Let’s take a modern company structure today. We have the C-suite and board of directors at the top making strategic decisions that determine the direction of the company. From there exists layers of middle management responsible for aligning the work of individual contributors to the direction set forth by executive leadership. Then all the way at the bottom of multiple layers of functional management we have individual contributors — the people doing all the work.
In effect a small minority make decisions that impact the vast majority of the company. The advantage of this is the speed with which a decision can be made. The key disadvantages come down to three things. Transparency, Execution Agility, and Openness. A lack of transparency with which the decisions from executives are made can lead to decisions being made that are in the best interest of decision makers, not customers or employees. The time it takes to deploy resources (people, funds, technology, etc) through the layers of middle management often results in wasted resources and often-times missing pivotal opportunities in industry. Lacking openness manifests in the form of contribution from employees and customers. Anyone who has interviewed for a job recently, knows just how difficult it can be to even get your foot in the door. From there the privilege to shape the direction of the company is earned over decades of service. At the end of the day, any given company is missing out on tons of available talent. A customer trying to help improve a product through feedback also has many hurdles to clear. They typically have to be very large customers to have direct executive access. Or they have to submit some form that may never be seen or acted upon requesting a new feature that would help them remain loyal to their provider.
Now, lacking transparency, agility, and openness has served a vital purpose in protecting companies. Companies have not had the ability to safely make all their decisions transparent, deploy resources efficiently, and be safely open to any contributor.
If you wanted to design a governance system that is open to the brightest minds around the world, transparent for all to see, agile in bringing innovation to market AND effective; what would you create?
Taking a quick step back — we know that Ethereum is a blockchain who’s most prominent feature is the ability to deploy smart contracts onto its distributed ledger. These smart contracts — a vault with programmed logic for accessing its assets — are immutable. No one can go back and change the contract once deployed. Its logic must be followed to a ‘T’. Imagine for a moment a vending machine stocked with your favorite goodies. In order to access a bag of chips, we must supply multiple inputs in the form of money and a combination code. With the correct inputs, out pops our desired snack.
Photo by Kenny Eliason on Unsplash
Today, most smart contracts are being used in service of core financial primitives. Pools of tokens to exchange between, borrowing & lending vaults, and peer-to-peer exchanges of NFTs.
A use for smart contracts that is rapidly gaining popularity is for DAOs (Distributed Autonomous Organizations). DAOs enable communities of individuals to propose new ideas, reach consensus, and deploy resources in services of a common shared vision. All while being open to anyone, transparent in decision making, and agile in execution.
DAOs are composed of three primary building blocks — all different smart contracts:
Treasury — to hold the organization’s capital
Governor — to be the consensus & execution engine
Token — to represent membership & voting rights in the organization
The creation of a DAO, like any smart contract, establishes a vault and rules for interacting with that vault. The logic for interacting with the treasury is written to include governance mechanisms the community can use to manage their pooled capital, typically in the form of proposals made and voted on by organization members.
With all three building blocks in place investors and community members can acquire governance tokens showing they have a vested interest in the success of the DAO. These token holders are then able to draft proposals both “on-chain” and “off-chain.” On-chain proposals are opened for discussion and voting by other organization members through the execution contract. Once approved, on-chain proposals are automatically executed. In effect, all a proposal is doing is asking permission from the community to move funds in the treasury from one place to another. Could be to pay a salary, make an investment, or even to another DAO.
Photo by Marco Oriolesi on Unsplash
The utility of bringing people together towards a common goal, with incentives aligned between themselves and the organization as a whole is limitless. What comes to your mind? How would you utilize a DAO as a governance tool?
Right off the bat, pooling shared capital together and making investments sounds a whole lot like private equity and venture capital. You would be right! This is exactly what MetaCartel Ventures is seeking to do for the Web3 community.
What about a group of people all working on an open source platform that produces revenue? RedHat maybe. That is actually how Uniswap, Aave, and Balancer operate.
Patreon is another great example. Giving content creators around the web access to fan-sourced capital in exchange for exclusive content, community, and a host of other benefits. Except there is that 5–12% take rate for using the platform. Why not spin up a DAO yourself so your fans can have a more direct relationship with you and your community?
Early adopters of DAO methodologies had to endure an agonizing process of writing smart contract code line-by line to create their organizations. OpenZepplin provides an excellent framework for creating your own custom DAO contracts.
Fortunately for the less coding inclined of us, there are well established platforms that make creating DAOs as easy as connecting your DeFi wallet of choice to their site and filling out a few parameters! Two of the biggest players in this space are Aragon and DAOhaus.
These platforms have built in modules for treasuries, voting, governance token creation. All in an intuitive user interface. The downside of using pre-canned DAOs is that you lose fine-grained control of features and functionality.
DAOs as a tool for community governance have seen tremendous momentum, with some $8.7B sitting in treasuries at this time of writing this. What potential do you see in DAOs over the next 3yrs? What pitfalls should open community governance be aware of? Let’s discuss!
Disclaimer: This article represents my thoughts and opinions only. None of the projects mentioned have influenced or sponsored the creation of this article.