An analysis of a blockchain DAO based on a Marxist theory of capital circulation and accumulation. And of DAOs as a platform cooperative considering class relation.
In the space of blockchain technology, smart contracts and DAOs, imaginations around decentralized property have emerged, portraying a possible "decentralized capitalism" future. In this article, I want to examine how this "decentralized capitalism" might look like from the perspective of a Marxist theory of circulation and accumulation.
The technology is still young and interaction with the world outside a blockchain is cumbersome to realize. Yet even today, the crypto scene frequently claims that blockchain will democratize the market and property rights. This is supposed to mitigate the monopolization problem [1] of capitalism, thus making the latter more egalitarian. But even among critics of the market logic and opponents of a faith in a purely technical solution, we can find practical approaches to connect DAOs with cooperative organizational structures [2]. Furthermore, first academic reflections exist considering DAOs as platforms for cooperation and coordination of the division of labor [3]. Therefore, I would like to examine in which sense the accumulation and circulation of capital of a centralized institution can be distinguished from a decentralized organization and what factor is essential to be able to speak of a fairer system.
Let's start with an (simplified) explanation of the relevant basics of blockchain and capital's law of motion.
Blockchain is a decentralized consensus-based peer-2-peer protocol used to organize a list of transactions. There are coins, which are the native currency of a blockchain and are also called cryptocurrency. And there are tokens, which are custom generated units representing an arbitrary piece of information.
A smart contract (sometimes referred to as programmable money) is a computer program that runs in a decentralized manner based on the blockchain and that performs actions on the blockchain - autonomously or on behalf of others - according to programmed rules. Examples include but are not limited to standing orders, escrows for exchange between multiple users [4a], or voting mechanisms [4b]. The program code is written on a public blockchain and is executed on computers connected to the blockchain-network. Those computers provide their computing power to the smart contract for a transaction/execution fee. They are commonly referred to as nodes. So instead of being executed as a program on your own computer or on a hosted server, a smart contract is automatically run by a node with free capacity.
Within a decentralized governance model it is also crucial to practically solve the problem of how to organize the democratic decision-making process. However, since this is a big and complex problem, I shall only address it here by means of an example. For a more in depth analysis, I refer the reader to the cited publication on p2pmodels [5a].
A widely used - and heavily criticized [5b] - solution to the problem of decision-making is known under the term “governance token". Whichever user of the respective smart contract possesses such a token is allowed to participate in the decision-making process and vote. Governance tokens may be used, for instance, to decide on the allocation of funds [6a] - i.e. the transaction is executed if a certain percentage of the users agree - or to decide whether a smart contract should be replaced by a newer version [6b]. Therefore, it is possible to implement ownership-like rights on a single smart contract or on a set using a governance token.
A DAO, short for “decentralized autonomous organization”, is a special collection of smart contracts. Those collaborate, perform complex interrelated tasks, and manage an associated "wallet" (with coins or tokens). In general, some governance methods are built in to allow control by the organization's members. As such the smart contracts may be perceived as a standalone entity, organization or a company. For example, DAOs could assign tasks to people or other DAOs.
So far there have only existed very few DAOs. Contemporarily, the most relevant ones are classified as “DeFis”. DeFi stands for “Decentralized Finance”. These are platforms that automate the exchange, lending, investment, etc. of cryptocurrency without requiring anyone to manage or own the platform - and are envisioned to replace traditional financial markets. For example Uniswap, currently the largest decentralized exchange and the first DeFi with automatic price discovery (so called liquidity pools) offers users the functionality to exchange coins and tokens with each other and has a daily volume of approximately $1-2 billion [7a]. Another example is Aaeve, which is currently the largest decentralized crypto lending platform and holds funds of $21 billion [7b]. From a Marxist perspective, DeFi is a pure merchant, and as such it adds nothing to the production process: it neither transports nor fabricates goods, but is only settling the exchange process in an accounting manner [8].
As an introduction to the basics of the law of capital circulation, a simplified presentation of Marxist theory will serve. We treat solely the movement of capital (in the production sphere). The key concept here is the accumulation of capital.
The core concept of accumulation can be illustrated by an abstract notion of purchase and sale of goods. We assume that a person owns money and buys goods to sell them again. We represent this with the following formula: Money → Commodity → Money' We should assume Money' > Money, since no one is willing to undergo this effort in order to end up with the same or a smaller amount of money. By repeating this process of buying and selling (respectively reinvesting), the amount of money grows steadily. E.g.: 100 Money → 25 Wood → 110 Money → 27 Wood → 125 Money → ... In principle, however, it is irrelevant in terms of the accumulation process whether one starts with money and ends up with a larger quantity of money, or whether one starts with commodities and ends with a larger quantity of commodities.
