Why DAO? and Why Now?

TLDR: A new type of corporate structure is enabling a new crop of disruptive companies that have failed in the past, or have yet to be possible due to global contribution and mutual benefit.

NOTE: This paper assumes a healthy understanding of the Blockchain ecosystem, general business concepts, technology fundamentals and common American colloquialisms. I also try to avoid names, companies, projects or any kind of promo. However, it’s written in plain english so that any business person can understand the contents. Links should not be considered endorsements.

A DAO In Name Only

Anyone familiar with cryptocurrencies has by now surely heard of a new type of business entity emerging called the decentralized autonomous organization (or “a DAO” - not to be confused with “the DAO” - the first of this kind). While most people understand the basic concept that such an organization is meant to run without the central human management we see in a traditional company, very few understand how this can work in practice. The problem may stem in the DAO acronym itself, as it can be argued that outside of the DeFi space, these entities are rarely decentralized; hardly autonomous; and seldom well organized. Rather than thinking of the DAO as an organizational structure, then, let’s consider it an ambition.?

The ambition is simply that computer programs and algorithms can handle the full management of a company without an operator… eventually. But for now, the vast majority of business models will require considerable centralization, at least at first. This is not to say that true DAOs do not exist. In fact, many do. But their scope is very narrowly tied to functions that, once deployed, can be automated on the blockchain. Currently, this includes investment or speculation vehicles (such as crowdfunding), membership organisations (such as social clubs), and work cooperatives (or guilds). It should be no surprise that these are the same types of entities that began to form early in the roman empire’s history when corporations were first known to formally be established.

But the business world at large is much broader. Which means that there are countless opportunities to establish new entities striving towards the DAO objective. This paper exists to demystify the concepts necessary in order to establish a scaffold for such an organization and outline a framework for working towards true decentralization.

See Beyond the Current Landscape

The global structure of business organization has not changed significantly in 50 years when the concept of a limited liability company was introduced in Wyoming in 1977. Prior to that little had changed in two thousand years since the term ”corporation” itself dates back to ancient Roman times. But now, with a completely new paradigm enabled by a globalized world, the typical follow up question is “what kinds of businesses will we see forming as DAOs?”.?

Most technologies allow only iterative progress, and thus the corporate entities that execute them tend to look very similar (IBM and Facebook org chart looks the same despite nearly a century difference in age). So while many would like to see DAOs that offer similar products to displace incumbent mega-corporations such as Facebook or Google, I believe that would be a waste of our potential, at least in the short term. For one, even if we raised enough money to replicate all of the features it took those companies over a decade to build - we would still not replace them due to their market dominance. Second, it will take several years to experiment with all of the potential ways to structure and govern DAOs, and it would be too risky to waste this effort when the reasons for success or failure are not clear. Third, if the models prove successful, it would only make sense for the incumbents to join the party and contribute their code and IP, rather than fight a clearly impossible battle.

Instead, we must focus on the fact that DAOs open up new possibilities to business models that have not worked in the past, were too nuanced and risky, or were too hard to execute due to the high cost of attention. Business models that can benefit from a global workforce, a shared interest, and mutual rewards. This in no way implies that the DAO model is “better” than traditional business models for all companies moving forward, but SaaS and Marketplace Platforms would seem to benefit most from an invested workforce and user base.

The Modular Enterprise & Organic Workforce

In our evolution towards DAOism, it’s important to understand the vehicles required to get to full decentralization and autonomy. I consider the two most important to be a Modular Enterprise and an Organic Workforce.

The Modular Enterprise (ME), in contrast to a traditional one, is intended to morph over time. In form, it is a combination of collaborative corporations. But in function, it exists to phase itself out of centralization over time.?

The Organic Workforce (OW) consists of collaborative individuals that believe in the mission and ambitions of the collective, and work in groups to see to that end, compensated with tokens (when possible) that appreciate in value as the business grows. These same tokens are also leveraged to vote on the operations and objectives of the organization, drive its product directions and change its fundamental economics. This workforce provides for one huge competitive advantage - no competition. With the ability to benefit more from collective work than independent work, there is little incentive to compete. Of course, not everything can be paid for in tokens, so it’s also important for a business to maintain sufficient fiat cash liquidity so as not to stifle productivity.

