Easing into Crypto, Part 12: DAO’s (organizations managed by algorithms, governance tokens, collective ownership, and the “network state”)

Michael CalozCryptoLeave a Comment

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This is part 12 in my cryptocurrency educational series.

⭐ Each part builds on the previous ones, so I suggest starting with:

Part 0: Overview of my series, who this is for, why you might consider listening to me, and how easy it is to think you understand crypto when you actually don’t.

Cryptocurrency 101 series (i.e., core principles and Bitcoin):

  1. Part 1: Why should I care? What’s in it for me? Why is crypto important (it’s about a lot more than just making money!)?
  2. Part 2: How crypto actually works, why Bitcoin is valuable (even if it’s just “made up!”), and what you should know about blockchains (the tech behind them and how they could influence the future of our world)
  3. Part 3: How the blockchain keeps running, where new Bitcoins come from (i.e., how mining works), and concerns about Bitcoin’s environmental impact
  4. Part 4: How crypto offers autonomy, why it can’t be stopped, and the value of decentralization
  5. Part 5: How to store and use cryptocurrency, some basic cryptography, how wallets work, identity management, and the future of democracy
  6. Part 6: Overview of the different types of wallets, which one is best for you, what to be careful of, and why a hardware wallet might be worth the investment

Cryptocurrency 102 series (i.e., intermediate principles, Ethereum, and other coins/tokens):

  1. Part 7: Ethereum (the #2 most popular cryptocurrency, and the one I’m most excited about), smart contracts, dapps, gas (and the high gas fee problem), Proof of Stake (PoS), and Ethereum 2.0
  2. Part 8: Coins vs. tokens, and some real Ethereum use cases—oracles and DEX’s
  3. Part 9: Intro to NFT’s (collectibles, research funding & historical significance, and music)
  4. Part 10: More categories of NFT’s (art, video games, virtual reality)
  5. Part 11: Wrapping up NFT’s (what you can actually do with them, upsides, downsides, risks)
  6. Part 12: DAO’s (organizations managed by algorithms, governance tokens, collective ownership, and the “network state”)

Cryptocurrency 103 series (i.e., advanced principles, investing):

  1. Part 13 (in progress): DeFi (decentralized finance): yield farming, liquidity staking, and more
  2. Part 14 (in progress): Investing (principles, leverage, indexes, risk/reward, and my favorite options for making money in crypto)

Part 12 Reading Time: 21-26

Like NFT’s, I believe DAO’s are another crypto domain that’s still finding its legs but will turn out to be hugely important in the future.

Ethereum use case #4: DAO’s

Think of a DAO as a corporation governed by smart contracts (basically, an organization managed by algorithms instead of people).

DAO stands for decentralized autonomous organization.

At the simple level, it’s a group of people coming together around a common interest, goal, business venture, project, or cause. It could be anything from a group of NFT collectors, to a group of developers working on a new cryptocurrency or software project together, to a group of moderators running an online community.

Because DAO’s are built on the blockchain, all sorts of interesting things become possible:

The operating procedures are programmed in via smart contracts.

That means there’s less bureaucracy to handle and less need for lawyers to ensure everyone’s following the rules.

Everything (including all financial transactions) is completely transparent since it’s all recorded on the public blockchain. At any point, the DAO could be easily audited by a third party to ensure everything is working properly and the rules are being followed.

This degree of transparency, flexibility, and shareholder control has never been possible for organizations until now. (You’ll learn more about the “shareholder control” piece in a moment.)

It’s easy to join a DAO, and membership can have tangible benefits.

Typically, all you have to do to join a DAO is visit their website, connect your Ethereum wallet, and exchange ETH for some of the DAO’s governance token (which is just another cryptocurrency). It’s like buying stock in a company.

Since you’ve bought a stake in the DAO via its governance token, you’re now an official member who’s automatically entitled to things like voting on new rules and receiving a share of any profits the DAO makes (proportional to what percentage of the governance tokens you own).

Voting in DAO’s is like a much better version of how it’s supposed to work when you own stock in a traditional company.

I’ve owned stocks for many years, and every once in a while I receive a voting packet in the mail for some company I own stock in. It will contain a lot of complex information on proposals to vote on, and I’m supposed to fill it out by hand and mail it back in. My guess is that the majority of stockholders (at least the small-time ones) ignore these things because they’re so cumbersome.

Voting in DAO’s is a lot easier since it’s all done on the DAO’s website. Plus, unlike with those paper-based stockholder voting packets I just mentioned, voting on DAO’s is a lot more secure since you’re signing your vote with your private key. So, as long as you never share that, there’s never any doubt about voter fraud.

Typically, if you own some minimum number of governance tokens, you can submit a proposal to adjust the rules of the DAO or to suggest where it heads in the future.

For example, if you’re part of a DAO that runs a crypto investment dapp, you might vote on whether or not to adjust the interest rates being offered to the public. Or, if you’re part of a DAO that runs a blockchain-based video game, you might vote on which new features should be prioritized.

And here’s the cool thing: Once a proposal passes, it’s automatically executed by the smart contract. For example, if someone triggered a vote about whether or not the DAO should use treasury funds to make a certain investment, the DAO itself would automatically make that investment if the vote passed.

