Talking points from my presentation — ‘Introduction to DAOs’

I’ve written down some talking points from my talk delivered during the Ethereum Meetup Warsaw on 28.04.2016. For TL;DR you can review the slides:

People Create Abstractions to Cooperate.

You don’t know who made your clothes. You don’t know who made the device you are reading this on. The majority of physical and virtual objects we interact with on a daily basis were not created by one person. Look around and realise that what you are seeing is a result of a coordinated economic effort of large numbers of people.

How can we coordinate large numbers of individuals to work towards the same goal? Humans invent abstractions that allow them to cooperate. Money, joint-stock companies and even the nation states are inventions that people use to coordinate their efforts.

These abstractions that don’t really exist outside of the human mind, allowed people to align their economic goals and orchestrate efforts to produce all things you see around yourself.

Pooling Resources And Risk/Reward Distribution.

Inventions like the joint stock company created mechanisms of economic alignment that allowed multiple individuals to share risks & rewards in productive ventures.

The joint stock company model evolved into global corporations but there’s a growing misalignment of interests between shareholders, employees and customers.

Digital Era Needs New Abstractions

Creating new productive ventures in the digital world is a high risk/high reward activity (startups). Most likely you’ll fail but if you win — you win big.

Most startups today are platforms that rely on decentralised value creation by their users. Work is decentralised (by writing these words on Medium, I’m creating value for Medium’s shareholders) but rewards are centralised — mostly in Silicon Valley because this is where the majority of platforms are initially funded and incorporated.

The industrial model distributed economic surplus via jobs & salaries. The digital age model distributes economic surplus primarily via equity in platforms.

But while everyone with a smartphone can participate in information exchange on platforms, only selected few can participate in platform’s equity.

Bitcoin — The Organisation Built on Software Based Incentives

Let’s forget for a moment about bitcoins as an asset class and focus on Bitcoin the ‘organisation’.

Bitcoin proved it’s possible to embed incentives in software so that the same level of coordination and efficiency is achieved without establishing legal entities, signing agreements, employment contracts etc.

In the industrial model their roles of the employer, employee, shareholder, CEO etc were fixed and expected contributions clearly defined. In the Bitcoin model, these roles are fluid. Users just contribute value to the ‘Bitcoin organisation’ depending on provided incentives and disposable resources they have (know-how, capital, appetite for risk etc).

Functionally, people just ‘do’ stuff for the Bitcoin network as they would for their employer. They provide IT infrastructure, write code, do marketing etc. They perform actions in the physical world because Bitcoin’s incentives make it profitable to do so.

Bitcoin proved that economic coordination at the global scale that was previously extremely costly is now possible with pure software. This is the real breakthrough of Bitcoin. The fact that the first ‘product’ of the ‘Bitcoin organisation’ is a money-like asset class is important but secondary here.

There will be many more Decentralised Autonomous Organisations (DAOs) that deliver other products to the world using the same paradigm that Bitcoin pioneered.

Ethereum is to DAOs What Blogger Was to Online Publishing

Bitcoin required specialised knowledge to experiment with other incentive models and its security model limited the range of experimentation to currency-like products.

Ethereum takes the idea of Bitcoin to the next level. It abstracts out the underlying platform so that you can focus on building other incentive structures. In other words, you can create coordination mechanisms for other groups of people, who can share risks & rewards in new ways than in the typical cryptocurrency scheme.

Blogger allowed writers to focus on what’s most important, the content and forget about HTML, web servers and IT infrastructures.

Ethereum does the same for DAOs. DAOs are not organisations as we normally imagine them (own stuff in the physical world, have employees etc). DAOs are pure economic coordination mechanisms. By distributing risks and rewards, DAOs can make people that never met each other contribute resources to the shared purpose.

We can say that DAOs achieve the same results as traditional organisations (creating value by combining skillsets and assets of participants ) but using somewhat different means.

Key questions when thinking about DAOs:

what roles does your model bring together?

what assets do they exchange? (talent, know-how, capital etc)

what is the product of this exchange?

who absorbs the risk of failure?

who gets rewards when successful?

what success means in your model?

Ethereum as a ‘World Computer’ is a bad metaphor.

While technically accurate it creates wrong mental associations for most people. (outside of the narrow group of insiders) It makes people think about ‘computation’ as an application of Ethereum.

But computation on Ethereum is slow and expensive. For computation, there are better, cheaper and faster alternatives that don’t require blockchains and all that.

Ethereum’s value proposition is not in computation.

Ethereum can create various forms of economic alignment, shared purpose and coordination between thousands of anonymous people, at a fraction of a cost compared to alternatives (legal frameworks). There’s no alternative for that currently.

Let me give you an example.

You can read this post and if you agree with me, we can have a shared perspective on the world. But we don’t have shared economic goals.

Most likely, we live in different countries, get paid in different currencies, work for different employers. No shared economic goals here.

But if we purchase the same DAO token (BTC, ETH or other) , suddenly we both have a vested interest in success of that DAO. We don’t have to know each other, speak the same language but still we are economically aligned proportionally to our stake in a DAO. We start reading the same websites, join the same reddit communities, tell our friends the same stories about how great the DAO is.

From Social Networks (Web 2.0) to Incentive Networks (Web 3.0).

Cryptographic tokens represent various risk/reward profiles and their holders create various incentive networks.

Web 1.0 — Static Document Networks — web of static pages connected via hyperlinks.

Web 2.0 — Social Networks — web of people connected via social links (likes, follows).

Web 3.0 — Incentive Networks– web of people connected via economic links (tokens).

Each subsequent paradigm affects the behaviour of the previous one. Web 2.0 influenced the way Web 1.0 looks like — social networks affected the way websites are designed.

Web 3.0 is already affecting Web 2.0 — just look at what happens on reddit during crypto bubbles, crashes, blocksize debates etc. The amount of noise will only intensify when DAO proposal debates begin. To fix that we need to be able to see incentives behind behaviours.