Disclaimer*: What follows are merely personal reflections, penned without filter or reservation. Proceed with curiosity, and read at your own risk. ;)*
I believe that protecting and enforcing access to incentives for groups through smart contracts is the most exciting use case of crypto and web3 and will revolutionize how we organize the human collective.
I’m writing down some thoughts and adding diagrams to explain a few concepts that have been floating in my head for some time.
First, let’s review what differentiates the traditional world from DAOs.
In the traditional world, companies rely on the local jurisdiction and the banking system to protect incentives being shares, bonds, options, liabilities, etc. This process is not black and white and relies on an army of lawyers, compliance officers, auditors, and accountants. The process is not inspectable or digitalized, and many things get lost in the spider web of complexity. This system ultimately depends on humans doing their job correctly. It is riddled with grey areas where no matter how much legal fees you pay, there’s no precise answer, but rather varies according to the expert you ask. Most of those above are what we would call first-world problems. In less reliable jurisdictions, the systems are more brittle and easily corrupted; therefore protection of stakeholders is more uncertain, and the financial system is not accessible to everyone.
In Web3 and crypto, we are attempting to create better, more inclusive systems. We use fungible and non-fungible tokens to map ownership, rights, etc. We rely on global state machines to dictate truth and apply rule sets to the different on-chain incentives. This is a huge step forward since the process is more transparent and less bound to human error. Most people nowadays describe DAOs as entities that are fully democratic and transparent based on smart contracts and an excellent governance system where censorship-resistant is a necessity. DAOs distribute voting power as widely as possible to avoid concentrating the control over a few. Let’s dig deeper into different entities and how they distribute power.
Mapping the governance spectrum: At one extreme, we find pure dictatorship, characterized by absolute centralized authority. At the other, pure democracy, where every decision is shaped by collective voting.
In our conventional systems, few fully embrace either end of this spectrum. Take Switzerland's approach to "direct democracy." Here, many laws and regulations are subjected to a majority public vote. It's a captivating model demanding a highly informed and engaged citizenry. Indeed, many believe it's effective precisely because of the Swiss context. Yet, it isn't a full-blown direct democracy; citizens aren't voting on every minute detail, like salary increments for individual civil servants. Such granular decisions remain shielded from the popular vote.
On the opposite end, we have centralized systems epitomized by the likes of Stalinist dictatorships. Here, a single figure, supported by a select group and their hierarchies, makes the decisions. Yet, the extreme of this side would be an autonomous AI, making it the ultimate dictator with its singular decision-making capacity.
Meanwhile, DAOs (Decentralized Autonomous Organizations) anchor themselves closer to the democratic end. These are blockchain-based frameworks that empower communities to self-organize and self-govern. Governed by automated rules on a transparent blockchain, they aim for decentralized and censorship-resistant operations.
The ideal for DAOs? A pure democratic ethos where every member possesses equal rights and weighs in on all decisions. But in practice, the intense commitment required means many DAOs today grapple with truly embodying this ideal. To better understand this, consider the following hypothetical scenario.
Imagine four participants, each possessing a unique set of information crucial for an informed decision. In our hypothetical pure democracy, a collective vote is required. But for that vote to yield the best outcome, each participant must be armed with all the information sets. Only then can they achieve a comprehensive understanding to decide effectively. Voting without this complete knowledge risks making suboptimal decisions for the collective.
Participants must share their unique information sets with one another. Let's posit that each participant commits to both absorbing and sharing information diligently. However, there's a catch: a participant can either share their information or absorb someone else's at any given moment, but not both simultaneously. This mirrors our human limitation of not being able to speak and listen at the same time.
Refer to the accompanying diagram which visualizes these four participants navigating this collaborative challenge.
The above illustration presents a systematic process, showcasing how transparent agents share their information sets conscientiously. However, bear in mind the following assumptions, which may not hold true in all scenarios:
Agents adhere to a specific sequence when sharing and absorbing information, ensuring no data loss.