Because there tend to be a lot of proposals to keep track of, another cool thing I’ve seen DAO’s do is allow people to delegate their votes to someone else.

For example, say there are 10,000 people in a DAO, but only a few hundred of them are regularly active on the message board or Discord channel, and only 5 of those people regularly share strong opinions about their vision for the future of the DAO.

You might choose your two favorites of those people and cryptographically sign away half your votes to one and half to the other. That way, they’ll vote on your behalf, which can be especially handy for proposals involving highly technical issues that you don’t fully understand.

Some DAO’s even reward participation by giving you a small amount of that DAO’s governance token for each vote you participate in; and, you still get that free cryptocurrency even if you’ve delegated your vote to someone else.

By the way, this is a lot easier than it sounds. Usually, the DAO website will have a big Delegate button, and all you have to do is enter the wallet address, i.e., public key, of the person you want to delegate to, along with the percentage of your votes. You can also retract that ability at any time and vote yourself instead.

Your real-life identity doesn’t matter in a DAO.

Remember from Part 5 how smart contracts allow for “trustless” working arrangements, meaning that you can safely make financial and business deals with people even if you’ve never met them and aren’t using lawyers?

That comes into play here. In many DAO’s, the members have no idea about the real identities of the other members—they only know them by wallet addresses or nicknames.

So, if you want to contribute your skills and knowledge to a DAO, it doesn’t matter how old you are, what race or gender you are, or where you live. Many cryptocurrency project teams (like the SushiSwap team) operate this way.

If someone has great ideas, you could choose to delegate your votes to them even if you have no idea who they really are.

DAO’s can offer collective ownership and profit-sharing.

Let’s say you’re really into NFT art, but there’s no way you could afford a particular piece that costs $100,000. If you formed a DAO with 99 other NFT fans, you could each put forward just $1,000 and jointly purchase that NFT. The great thing about this, though, is that you don’t have to rely on the honor system.

Remember how blockchain tech is trustless (meaning, you only have to trust the system itself and not the individual people you’re doing business with)?

With a DAO, you could comfortably put real money into it and split the ownership of that NFT even if you don’t actually know or trust the other people in the DAO (or they live in different countries).

Since it’s run on smart contracts, the DAO itself is the owner of the NFT, and no one member can try to steal it from everyone else.

If someone leaves the DAO, they would likely give up their partial ownership of the NFT and be bought out by the DAO’s treasury. But, for people who stick around, as the value of that NFT went up over time, all the DAO members would benefit.

By the way, DAO’s don’t just have to be about making money for their members. You could just as easily have a DAO focused on charity work. Or, you might program the smart contract such that a percentage of all profits is always donated to a charity of the DAO’s choice.

Collective bargaining and the road to the “network state.”

All the way back in Post #2 in this series, I mentioned the idea that the future of Silicon Valley might be in the cloud. Furthermore, through blockchain technology, we might even reach a point where people can form country-like entities based on shared values rather than physical location. 

Now that you know about DAO’s, those ideas might begin to make more sense.

The brilliant Balaji Srinivasan, who I’ve referenced before, has written a lot about this. I’ll summarize some of his thinking here:

  1. Following the current trendline, imagine a future where a lot of people permanently work from home.
    1. Said another way, imagine a future where a lot of people can work from anywhere.
  2. Because of that, forward-thinking cities, states, and countries will be competing to attract people: entrepreneurs who will start businesses there, artists who will improve the local culture, community organizers who will make things happen, etc.
    1. For example, one reason Miami is quickly becoming a hotspot for crypto development is because of how its mayor directly interacts with and supports the tech and crypto communities.
    2. The City of Miami is acting more like a tech startup than a traditional slow-moving government. They even announced in July 2021 that they’re creating their own cryptocurrency, Miami Coin, to help fund city initiatives.
  3. Now, say you’re dissatisfied with your current living situation, and you want to move somewhere new.
    1. Through online message boards, Discord channels, and so on, you connect with like-minded people who live all over the United States, and maybe even people in other countries.
    2. All of you are able to work from anywhere, and you share strong feelings about how the world should be and what kinds of social and political structures you’d prefer to live under.
  4. All of you decide to form a DAO together.
    1. Everyone buys into it with ETH to gain voting rights, proportional representation, and profit-sharing.
    2. Let’s say there’s a minimum investment requirement to prove that a prospective member is serious.
  5. Through the governance structure of the DAO, interested members regularly meet, put forward proposals, and vote on them.
    1. When a proposal involves money, the smart contracts automatically pull the right amount out from the treasury (funded by the ETH that each person put in to join) to pay for it.
    2. Through all the discussions and voting, the DAO gets more and more clear on where the collective stands on key issues: where they would want to live (weather, timezone, close to water, etc.), how they feel about various social issues, what kind of taxation structure they believe in, and so on.
    3. Remember that there would likely be many different DAO’s like this, so you could explore several until you found the one that best fit you.
    4. Remember too that you would only have to be as involved as you want to be—you could delegate some or all of your votes to other people you trust. Maybe the DAO is even sophisticated enough that you could delegate all votes about economic issues to Person X, all issues about social issues to Person Y, etc.
  6. At this point, the DAO has real collective bargaining power.
    1. Say it has ten thousand members and each pledged $10,000 to join. That means the DAO has $100M behind it and thus represents a significant force.
    2. If $10K seems like a lot, remember two things: (1) The DAO could decide that anyone can get some or all of their money back if they decide to leave, and (2) We’re talking about starting something similar to a new government here, so this would only be for people who were serious and who had the financial stability (and privilege) necessary to take part in a venture like this.
  7. Now that the DAO has its agenda laid out and the funds to back it up, it can effectively start something very similar to a new government.
    1. The group only needs a physical location to live (or, they could even choose to continue each living where they are and simply meet online or in virtual reality).
    2. That’s where the collective bargaining power really comes in. Representatives of the DAO could approach the mayor of a city (or even the governments of small countries) with a proposal: We’re willing to all commit to moving to your city (bringing all this investment money and talent with us) if you agree to adjust your laws to better match the vision we’ve collectively laid out for our ideal living conditions.
    3. Forward-thinking leaders like the mayor of Miami would likely be willing to have a serious conversation to woo these people.

Here are some links to dive deeper into Balaji’s vision:

Just like with the concept of the pseudonymous economy from Part 5, I’m not saying that this model is necessarily ideal. For now, I’m just exploring what would be possible from a tech perspective.

As you can see, DAO’s get at the heart of cryptocurrency’s spirit of decentralization and empowerment for everyone.

Whether you believe in this “network state” vision or not, in the coming years, DAO’s will almost certainly become a major force in the business world at least. Customers will demand transparency in processes and a voice in decision-making.

Which company do you think will survive and thrive:

  1. The traditional one run by a small board of directors whose inner workings are largely kept secret, or
  2. The DAO-based one that’s fully transparent about everything it does, makes all its financial information visible, and allows any DAO member to put forward proposals to guide the future of the company?

I also want to be realistic here: DAO’s aren’t a magic solution to all the problems inherent in getting a group of people together to make decisions.

There are still a lot of social aspects involved in governance that need to be addressed for any group—DAO or not—to function effectively. But, compared to the cumbersome (and unfair) corporation model we have now, DAO’s do provide some helpful tools that should promote innovation (and increased access for anyone) in this space.

It’s also not to say that everything is going to be design-by-committee. It’s very likely that the most successful DAO’s will set up their policies such that members vote on the general ideas and then empower subject matter experts and visionary designers to execute the details.

So what do real DAO’s look like?

Here are five DAO’s that are either popular or I find interesting:

  • MakerDAO is the organization behind the stablecoin Dai (i.e., one of the most popular crypto coins that’s linked to the price of the US dollar to provide stability).
    • DAO members (i.e., people who own the MKR token, which you can easily trade ETH for on a DEX like Uniswap) are able to vote on things like how many new Dai coins are minted.
    • To be clear on how significant this is, we’re talking about a global financial system of over $5B that’s democratically governed by a wide variety of people from all over the world, most of whom have never met each other. You can literally join this DAO in minutes simply by buying some MKR token.
    • Here’s the official guide to learn more, and you can even see the full list of actual proposals that members are voting on.
  • Universe is like a decentralized and DAO-governed version of OpenSea or Rarible.
    • Their goal is to create a whole decentralized ecosystem to connect artists with fans—a marketplace run by NFT artists to create, edit, and auction off NFT collections.
  • Uniswap, as I mentioned in a previous post, is one of the largest decentralized exchanges (i.e., dapps for exchanging one coin or token for another).
  • Moloch is a DAO that contributes to public works projects in the crypto space. Currently, they’re largely focused on Ethereum 2.0 development. Moloch has raised over $4M that they give out in grants to crypto infrastructure projects.
    • This is also a DAO that requires a membership application process (filling out a questionnaire that asks about your relevant experience and what you can contribute).
  • IndexCoop runs several crypto index funds (which I’ll get into in my next post on DeFi).
    • Not only are they doing important work in the DeFi space, but I appreciate their onboarding process for new members—which includes offering advice on how you can best contribute depending on how much time you have available (e.g., 0-5 hours/week versus 15+ hours/week).
    • That kind of structure—encouraging part-time contribution from anyone, anywhere in the world—is another example of how the DAO world will be more accessible and forward-thinking than the traditional corporate world. IndexCoop even has a paid internship program.
    • You can learn more about the DAO here.
  • Flamingo is a well-respected group of NFT collectors and investors.
    • They’ve developed a reputation for having an eye for which NFT’s will end up being popular, and their members pool their money so that they can collectively buy expensive NFT’s.
    • Flamingo is different than many of these other DAO’s because it’s more exclusive. Its membership is capped at 100 people, and the minimum investment to join is 60 ETH (currently over $140,000 USD).
    • You can learn more here.

Next time, we’ll wrap up the top 5 Ethereum use cases with the big one that’s most popular right now: DeFi (decentralized finance).

Part 13 (in progress): DeFi (decentralized finance): yield farming, liquidity staking, and more

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