The combined entity (MEOW) is, therefore, a necessary basis to establish the foundation for the future DAO that is to come.

Many Chefs - One Kitchen

Now, if we’re being completely honest, there are some significant challenges to even the MEOW model, let alone the ultimate, fully autonomous DAO. For one, we already know that the larger a group of people are, the harder it is to get them to agree on anything. You can imagine how crippling it would be if every corporate decision was made by votes cast by thousands of members. They would spend all day voting, and not getting any actual work done.

Furthermore, building a global workforce requires dealing with numerous cultural divides. It is unreasonable to expect, for instance, a progressive female from San Francisco to come to a consensus on the HR policy dealing with sexual harassment with a conservative male counterpart in Kabul. Yet, this is precisely the kind of cultural discrepancy we must expect and account for, all without compromising the “best” solution.?

Finally, it’s no secret that as a corporate entity scales, the pressures of maintaining margins and pleasing shareholders are the perfect breeding ground for greed, moral corruption and anti-competitive practices. Each MEOW, at the earliest stages, should be designed to combat these tendencies.

But, Why Now? Identity & Governance!

As we enter the internet era many are calling Web3, we’re seeing various transitions take place with a focus on decentralization. From the original Mainframe/Terminal paradigm, we shifted to Client/Server and then to Cloud/Device as computing capabilities shifted, slowly working towards decentralization. The next logical evolution is a convergence of the Cloud with the Peer-to-Peer paradigm we’ve been toying with for 20 years to utilize the blockchain for efficiently monitoring work, empowering workers with a vote, protecting or crediting original ideas, and democratizing investment opportunities at the earliest stages. This can certainly be done without the blockchain, but platforms engineered to run global financial and identity systems like 3rd generation blockchains already inherently provide for such functions.

The Key Concepts

The idea of a holacracy is not entirely new, but prior to the advent of the blockchain it was inconvenient at best. Luckily, by virtue of solving the complex problems related to democratizing currency in a trustless environment (i.e., cryptocurrency) we’re left with a number of concepts that could also facilitate the management of companies, municipalities and even entire countries.?

Governance

Primarily, the idea of Governance (or reaching consensus) is critically important not just for advancing the objectives of monetary systems on the blockchain, but also to establishing the objectives and priorities of a company running autonomously on the blockchain. The way this works is simple - community members make proposals, and those proposals are voted on. Well, perhaps not so simple considering the community will need to decide what prerequisites there should be, if any, in order for a community member to make a proposal; then they would need to decide which of the various voting mechanisms to employ; and ultimately, what to do if the thresholds are not met, or some other anomaly takes place.?

As alluded to before, a system where there are too many proposals or too few voters will yield lower production. Or if an imbalance of proposals come from the top contributors versus the bottom, community members may become disenfranchised. This is certainly a challenge to establish, but the good news is that once a system is agreed upon, it can be coded into a smart contract, and thereafter run completely autonomously for all similar proposals.

Initially the founders of a community may establish the basic principles of governance to get the project moving forward. So long as they are doing so in the best interest and long-term benefit of the community at large, and in a transparent manner, there should be no issues down the line. However, overly-centralized control or questionable virtue signals will certainly detract the most fervent DAOists.

Tokenomics

In many cases, Governance can be reliant on the tokenomics of the community - or the formula by which it creates (mints), distributes (drops), or destroys (burns) their tokens - in that some amount of tokens must be held in order to cast a vote. Tokens - which are managed by the organization’s Treasury - can be traded (often on open exchanges), allowing for the value to fluctuate with the value (or perceived value) of the community and their products, where typical supply and demand rules apply. Among the complexities of tokenomics is to determine how many tokens to issue, whether or not they are fungible, and what contributions (if any) warrant earning a token. For instance, it’s not uncommon for the issuer of tokens to “air drop” a certain percentage (say 10%) of the total supply to its early adopters in order to show appreciation and encourage promotion.?

Thereafter, tokens might be issued for the completion of various tasks, or for accomplishing some goal. In other words, it can be used as compensation. One method is to establish “pools” of tokens for various disciplines (departments), and distribute them at regular milestones, or under certain vesting or earn-out rules.

