As an advocate for DAOs, I have argued with others about DAOs on various occasions, but I have never systematically expressed my views on DAOs. Today, I will take the time to do so.
Before discussing what DAOs are, let's first discuss how to understand a rapidly evolving concept. First, we should not interpret it in a static, literal way. For example, what does the "D" represent, what does the "O" represent? The extension of the concept of rapid evolution will quickly surpass its original literal meaning. Secondly, we should not criticize DAOs based on our own interpretation, as it is easy to fall into straw man attacks, setting up a target and attacking it ourselves. We should understand it with an open attitude, first understanding what problems it aims to solve, and then considering the possible evolutions.
So why do we need DAOs? What problems do they solve?
To understand why we need DAOs, let's first understand why we need companies. Why not just have a boss hire some workers, why establish a company? What does a company provide in addition? A company provides an abstraction of a "legal person," allowing the company to be an independent legal entity, able to own assets and assume liabilities. This abstraction relieves entrepreneurs and shareholders of unlimited liability, creates possibilities for stock ownership and IPOs, and allows the lifespan of a company to surpass individuals and families. Therefore, companies have become the main entities in modern economies, and most contracts are related to companies.
From this perspective, DAOs aim to simulate a subject in the crypto world through programming, which can own assets (rights) and assume responsibilities (obligations), thus decoupling from individuals.
So why can't we continue to use the company model in the crypto world?
- The mechanism of corporate legal personhood relies on the judicial system and the financial system to be effective. The judicial system has the power of compulsory enforcement over corporate property, but it does not have compulsory enforcement power on public chains.
- The enforcement power of laws is constructed by nations, and cross-border enforcement has always been a problem, while public chains are globalized.
- Smart contracts themselves have enforcement power and can construct dispute resolution mechanisms with lower costs and higher flexibility than the judicial system.
From this perspective, DAOs are not only an abstraction of a subject but also require a set of governance protocols to resolve disputes. The specific governance mechanism is not the key; the flexibility of programming can implement any type of governance mechanism. However, this governance must be "self-bootstrapping," a complete autonomy.
So why haven't we had DAOs in recent years? The crypto world seems to be developing well without them.
If we observe the entrepreneurial teams and investment models in the crypto world, they are equivalent to the "primitive tribe" stage, relying mainly on personal relationships and personal integrity. Since the law cannot intervene or the cost of safeguarding rights is too high, entrepreneurs and scammers abound. However, because this is a rapidly developing market, when encountering pitfalls, acknowledging them and then finding the next opportunity can generally cover the pitfalls, so things can still work. But as the size of the crypto field grows and the number of practitioners and users increases, the original model is no longer effective, and this is the opportunity for DAOs.
It can be foreseen that with the explosion of projects and the expansion of team sizes, disputes between various capital providers and entrepreneurial teams, among founding team members, and between teams will become highly probable events. Defining rules and dispute resolution solutions in advance through DAOs is a wise approach.
From this perspective, let's deduce the possibilities of DAOs:
- Through DAO fundraising, define rules for the allocation and use of funds in contracts to avoid team rug-pulls (running away with funds). Many DeFi projects have already achieved this.
- Use smart contract DAOs to define organizations, member roles, and contribution allocation contracts. Example: Sushi's CEO election.
- With DAOs, contracts between DAOs can also be defined through contracts. Example: Compound's security company bidding.
- Tools around DAOs will flourish. The entire toolchain around enterprises can be migrated to the DAO ecosystem and can provide greater value because these tools can connect data between different DAOs through the chain.
- Financial services around DAOs will emerge. For example, with on-chain employment contracts and business contracts, implementing credit loans is not difficult, as credit loans are essentially mortgaging future income.
- Models combining DAOs and law will appear, and private arbitration services will emerge. Although DAOs are autonomous entities, they can seamlessly integrate with the legal systems of common law. Under the current legal system, private arbitration is difficult to exist because if the arbitration result lacks enforceability, it is meaningless. However, smart contracts provide enforceability, so only an organization or individual recognized by both parties is needed to provide arbitration services. Example: The DAO Act in Wyoming.
Looking at the evolution of current DAOs, we can see that they are either based on project exploration (such as governance mechanisms of public chains or DeFi projects) or based on asset exploration (starting with a certain amount of assets and then experimenting with governance, such as fragmented NFT projects), or they are tested through airdrops to a group of users.
Although blockchain is not yet ready to accept a large number of users, it has no problem supporting transactions and dispute resolution between DAOs. From this perspective, applications to DAOs will develop before applications to individuals. It can be predicted that the most active projects in 2022 will be in the DAO field. The crypto world has created DeFi and will now create DAOs, providing the engine for economic development.
This article is taken from my Twitter and Weibo accounts:
