In this first article of our Choice Architecture series, we'll discuss how the Decentralized Autonomous Organization (DAO) is a profound evolution of Choice Architecture.
On any given day, we face a constant stream of choices and decisions: what to wear, what to eat, who to call, how to progress… etc. Indeed, progress is the art of decision-making: the better our decisions, the more proximate our goals; or, as Jeff Booth has phrased it: "Intelligence is error-correction."
Choices are hindered when individuals base their decisions on wrong assumptions or value first-order consequences above higher-order ones. Take the decision not to exercise as an example: it avoids pain in the short-term, but can have long-term consequences that are far more debilitating.
Yet, decision-making itself is not free: the more decisions we have to make, the more our cognitive resources are depleted and the more intractable life becomes. Why decisions should be so mentally and emotionally exhausting is hinted at by the meaning of the word 'decision' itself: literally, 'to cut off'; by choosing one path, we are excising all others, which takes calculation and courage.
Technology has come to the aid of those who can afford it to reduce the need to make decisions - as with GPS - or at least make more decisions in less time, such as Netflix recommendations. The fact remains though, that as life gets more complex, the number of choices we have to make increases exponentially. This is the paradox of freedom and progress: decisions are costly.
To manage this complexity, many of us calculate that delegating decisions to experts is less costly than assuming those responsibilities ourselves: schools teach our children, lawyers defend us in court, politicians represent us in parliament, etc. These principal-agent relationships are nearly always mediated by a duty-of-care, but, fundamentally, they represent a decision not to decide what to teach or how to defend ourselves.
The decision to defer to experts is rational for two reasons: the first-order reason is that it saves cognitive ‘bandwidth’ by creating an event-horizon, beyond which no further decisions need to be made (on that subject). The second-order reason is that bad decisions can be extremely costly and precipitate a cascade of further decision-making, so it makes sense to harness the experience of others to mitigate that risk. However, delegation is not a panacea: experts are not infallible, are liable to exaggerate their worth, and it is not uncommon for narrow expertise to be blind to external threats that are painfully obvious to outsiders: the overthrow of Blockbuster by Netflix and Kodak by digital cameras being prime examples in the business sphere. So, principal-agent relationships can never be wholly released from oversight; checks and balances are always necessary to modulate the transfer of power from the many into the hands of a few.
How Governance Evolved
As society has become more complex, exponential choices have been tamed at various points in history by novel methods of governance: Roman soldiers were subordinated under centurions, Henry II delegated judicial decisions to local juries, and flat tax rates replaced audits of individual wealth. In his 1937 essay, 'The Nature of the Firm', economist Ronald Coase hypothesized that the company structure also emerged as a coordination mechanism to internalize productive relationships, thus eliminating the costs of managing independent contractors.
Over time, the mapping between principals and agents has improved from a many-to-one relationship (with almost no agency) under a monarchy, into a productive many-to-few relationship modulated by purchasing power and elections in a free-market democracy. Gradually, organizations, businesses and the State have evolved into a 'choice architecture', abstracting millions of decisions away from our daily lives and into the hands of politicians and founders. Without such a hierarchy, many believe that society would simply not be able to function at the velocity we enjoy today, but that is not to say that there is no room for improvement.
In a recent article, A DAO Defined: the Big Picture, we highlighted how government policies are examples of centralized power conducting experiments on live populations, with some horrific consequences and many avoidable harms. Power has to be focussed to perform useful work but when centralized power is used to distort markets, suppress the wisdom of the crowd, or restrict choices unnecessarily, it is a sign that power has become illiquid and the choice architecture needs a redesign.
Web3: the Next Phase of Governance
Encompassing Bitcoin, DeFi and the wider crypto ecosystem, Web3 is largely viewed as a technological curiosity at the moment: slightly concerning to regulators but of limited popular appeal. Yet, this is like dismissing an acorn having never seen an Oak. As the next iteration of social mapping, Web3 is no less profound than Magna Carta.
Bitcoin is revolutionary because it architects away an entire organ of State: that of monetary policy. From Henry VIII's Great Debasement to the Federal Reserve's latest round of Quantitative Easing, monetary policy has never been fully relinquished into democratic hands. To be clear, Bitcoin hasn't done this directly, but it has incepted a parallel free-market jurisdiction for money, governed by 'fork politics', where citizens are free to adopt the coin whose monetary policy they prefer, or 'fork' a novel one. In this way, every crypto transaction serves two democratic purposes: first to wrest legitimacy away from centralized monetary policy, and second, as a vote in favor of a new unit of account. As votes mount in favor of one coin over all the rest, its value rises, others are rejected and society has peacefully chosen its own monetary policy.
The excision of monetary policy in Web3 has been quickly followed by software for decentralized autonomous organizations (DAOs), which architect away the kernels of organizations, making it trivial to spin up borderless companies, charities and investment groups with secure treasuries, inclusive voting, fully transparent audit trails and no intermediaries. DAO kernels such as Aragon Client are already sophisticated enough to replace entire governments - only lacking in user experience and cost-effectiveness - but as scaling solutions such as Polygon bring down the cost of transactions and voting (or cleverly architect them away as in Aragon Govern), the security, transparency and liquidity that DAOs afford will become irresistible (in keeping with Coase's theorem).
Web3 then, is a profound evolution in choice architecture, replacing centralized management with a kind of anarcho-syndicalism, where a direct democracy of coin-holders (usually referred to as 'token-holders' in the context of a DAO) vote on decisions pertaining to the DAO. Because of this new decentralized structure, an effective voting system is crucial to the success of a DAO; the familiar roles of production, marketing, accounting and operations all have community oversight and need accurate ways of soliciting the opinions of DAO members.
As the world grows more complex, the number of choices that need to be made will only increase. We cannot possibly cope with this as individuals, so the question becomes, 'How should we delegate?' Most of the time this is automated away by the companies and apps that are being built to make our lives easier, but the question becomes more operative as DAO software pushes choices back out to members on the periphery of decentralized organizations.