Tokens may even be sent to a celebrity or influencer to gain their attention in the hopes of an endorsement or collaboration. Imagine noticing a newly minted token in your digital wallet that is growing in value regularly - you might want to learn about it and help it grow.?

Bounties

Of course if everyone got free tokens, nothing would get done, and while an effectively promoted token may increase in value, if it does not produce anything it may be considered a “rug pull”, and your community may all just “rage quit” at once. To avoid such a scenario it is imperative to establish “bounties”, which are specific goals or tasks associated with a token amount, which have been approved by the community. Once completed and verified, the bounty is released.

It may not be hard to image how bounties can be programmed into smart contracts which execute a series of transactions once a milestone is reached. Imagine how much more simplified thousands of job functions would be if you could simply program payment to be released once a predefined numerical number is met.

Proofs

But where there is payment, there must also be fraud. For this reason the most complex component to automating such contracts is often the proof. While some proofs are fairly simple - such as sales reaching a certain figure - and can easily be verified by a program, others are more complex. Some accommodations can be made, such as paying writers per word or coders per line of code rather than per hour. But generally, proofs can be daunting, and will likely be the barrier to full autonomy for most businesses.?

Proofs may also be used in tokenomics or governance, where certain events or transactions are predicated on the validity of the proof. This can make all areas of running a DAO daunting considering that blockchains are mostly anonymous, trustless environments. Some of the basic proofs exist simply to verify that the community member is human, or has taken some action such as participating in a call or event. For instance, a member may be required to be human, attend at least 2 monthly team calls (which is easily verifiable with code) and post 20 chat messages (also easily verifiable) in order to be eligible to receive their tokens.

In the future, some of the more useful proofs may be:?

• Proof of Knowledge
• Proof of Skill
• Proof of Activity (physical)
• Proof of Promotion/Contribution
• Proof or Relationship?

Oracles

Eventually, if they don’t already, most payroll and billing systems will have some API’s for DAOs to verify that some kind of work was completed. A new breed of independent organizations called Oracles have been born from the blockchain to collect and verify various facts such as these and others, to make them available in one place. This is essential to the blockchain philosophy of consensus, in which transactions cannot be recorded unless all ledgers match.

Tooling

In addition to oracles, a variety of tools will be necessary to properly manage the business. These tools will aid in the ongoing operations, handling everything from communications to governance to finance and treasury management to reporting to data and document management, all in a way (ideally) that is recorded on the blockchain.?

One of the main tools in this set is sure to be the custodial wallet (or a multi-signature; multisig) which allows for certain rules to be set before funds can be released, such as requiring signatures from multiple trusted individuals or multiple keys from trusted systems. The other mandatory tools would be the voting system, which allows decision making to occur, and the communications system, which is a recordable forum for voice, text and video communications. It’s important to note, that not all of these systems need to be “on-chain”, meaning that they may be recorded on centralized systems. Ultimately, however, even centralized systems should be verifiable by oracles and on-chain systems.

While much of what happens in the blockchain world is open source, this does not mean that Intellectual Property is a forgotten or unnecessary concept. On the contrary, IP on the chain is highly traceable and equally rewarding. However, the secretive skunk-works of yesteryear, and the patent trolling of today are better off becoming vestiges of less virtuous times.

Wrappers

Of course in as litigious a society as ours it would be naive to assume disputes won’t occur. While smart contracts can handle much of the dispute resolution automatically, other situations may require traditional contracts to be wrapped in provisions to delegate arbitration to the blockchain, at least as a first step.

Rollups

To further the ethos of working towards a common goal, it may become common for multiple DAO businesses to band together to form rollups. Like traditional M&A deals, this would come with lots of negotiation between potentially disparate communities, or perhaps there may even be growing crossover in the communities, which over time would make a merger seem obvious. The term “rollup” however is not a good one as it has a completEly different meaning within the blockchain world - which is to to combine multiple transactions off-chain for the sake of speed and reducing gas fees.

A MEOW is a business model in which everyone is some combination of investor, cofounder and worker - building for the greater good and rewarded for their efforts with equity.

The Structure

Surely there can be any number of ways a MEOW may be structured, and the most effective option may depend on the business purpose of the entity. Below is one general model that I came up with to allow for flexibility and decentralization. It consists of 3 separate legal entities. Two of which phase out over time (assuming a sooner event such as merger, acquisition, IPO or shutdown does not occur).

A Delaware C-Corporation

Much like a traditional startup, the C-Corp functions as the primary centralized hub of the overarching organization. It initially provides for all usual centralized functions such as Fundraising, Marketing, Contract Negotiations, Sales, Tax Reporting, etc. While it exists, it holds an irrevocable perpetual exclusive license to use and sell the technology produced by the greater organization, as well as initial oversight, minting and distribution of tokens. While traditional venture funding to the c-corp may be required to get the project launched, it is anticipated that fewer subsequent rounds of funding will be necessary, due to the ability to raise capital through coin offerings, and that voting rights are delegated to the community. With this in mind, it is critically important to properly represent the tokenomics when raising funding, specifically if by SAFE note. It is also important to avoid triggering securities provisions such as ensuring that all investors are accredited and there are less than 99 of them. Needless to say, the C-Corp, while it exists, is a for-profit venture, albeit regulated by and for the benefit of the greater organization.

A Wyoming DAO LLC

As of July 2021, the state of Wyoming allows for limited liability companies to organize as a DAO, meaning that for the first time, the state will recognize a company managed algorithmically (instead of by named individuals).?It's only fitting that the state that introduced the LLC is reinventing it.

In contrast to the C-Corp, the DLLC functions as the hub for all decentralized activity of the organization, which includes, but is not limited to ongoing oversight and management of tokenization, governance, bounty allocation, etc. Over the course of time - as the system matures, as corporate and tax laws evolve, and as technology affords the DAO more autonomy - it will assume more and more of the functionality of the C-Corp and, ultimately, will buy-out the C-corp, all of its contracts, all of its Intellectual Property, and all of its physical property. This is assuming the C-Corp is actually a healthy and profitable entity. Otherwise, the DAO would be better served seeking out or creating a different entity to merge with.

A 501(c)(3) Nonprofit Corporation

Sitting between the two aforementioned entities is a Not For Profit entity. It is designed to regulate the C-Corp and service the IRL needs of the DAO, such as handling any charitable contributions the DAO may make, create or acquire. But most importantly, it is meant to outlive the C-Corp and succeed it as the operator of the DAO in the case that laws impede the DAO from full autonomy.

It’s also important that existing companies have a path to DAOism using the model above, even if they operate purely as a C-Corp now.

The Founders

Now that you have the fundamental knowledge of the virtues of a DAO, and an idea of how a MEOW can bridge the temporary gap for all sorts of businesses, you must know that none of this is possible without founders. Whether you intend to be one, or support one, it’s important to understand that your participation is critical in our collective future.

Founders need funding and encouragement… and, at the earliest stages, they need some autonomy. It is imperative that the initial founding group remain small and highly motivated. They will be tasked with establishing the initial vision and direction for the business venture. They will need time to assemble the initial concepts and presentations to share with the community. Not everything needs to be decided by everyone. As someone that works with law firms (that do nearly everything “by committee”) I can tell you that it’s near impossible to reach the “best” outcome because the decision makers are not provided with the tools to make informed decisions, and generally lack the experience and cultural context to make objective choices. While the decisions made by founders may also not be the “best”, they at least have the benefit of speed, and if structured properly, bad decisions can later be modified or reversed. Generally, however, the founders have spent considerably more time weighing the outcomes and consulting with experts than a typical community member.

If any of this sounds too futuristic, I warn you - it's not. This structure has already been used successfully in the Decentralized Finance space and accounts for Billions of dollars in Market Capitalization. What we're doing now is simply porting the model beyond that industry. Initially we will be learning new things and designing new paradigms together. However, if we do so with the best intentions, we will see progress and diversified prosperity like never before.

Within the next few weeks I will be rolling out the framework for a new MEOW>DAO venture with a group of brilliant collaborators. If you are interested in helping, investing or are interested in starting your own MEOW>DAO, please get in touch...