Roughly 35% of insurance premiums are lost due to frictional costs in the system. Only 65% of premiums are returned to customers via claims, the rest is lost in distribution, operational expenses (including regulatory), capital costs and profit. Blockchain technology and smart contracts can strip out not only the administrative inefficiencies but a large portion of the governance and regulatory related costs due to administrative savings and reduced governance and regulatory costs, effectively halving the frictional costs in the system.

Additionally, through the use of membership tokens, blockchain technology can bring back the original goals of the mutual where all contributions are entirely for the benefit of members. Aligned incentives, in the form of the NXM token or coin, will foster a community spirit rather the existing adversarial and unbalanced relationship between individual and large institution. Blockchain technology allows a peer-to-peer insurance mutual to be recreated in a cost effective and scalable way. It allows the cooperative ethos to be regained while preserving the benefits of diversification.

When we turn to the Appendix in the white paper, we see some concrete savings as a direct result of moving to a DAO model:

1. Operations and IT – the major area where large cost savings can be realized, estimated at a 90% cost reduction vs the traditional company model.
2. Support teams – large cost savings are expected because the number of people employed will be dramatically reduced
3. Overall savings - combining the above estimates, the company expects to be able to reduce the non-commission frictional costs (fees, tex, expenses) by approximately 72% compared to a traditional insurance company.

Nexus Mutual has been active for over two years now and they have grown their shared pool of capital to $400M. Members have shared over $1 Billion in risk between them. At this time Nexus is focussed on insurance for the crypto ecosystem but plans are afoot to become a platform for many different types of communities to insure themselves without the need for an insurance company.

Conclusion - "The piper at the gates of dawn" ?

Decentralized, autonomous, transparent and smart. "Welcome to the machine" then ... ? In reality DAO's remain firmly based on intense human collaboration.

Communities are increasingly taking over the way we collaborate, communicate, learn and organize. We are getting more and more aware of the potential of the hive mind, the wisdom of the crowd, and we are learning how to tap into its power. DAO's are borne out of this vision and a logical extension of it. Add to this open source ethos and the tokenization of the world - I wrote about that before in my NFT article - and we have the ingredients to modernize the current organizational models.

DAO's are a new way of creating an economic value chain and a compensation system. This organizational model takes advantage of our increasingly decentralized world. Will DAO's become the next wave of organizing work? It's a little early to tell but it's a fascinating way of bringing the organizational model into the 21st century. To be continued for sure ....

Snapshot of DAO collaboration as measured by deepdao.io on 18 August 2021

Sources and Inspirations:

Various Pink Floyd album and song references such as 'Welcome to the Machine', https://www.youtube.com/watch?v=lt-udg9zQSE

The History of The Genesis DAO, https://www.youtube.com/watch?v=rNeLuBOVe8A

Another one of the many interesting examples of a DAO, check out dOrg, a web development collective

Why Shapeshift is shutting down, https://www.youtube.com/watch?v=X90dZRp785A

Why Erik Voorhees transitioned Shapeshift into a DAO, https://www.youtube.com/watch?v=LiYNafMs7f8

The DAO revolution, https://www.youtube.com/watch?v=D3srjp25leU

DAO analytics, https://deepdao.substack.com/p/introducing-deep-dao-analytics-for

Streaming payments, https://www.coindesk.com/superfluid-multicoin-9m-streaming-payments

DAO overview (from 2017), https://blog.codecentric.de/en/2017/09/decentralized-autonomous-organization-blockchain/

An insurance DAO, https://nexusmutual.io/assets/docs/nmx_white_paperv2_3.pdf

Nexus Mutual, CEO interview, https://stockhead.com.au/cryptocurrency/while-defi-suffers-more-hacks-we-chat-to-the-aussie-founder-of-crypto-insurance-solution-nexus-mutual/

dORG, https://hackernoon.com/the-evolution-of-dorg-the-builder-dao-jcz3xxg

What is a DAO, https://hackernoon.com/what-is-a-dao-c7e84aa1bd69

15 ways the world transforms with DAO's, https://blog.aragon.org/15-ways-the-world-is-being-transformed-by-daos/#fan-ownership

DAO & Legal Standing 1, (Wyoning atempts to linka DAO to local legal framework, which is notable but seems counter to the objective of a DAO :-), https://www.dlapiper.com/en/us/insights/publications/2021/03/wyoming-takes-a-step-ahead-to-clarify-the-legal-status-of-decentralized-autonomous-organizations/

DAO & Legal Standing 2, https://medium.com/@OpenLawOfficial/the-era-of-legally-compliant-daos-491edf88fed0

Parametric insurance, https://www.insurancejournal.com/news/international/2020/01/09/553850.htm, and https://www.propertycasualty360.com/2021/02/23/what-is-parametric-insurance-and-why-should-we-care/