A DAO Defined: The Big Picture

DAOs are internet-native organizations, and their time has come.

A DAO Defined: The Big Picture

A short definition is that a Decentralized Autonomous Organization (DAO) is an internet community that jointly controls a cryptocurrency wallet to pursue common goals - such as running a business or charity - without having to ask anyone for permission. This is made possible by open-source software on the Ethereum blockchain (amongst others), which can lock funds in a wallet and only permit transactions if they are voted for by members of the DAO. To become a member, one usually only needs to buy a fraction of that DAO's membership token from sites such as Uniswap (although more tokens usually mean more weight in any votes you participate in).

Answers to lots of common questions can be found in our How to DAO article but for those of you wanting a broader look at the phenomenon of DAOs, it is first worth examining how we humans currently organize ourselves.

What is Wrong with Traditional Organizations?

Concentration of Power vs Decentralization

A child born in 2001 in the African country of Rwanda will have only known one president during her lifetime, and, due to a recent change in the constitution, this could be true until 2034. Out of 150 million km² of landmass on Earth, she will only have 26,338 km² to roam around in and share with 12.6 million other people, with very little hope of being able to move somewhere more spacious or prosperous. One foundational question posed by the DAO movement is that if the Earth is owned by all of us, why is it acceptable for some people to imprison others in limited regions of it?

The answer is that historical precedent has concentrated power in the hands of a select few people who have used their power to restrict the life chances of millions of free-born individuals. A huge element of this historical precedent is the organization of money, specifically, the control of money protocols by powerful banking and political institutions. For example, the stock of US currency has been unilaterally inflated by 120% in the last ten years by the Federal Reserve, forcing asset prices to race well beyond the reach of people merely holding the currency, whose purchasing power has more than halved. As these disparities compound over generations, it becomes almost impossible for wage-earners to accrue the capital needed to build businesses and other organizations.

The alternative to this is not to labor vainly to reform the old systems but to abandon them and build better ones that replace centralized power structures with disinterested software kernels that anyone can plug into and use to manage their own project. This is not a declaration of war, but a competition. In this vein, the DAO movement has opted out of the fiat money system entirely and instead built on internet currencies (cryptocurrencies) such as Ethereum, which have fixed monetary policies that can only be changed by consensus, not by the whim of a few individuals. A DAO cannot, by itself, break people out of authoritarian regimes, but it can loosen their grip by defunding them, bypassing state banks and capital controls and affording citizens greater control over their own lives by being able to join online, decentralized businesses, communities and organizations, and build capital of their own that cannot be easily confiscated. People building and using DAOs are also betting that decentralized organizations, freed from the burdens of geography and regulation, will be magnitudes better than traditional ones at creating value.

Governments are extreme examples of concentrated power but the business landscape is similarly uneven. The underrepresentation of women and minorities in management positions has been well documented and the traditional routes via education and networking can mask systemic barriers to access. Contrast this with a DAO that is permissionless by design and often anonymous, meaning anyone may join, regardless of age, sex, skin color or any other superficial characteristic. To clarify, it is technically possible to restrict access to a DAO by only distributing its tokens to specific individuals, but the vast majority of DAOs are open and meritocratic, with very shallow hierarchies, reminiscent of cooperatives.

By far the biggest flaw of offline organization though, is that every government action is an experiment on live patients. Stephen Kotkin estimated that around 65m people were killed by social engineering projects under Communist regimes between 1917 and 2017. Instead of conducting lots of small-scale experiments with low costs of failure, state leaders have used their power to conduct enormous experiments on entire populations at incalculable cost. This is as absurd as it is tragic. The approach of DAOs is far more rational, with a culture of building software primitives for governance and voting that can be tested, combined and recombined in countless, rapid, experiments with very low costs of failure. DAO communities are integral to this process as they take part in daily testing and suggest improvements.

Government Regulation vs Self Regulation

"Fog everywhere...Fog in the eyes and throats...fog in the stem and bowl...fog all round them..." - Charles Dickens, Bleak House.

National borders are one of the most grievous restrictions imposed by a few elites on the populace, but almost all forms of human organization come shrouded in a thick fog of regulation: companies, charities, institutions and cooperatives are only really incorporated by those with saint-like patience and a strong stomach for filling in forms. Barriers to fraud are not ignoble in themselves, but they are a drain on resources and enthusiasm, and doubtless choke to death many early ventures.

