Updated: Aug 31
By now, many people are convinced that SWARM Organisation provides an excellent framework to address the much-needed organisation change and to create a new competitive advantage in our extremely fast changing society. The principles of self-organisation improve the connective, innovative and adaptive capacity of an organisation. They create what is known as ‘swarm intelligence’ or ‘the wisdom of the crowd’, an intuitive self-emerging mechanism for decision making and self-governance. However, these exiting new properties require several conditions to be met. They require autonomous participation of individuals, purpose driven motivation and the ability connect redundantly with all participants in the collective, share information and monitor decisions and transactions. And specifically this last part requires a system and technology. This is where DAO’s provide an interesting solution.
Clearly, implementing DOA's without inducing a change in an organisation's' (read: peoples') mindset and behaviour, will probably solve some issues but definitely not all. This is why we offer courses that help organisations with this fundamental 1st step (see: https://www.swarm-organisation.com/academy).
But what is a DAO and how will it solve the governance challenge? Recently several articles were published on the topic of DAO’s. DAO’s are a promising solution for solving the connectivity gap, the leadership paradox and distributed governance, for future proof successful business models. Interested? Then please read the article below.
What is a DAO?
DAOs tackle an age-old problem of governance, which political scientists and economists refer to as the principal-agent dilemma. This occurs when the agent of an organization has the power to make decisions on behalf of, or impacting, the principal entity in the organization. Examples hereof could be managers that act on behalf of shareholders or politicians that act on behalf of citizens. In such setups, moral hazard occurs when one person takes more risks than they normally would, because others bear the cost of those risks. More generally, it occurs when the agent acts in his own interest rather than the interest of the principal because the principal cannot fully control the agent‘s actions. This dilemma usually increases when there is underlying information asymmetry at play.
Traditional Organizations VS. DAOs
In traditional companies, all agents of a company have employment contracts that regulate their relationship with the organization and with each other. Their rights and obligations are regulated by legal contracts and enforced by a legal system which is subject to the underlying governing law of the country they reside in. If anything goes wrong, or someone does not stick to their end of the bargain, the legal contract will define who can be sued for what in a court of law.
DAOs, on the other hand, involve a set of people interacting with each other according to a self-enforcing open-source protocol. Keeping the network safe and performing other network tasks is rewarded with the native network tokens. Blockchains and smart contracts hereby reduce transaction costs of management at higher levels of transparency, aligning the interests of all stakeholders by the consensus rules tied to the native token. Individual behaviour is incentivized with a token to collectively contribute to a common goal. Members of a DAO are not bound together by a legal entity, nor have they entered into any formal legal contracts. Instead, they are steered by incentives tied to the network tokens, and fully transparent rules that are written into the piece of software, which is enforced by machine consensus. There are no bilateral agreements. There is only one governing law (the protocol or smart contract) regulating the behaviour of all network participants.
As opposed to traditional companies that are structured in a top-down manner, with many layers of management and bureaucratic coordination, DAOs provide an operating system for people and institutions that do not know nor trust each other, who might live in different geographical areas, speak different languages, and therefore be subject to different jurisdictions. Instead of legal contracts managing the relations of the people, DAOs do not have a hierarchical structure, except for the code. Once deployed, this entity is independent of its creator and cannot be censored by one single entity, but instead by a predefined majority of the organization’s participants. The exact majority rules are defined in the consensus protocol or the smart contract, and will vary from case to case. In some countries, like Austria for example, there are trends in the legal literature to see DAO's as a civil law partnership.
Blockchain and smart contracts are governance technologies that have the potential to provide higher levels of transparency while reducing bureaucracy with self-enforcing code. They can minimize existing principal-agent dilemmas of organizations and subsequent moral hazards. Tokens of distributed networks hereby provide incentives to automatically align interests in the absence of third parties.
A DAO can be formalized by a smart contract. Use cases range from simple to complex. The complexity depends on the number of stakeholders, as well as the number and complexity of processes within that organization that will be governed by the smart contract. Depending on the purpose and governance rules of the organization, these use cases can have a resemblance to companies or nation states. The more centralized governance rules are, the more it resembles a traditional company. In a more decentralized setup, the governance rules might resemble nation states, automatically steering behaviour with tokenized incentives and disincentives. In such cases, the token governance rules incentivize and steer a network of actors without centralized intermediaries, thereby replacing the need for top-down organizations managed by a group of people, with self-enforcing code. Such decentralized organizations can use the legal system for some protection of physical property, but such usage is secondary to the preemptive security mechanisms smart contracts offer. A complex stack of technologies, steered by consensus protocols, has to be put in place in order to create a functioning autonomous infrastructure. Their native protocol tokens enable distributed Internet tribes to emerge.
DAOs are open-source, thus transparent and, in theory, incorruptible. All transactions of the organization are recorded and maintained on a blockchain. Interests of the members of the organization are (if designed correctly) aligned by the incentive rules tied to the native token. Proposals take the primary way for making decisions within a DAO, which are voted for by majority consensus of involved network actors. As such, DAOs can be seen as distributed organisms, or distributed Internet tribes, that live on the Internet and exist autonomously, but also heavily rely on specialist individuals or smaller organisations to perform certain tasks that cannot be replaced with automation. We will likely see many more DAOs, with a wide range of purposes, evolve on top of this technology. In combination with the “Internet of Things,” smart property governance can also be integrated into the blockchain directly, potentially allowing decentralized organizations to control vehicles, safety deposit boxes and buildings.
A great example is the Bitcoin Network. It can be considered to be the first true decentralized and autonomous organization, coordinated by a consensus protocol which anybody is free to adopt. It provides an operating system for money without banks and bank managers, and has stayed attack resistant and fault tolerant since the first block was created in 2009. No central entity controls Bitcoin, which means that as long as people keep participating in the network, only a worldwide power outage could shut down Bitcoin. The underlying blockchain protocol enables an incentive network, powered by the governance rules tied to its cryptographic token. These token governance rulesets of the consensus layer allow for automated and transparent coordination of a disparate group of people who do not know or trust each other. The Bitcoin Network has shown that tokens can be used as a means of programming behaviour, aka steering the economic behaviour of network nodes. This incentive mechanism has proven to be a motivator in performing services to a network.
I would like to argue that there is no such thing as a fully decentralized and autonomous organization. Depending on the governance rules, there are different levels of decentralization. While the network might be geographically decentralized, and have many independent but equal network actors, the governance rules written in the smart contract or blockchain protocol will always be a point of centralization and loss of direct autonomy. DAOs can be architecturally decentralized (independent actors run different nodes), and are geographically decentralized, but they are logically centralized. The question of how to upgrade the code is very often delegated to a set of experts who understand the techno-legal intricacies of the code, and therefore represent a point of centralization.
Full text and high-resolution graphics available as paperback & ebook: Token Economy, by Shermin Voshmgir, 2020
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