All agents are constantly accessible.
Each agent is proactive in both disseminating and ingesting the information.
Every transmission is genuine and factual.
This model represents an almost ideal communication framework. Yet, even within this near-perfect setup, achieving complete knowledge across all agents necessitates multiple steps. Now, envision the complexity when introducing a fifth agent, as illustrated in the image below.
As the number of participants in the game increases, the required steps to reach consensus escalate dramatically. Now, extrapolate that to a scenario with thousands of agents. The path to agreement becomes exceedingly lengthy, especially when considering this is for a single decision. Reflect on the multitude of decisions an organization faces routinely. It's evident that purely democratic organizations might lag in agility, potentially hindering their overall performance compared to more centralized entities. Such considerations suggest that relying solely on DAOs as the default organizational structure might not always be the most efficient choice.
As we move forward, an increasing number of organizations will harness the capabilities of on-chain technology. While DAOs represent a robust model, offering resistance to censorship, not every entity requires such features. DAOs are merely the pioneers in a vast sea of on-chain organizational possibilities. The horizon promises countless innovative configurations for these digitally native entities.
On-chain organizations leverage smart contracts, human expertise, and computational power to accomplish specific objectives, operating independently of any political system.
DAOs are an exemplary governance model for addressing concave challenges, as highlighted in Vitalik's insightful blog post. However, they aren't a one-size-fits-all solution. While DAOs are apt for overseeing protocols serving as public goods for communities, entities grappling with numerous decisions or handling convex issues might find alternative organizational structures more advantageous.
Traditional organizations often prioritize speed in decision-making, sometimes at the expense of optimization, by using compartmentalized structures. The accompanying image provides a snapshot of a typical medium-sized corporation. At the pinnacle, stakeholders engage with more generalized information, making fewer but often more impactful decisions. As we descend the hierarchy, teams handle more specific data, making decisions with increasing frequency.
Comparing this with DAOs paints a distinct picture. Refer to the diagram below for a representative DAO structure. At its core, smart contracts engineer incentives for both givers/sellers and takers/buyers, effectively balancing supply and demand. Governance and oversight lie in the hands of token holders, endowed with the tools to fine-tune these contracts and, in turn, the overall functionality. Importantly, these modifications should never undermine the system's inherent censorship-resistant nature. Most DAOs also maintain a collective treasury, a tool to regulate the circulating token supply.
Over time, many DAOs have cultivated a community of dedicated contributors who actively support the protocol, engaging in tasks ranging from developer outreach to the development and upkeep of supplementary systems. The involvement of these contributors is often pivotal in bolstering both providers and users. Consequently, token holders have been innovatively leveraging smart contract functionalities to compensate these contributors from the communal treasury.
Using a collective treasury to remunerate contributors introduces a fascinating dynamic that has the potential to benefit both DAOs and other on-chain entities. As trailblazers, DAOs are pioneering various paradigms that hold promise for a broader range of on-chain organizations, encompassing areas like access permissions, financial management, treasury oversight, and token holder rights.
As DAOs evolve and become more intricate, they're expected to adopt increasingly sophisticated organizational methods. A growing number of DAOs are considering the establishment of expert committees, each responsible for a distinct organizational facet (e.g., engineering). These committees would then be allocated a budget from the central treasury to oversee their respective domains.
Upon closer inspection, one can discern parallels with the conventional corporate structure. Yet, the distinguishing factor is the inherent censorship-resistance granted by the power vested in token holders. They possess the authority to replace expert committees and contributors should they act counter to the organization's interests. By bestowing contributors with revocable access, the agility of DAOs can be enhanced, all while preserving their hallmark characteristics: censorship-resistance, community-centricity, token holder-driven decisions, inclusivity, and so forth. It's worth noting, however, that maintaining censorship resistance remains a paramount consideration, invariably influencing the operational design choices of DAOs.
