28 Oct 2019

Why Decentralized Autonomous Organizations matter

If you’ve read Yuval Noah Harari, you know Homo Sapiens’ most unique characteristic is their ability to collaborate at scale, through space and time. This is arguably what lead us to colonize all five continents and bend nature to fit our needs, creating our own anthroposphere.

Collaboration happens through organizations and each age had their own. It started with the tribes when voices, myths and stories enabled the first humans to manage the supply of food that hunters and gatherers were able to collect. When it came time to settle in villages, these stories became cults, religions and culture to organize the work in the fields. The invention of writing and counting systems made it easier to convey words and numbers in a lossless way. Money quickly followed as trade became necessary to organize agriculture (grain, meat and fish) in larger territories, through markets. This lead to new kinds of organizations, known as cities and kingdoms. Money also made it easier to build military organizations, but also required the ability to collect taxes. The kingdoms and empires saw the emergence of political organizations which set and enforce governance rules.

All over history, new techniques enabled new kinds of organizations, allowing us to collaborate more efficiently.

Corporations

During the enlightenment, the concept of “law” evolved to allow the emergence of a new kind of organization: the corporation. It took another few decades to see their real impact, but by creating a “moral person” and limiting the liability of the shareholders to their investments, these organizations became the catalyst of the industrial revolution, through what we know of as Capitalism.

Photo by Julian Hochgesang on Unsplash

Later, in the 20th century, in The Nature of the Firm, when considering the fact that production of goods and services could theoretically be carried without tangible organization, Coase concluded that firms exist because they decrease transaction costs by “internalizing” them. These costs, such as knowledge costs, bargaining costs, policing and enforcement costs can all be summarized as “information” and “coordination” costs.

For me, these invisible transaction costs are perfectly illustrated by I, pencil.

There is a fact still more astounding: The absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the invisible hand at work.

Humans alone cannot produce pencils, only corporations which coordinate the work of hundreds, if not thousands can actually produce something as “simple” as a pencil.

Photo by Alexa, what’s my name? on Unsplash

The Internet

At the turn of the century, our world saw the emergence of yet another collaboration tool: the Internet. The network of all networks allows for instant communication between any two humans, the spread of information and knowledge around the world, without any respect for borders and established orders.

The internet contributed to a massive reduction of the information and coordination costs. It became trivial to look up any random facts, participate in real time discussions happening concurrently on 3 continents and more.

The largest (and soon the last) encyclopedia in the world where we can all learn anything from the Dabusun Lake to the Normal Numbers is built and maintained by tens of thousands of contributors who have mostly never heard of one another whose work is only made possible by the internet, for the internet users.

Similarly, the infamous “gig” economy, despite all of its flaws is characterized by the largest transportation company in the world with no drivers on payroll… Connected smart phones provide all the information (location, routing, reputation and payment) to enable transactions between passengers and drivers.

Photo by Dan Gold on Unsplash

Pushing the concept further, we can legitimately wonder if these firms themselves should not be completely abstracted, as the fees they extract could easily be perceived as undue rent, as more of the information is made available by the network participants to other network participants.

Bitcoin

10 years ago, the Internet saw the emergence of a new network: the Bitcoin network. I argue that it is the very first decentralized autonomous organization.

  1. It is an organization as it is clearly a group of people working toward a shared goal: securing a ledger of balances.
  2. It is decentralized: it has no central point of control. Groups of developers, miners or even users could collude to influence its direction… but they can only influence, never arbitrarily decide of its evolution.
  3. Finally, it is autonomous because the work performed by its participants is paid using its own currency, removing all link to any external financial systems.

It started small, and its growth as been all but stable and predictable, but very few computer systems or network have been consistently operating for 10 years with no coordination whatsoever beyond adherence to a protocol defined in a white paper: a decentralized, autonomous and yet, incredibly organized collaboration.

Smart contracts

Other blockchains have emerged, including Ethereum which runs smart contracts. These smart contracts are bylaws for blockchain based organizations. The DAI smart contract specifies how participants in the MarkerDAO ecosystem can “mint” dollar-stable coins by build Collateralized Debt Position. Is the DAI system decentralized, is it autonomous? I’ll let others argue (endlessly) about that, but it clearly behaves as a new kind of central bank where the stability mandate is enforced by running code.

The Ethereum chain also birthed its first “The ĐAO”… and saw it fail abruptly. Its goal was to fund work for the Ethereum chain itself, by mimicking the behavior of a Venture Capital fund. The work would be funded in Ether, the native Ethereum currency, with the expectation that improvements (scalability, security, usability…) of the ecosystem would eventually be reflected in increased prices for Ether.

In 2019, the MolochDAO experiment and all if its “forks”, have iterated on the same theory that it is possible to fund work in a blockchain by using mechanisms enabled by the blockchain itself.

Other innovations are not necessarily considered to be Decentralized Autonomous Organizations, even though I would argue that they present the same characteristics. For example, Token Curated Registries fall in that category. The social object of this class of smart contracts is to build “lists” of ranked objects. These object could be restaurants in NYC, artists in a special field or even financial assets. The pattern is always the same: the list becomes valuable if it provides accurate information. People benefiting from that accurate information have economic incentives to perform the curation work if their rewards are tied to the value of the list itself.

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