DAOs, on the other hand, are built on open-source software that can be run from anywhere in the world so are largely immune to national laws and regulations. This might sound irresponsible but the architecture of cryptocurrency protocols like Ethereum means that most of the time, funds do not even need to leave the custody of one's own wallet. For example, surf.finance runs a DAO hedge fund that is completely non-custodial, meaning investors can participate while retaining control over their funds at all times.

DAOs are also public, which means that anyone can see where payments have been received from and sent to on blockchain explorers such as Etherscan. Such radical transparency automatically fulfills a lot of the reporting requirements mandated by regulation, but, more importantly, it enables the ferocious oversight of millions of self-motivated investors, who currently trawl through every jot of available data on crypto projects and sound the alarm with far more alacrity than under-funded government departments ever could.

How is Online Organization Different?

In contrast to the unjust, wasteful and sclerotic nature of offline organizations, the internet has grown up as an alternative jurisdiction where anyone can freely roam, speak and organize.

From Proto-DAO to the OpenStack DAO

Calling the internet a 'jurisdiction' is not just hyperbole: a huge portion of our time is now spent online and an informal 'constitution' of behavior has emerged, partly dictated by private websites' terms & conditions, and partly by constantly evolving conventions of behavior. In that sense, the internet is already an enormous proto-DAO where people self-organize into communities with a common purpose: we discuss on Twitter, vote with our attention that Facebook is better than MySpace, for example, and fund shared commons like Wikipedia. DAOs take this amorphous 'State' a step further and formalize it. For example, a DAO built on the Aragon OpenStack has a tripartite structure with full separation of powers: Aragon Govern is the executive layer that can schedule transactions, Aragon Voice is the legislative layer where proposals are made and voted on, and Aragon Court is the legislative layer for dispute resolution. For a deeper exploration of the full Aragon OpenStack, see The Optimistic DAO and to see the kinds of organizations that are being built, have a look at 15 Ways the World is being Transformed by DAOs.

Borderless Organizations

For anyone who is determined, national borders are largely irrelevant on the internet. Governments may restrict access to certain websites or censor content, but these measures can be circumvented fairly easily with technologies such as Virtual Private Networks, Mesh Networks and Mix Networks, enabling information to flow freely again.

Davidson and Rees-Mogg in The Sovereign Individual have argued that information is such an unstoppable force that the internet is an extinction-level threat to governments. Being able to conduct business online reduces the attraction of conquering physical territory and regulatory arbitrage is gradually reducing states' ability to extract taxes to pay for foreign conquests. At an individual level, remote working means that talented workers can contract with traditional organizations and DAOs all over the world, often earning in a much stronger currency than their own, putting pressure on countries with undesirable monetary policies. In the short term, this will favor stable, liquid currencies like the US Dollar, but in the long term, even the Dollar will come under pressure from borderless cryptocurrencies with hard-coded monetary policies. Protocols like Bitcoin and Ethereum make for fair units of account that are immune to capricious national politics and institutions like the Federal Reserve. Better than even the most stable national currency, cryptocurrencies such as $BTC and $ETH are perhaps the best example of technologies that could enforce fiscal discipline on governments and eventually obviate entire Treasury departments. DAOs are the next step in this evolution: their native currencies cannot be debased without consensus from the entire community, they have no immediate administrative costs and they can source the best talent from anywhere in the world. These reasons alone give DAOs a huge competitive advantage over traditional companies and organizations.

Democratic Organizations

Democracy within countries and organizations is nearly always conducted via centralized authorities such as delegated politicians or company boards. Even discounting the possibility of voting fraud, these centralized authorities will often make pragmatic choices about the voting process to make it easier or cheaper to run. This is clearly the case with the First Past the Post system used by most Western democracies, which is an extremely poor gauge of opinion, but simple to understand and administer for large populations. The architecture of a DAO makes these hierarchies unnecessary because a direct voting infrastructure is built into the protocol. In this way, DAOs have replaced the central core of human organization with software, devolving power to the peripheries in a fair and transparent way.

DAO: the Future of Online Organization

After years of centralized power, the internet is enabling us to route around old hierarchies and impediments to progress. DAOs are emerging as the natural governance structure for online collaborations: especially crypto-native projects, but also offline organizations looking for a competitive advantage by architecting out their administrative centers

This is what they look like in theory but the best way to really see what a DAO is, is to play with them. If you would like to join a DAO, or even set up your own, have a read through our How to DAO article for more detailed instructions.

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