However, if one assumes a fair and equitable market, without for example the presence of monopolies, this simple accumulation would not work, since no one would buy 25 Wood for 110 Money; after all, on the same market the same good is still being offered for 100 Money.
The concept of surplus value attempts to explain the observable accumulation by the fact that - within the capitalist mode of production - the additional value is added by labor. It extends the first formula by including the factor of purchased labor enriching the old commodity - be it by the production of entirely new commodities, by repair, or by means of transport. We update the old formula accordingly by including the production/creation of surplus value: Money → Commodity + Labor → Commodity' → Money' Thus, surplus value is a value realized (on the market) for which no equivalent was paid - and was extracted by someone else. In an even more simplified term, it is unpaid labor.
We define capital as a creation of surplus value and its constant accumulation. As a "self-realizing value" [9]. As a "value in motion" that keeps growing during its production and circulation process [10]. Rather a dynamic process than something static. As accumulated surplus value, whose only purpose is to be reinvested and to continue to grow.
The capital circulation will be visualized with the following diagram:
To illustrate the circulation of capital, here an example: A scissors factory starts with 100M. It buys metal, electricity, etc. for 10M and labor for 30M. The customer pays 60M for one pair of scissors. Accordingly, the next cycle begins with a value of 100M - 10M - 30M + 60M = 120M. In case production resources undergoing several cycles (e.g. machinery), their cost must be calculated proportionally to all cycles. The same applies to average waste, etc.
Since it does not matter for the accumulation of capital whether the commodity is paid for in advance or upon receipt, for simplicity - as before - the payment of the commodity is always assumed upon receiving the commodity.
In this definition of capital's law of motion, the specific social configuration (e.g. form of government, monopoly concentration, money supply, technological progress, consumption power, etc.) is not considered. Moreover, as numerous feminist theorists, among others, have already pointed out, this formula is blind for collectively emerged values [11] (e.g. general knowledge, social reproduction). With this, though, one should be able to model the movement of capital for a classical enterprise in the same way as for a decentralized computer program.
A simple example where a good is produced or a service is offered is sufficient for the analysis of capital circulation (in the production sphere) of DAOs. However, since a decentralized computer program is not a legal entity and thus cannot hold ownership over physical means of production, only a DAO as a replacement for a digital platform company is currently plausible.
For simplicity, circulation is therefore examined here on a constructed example of a bicycle pizza delivery DAO - a blockchain application based on smart contracts and organized by a DAO. A customer is visiting the DAOs website and is buying a pizza there using cryptocurrency. The application orders a pizza from a pizzeria, places the delivery order on a free courier - both e.g. in the form of a token - and transfers the coins as payment. The bike courier collects the food from the pizzeria and delivers it to the customer.
In this example, there are 3 main market participants, whose capital circulation will be illustrated separately below: The pizzeria, the node operator and the DAO. For a complete understanding, however, the capital circulation of all market participants involved must be contemplated in combination.
First, let's look at the capital accumulation of a classically central capitalist/company using the pizzeria as an example. The whole process of the pizza delivery example looks from the perspective of the pizzeria as following:
The pizzeria uses its money to buy everything necessary to produce a pizza. Flour, water, electricity, rent, etc. and working labor. After the pizza is produced, it is sold to a customer. In our example, this would be the bike courier who is already in the store waiting. By the end, the pizzeria possesses more money to invest in increasing its pizza production.
The node operator knows absolutely nothing about the pizza order, it merely provides computing power as a commodity for smart contracts on the market. The capital circulation process of the node operator looks like this:
The node operator buys hardware, electricity, etc., and labor on the market to get the whole thing up and running and connected to the blockchain network. The produced good is a computed and stored digital information on the blockchain at a given moment in time, or in simpler terms its computing power and time that any smart contract can buy. The goal of the node operator at the end of the circulation process is to reinvest more capital in its own node infrastructure in order to be able to sell more computing power. In that sense, a node operator is not much different from a server infrastructure provider like AWS or Azure.
From the DAO's point of view, our example looks like this:
The DAO receives an order from a user to deliver a pizza. The DAO buys a pizza from the pizzeria and a currently free bike courier. The courier then rides to the pizzeria, picks up the pizza and completes the courier order. The customer confirms the successful delivery to the DAO by paying for the good. It is important to note that before the DAO can settle the orders, it must buy computing power from a node operator.
An essential difference is that the DAO itself has no intrinsic motivation to end the circulation with more M than it started with. If all produced surplus value belonged to the courier, there would be no capital accumulation.
As can be seen from the example, the market continues to follow the same law of exchange and commodity production. And thus supposedly - at least if profit > 0 - the old logic of the capitalist mode of production. Regardless of whether one of the participants is a DAO. In case a DAO generates profits, we still have to look into who eventually collects this surplus value and how the accumulated value is socially controlled. We therefore need to add a political dimension to the so far economical examination of capital. After all, capitalistic commodity production consists not only of the pure production process, but also of a social relation. It is this relation that turns goods into a commodity with an owner.