So, what draws groups to the idea of using on-chain systems for organizations? Here's a breakdown of the primary advantages:
Cost-Effective: Even when factoring in high gas prices, the cost of incorporating a company traditionally can be prohibitive, especially for individuals in developing nations.
Efficiency: On-chain mechanisms enable swift organization, significantly outpacing conventional methods.
Accessibility: Entry barriers like needing a passport or bank account are non-existent, making the system open to all.
Digital Precision: Right from inception, all processes are precisely digitalized. Moreover, the organization operates on a standardized API, enhancing its compatibility with a myriad of tools.
Let's ground these points in real-world data. The subsequent chart details the 30 most challenging countries for company incorporation based on the relative cost of startup against the average income per capita. According to data from www.theglobaleconomy.com, these countries are predominantly in the developing world. Take Nicaragua, for instance, where starting a business costs approximately 65.70% of the average income per capita, roughly equating to $1,200. In contrast, creating a Safe multisig wallet on Polygon, given a gas price of 150 Gwei and a Matic price of $0.65, would set you back merely $0.04. This means the on-chain method is approximately 30,000 times more cost-effective.
When assessing the time investment, establishing a traditional company globally averages around 20 days. In contrast, setting up a multisig? A mere 5-10 minutes. This equates to an efficiency improvement of approximately 2,800-fold. Plus, the entire process is transparent; you can track each step in real-time, with the assurance that no external entity can hinder your progress.
One of the standout merits of on-chain organizations is their inherent accessibility. In the traditional business world, there are numerous obstacles that individuals often face when trying to establish an entity, such as the requirement of a passport, proof of residence, or a functioning bank account. These prerequisites, though standard in many developed nations, can pose significant challenges for residents of less developed or more bureaucratically restrictive regions. However, with on-chain mechanisms, such hurdles are effectively eliminated. The decentralized nature of blockchain technology ensures that anyone, irrespective of their geographical location or socio-economic status, can participate, create, or join an organization. This democratization not only broadens the spectrum of potential entrepreneurs but also fosters a more inclusive economic landscape.
Additionally, traditional business processes, especially during the foundational stages, can be mired in paperwork, manual verifications, and a host of other administrative tasks that are both time-consuming and prone to human error. On-chain organizations, on the other hand, offer a breath of fresh air with their emphasis on digital precision. From the very outset, every action, transaction, and decision is meticulously digitalized, ensuring accuracy and traceability. What's more, these organizations aren't just digital in isolation; they are structured atop a standardized API. This foundational architecture not only guarantees uniformity but also paves the way for seamless integration with a vast array of tools and applications. In a rapidly evolving digital age, such precision and interoperability are indispensable for efficient and scalable operations.
In an era marked by rapid digitization, both emerging and established organizations confront various challenges. From accessibility hurdles to efficiency bottlenecks, traditional structures often sideline potential innovators, especially those hailing from underserved regions or lacking typical credentials. Yet, amid these challenges, the transformative capabilities of on-chain mechanisms remain underleveraged.
On-chain organizations herald a new era in organizational structures. Their essence lies not just in eliminating traditional barriers like the need for passports or bank accounts but also in pioneering a more integrated and efficient way of doing things. Their brilliance is twofold: an unmatched precision in digitalizing processes and an expansive realm for tool integration. This combination paves the way for innovative and streamlined workflows.
Enter solutions like Palmera, which seamlessly weave into this promising tapestry. Acting as a pivotal aggregation layer, Palmera bridges the chasm between the immense potential of on-chain organizations and real-world applicability. With its unified tool interface and an emphasis on simplifying custom tool creation, Palmera accentuates the core strengths of on-chain setups. While my conviction in Palmera is evident, it’s essential to highlight the overarching narrative: the organizational future—whether in business, governance, or community engagement—is destined to thrive on on-chain platforms. Such ecosystems, with a blend of accessibility, precision, and integration, are poised to reshape our concept of organizations in this digital epoch.