Let us consider capital as a social relation between capitalists and the non-owning class, which 1. enable the creation of surplus value and 2. constantly reproduce the hierarchy between those two [12]. An illustrative example of this can be seen in the industrial factory setting: the factory owner employs a worker to produce goods, which the capitalist then profits from through the sale of these as commodities. This profit allows for the acquisition of new machinery and the expansion of the factory, thereby strengthening the capitalist's position within their class.
For the existence of a class relation, however, it is irrelevant at which point the surplus value is extracted. If we remove the capitalist from the production process - as someone who holds command over the work of others - e.g. with a cooperative factory, but pay interest, credit and rent with the created surplus value, capital accumulation is still possible and the social relation between the capitalist and non-owning class remain unchanged. The same is true for subcontractor-type schemes, whose produced value is realized on the market by the contracting firm.
By considering capital as a social relation, the significance of social control of DAOs in regard to a fair system can now be addressed more clearly. We have to examine whether the basic components of the capitalist mode of production (money, commodity market, wage labor, production process) can be combined by applying DAOs in some way that undermines the existing class relation (at least in parts) and replaces it by a system that neither reproduces the class relation nor can be used for producing/extracting of surplus value. To do so, we must examine two categories: A) added value extracted by private owners, and B) added value belonging to a common.
If a DAO is controlled by a private entity, it allows for the extraction of surplus value through payouts to the governance token owners. Hence, it can be used for capital accumulation and reinvestment. As well as the reproduction (and reinforcement) of the hierarchy between capitalists and workers and consumers, such as through the hiring of a software developer to further develop the privately owned DAO. Thus, there would be no significant difference between our DAO and the computers and programs currently used by companies like Uber Eats. And there would be no systematic difference between a DAO and a machine in a capitalistic factory.
At least in the DeFi world, this approach seems to reach its limits so far. It is common for clear power dynamics to emerge due to the concentration of governance tokens in the hands of a few individuals. But so far, none of the biggest DeFis charge a fee for the use of its services [13]. This decision is certainly due to potential legal issues, but also because of the simple replicability of code and the minimal effort for users to move from one platform to another. For instance, copies of ALL major DeFi projects have been created in a very short time. So, commercialization limits seem to have been nearly reached; however, since the absence of a functioning business model and a lack of revenue (except through new investors) are not unusual for digital startups, we will have to wait and see whether private DAOs manage to take a position in the market (through network effects or massive advertising) that allows them to capture private profits from users in the long-term.
If in the pizza-ordering example a DAO acts as a kind of common - for example by distributing governance tokens to consumers, couriers, and perhaps the pizzeria - it orchestrates the flow of (crypto)money, mediates the pizza within the pizza commodity market, purchases wage labor, and is instructing the transportation/production process. But it does not - unlike companies like Ueber Eats - privately extract surplus value from the bike courier's labor, nor does the DAO reproduce a class relationship between bike couriers and capital owners. In that case, the DAO organizes production and the market without accumulating private capital and the capitalist system is stripped of another field to extract surplus value from labor. If, for example, the DAO charges a (temporary) usage fee, it remains in the hands of the community to decide collectively on the use of these funds.
On the other hand, because the entire field is still in such an early state, it is hard to make predictions. While some DAOs that can be classified as commons-based peer production already exist, they are still very small, and it remains to be proven in practice whether participation is economically worthwhile for users in the long term.
A DAO as a platform cooperative bears immense potential towards democratizing the management of property and production, “if at first only by way of making the associated labourers into their own capitalist“ [14]. But, eventually, also (platform) cooperatives require capital to be initiated. And the capital owners usually demand an interest and/or realizable property titles for the loan/investment. The connection between DAOs and collective financing and the circulation of finance capital will be crucial for their future development. In other words, the question of how DAOs will be financed by other DAOs or DeFis - which the crypto community is already exploring extensively - must be addressed. Unfortunately, Marx does not provide a generalized law of motion for the credit system [15] that could be meaningfully formalized in the illustration introduced above to study these existing experiments.
Additionally, for DAOs to be suitable as a transitional form to a new mode of production, political and technical solutions need to be developed to enable DAOs to distribute surplus value, first cooperatively among their members and, eventually, among the DAOs themselves.
[1] „Whereas most technologies tend to automate workers on the periphery doing menial tasks, blockchains automate away the center. Instead of putting the taxi driver out of a job, blockchain puts Uber out of a job and lets the taxi drivers work with the customer directly.“ – Vitalik Buterin [2] Examples of approaches that think DAO together with social Cooperative: https://disco.coop/about/ or https://breadchain.vercel.app/ [3] THE STATE OF BLOCKCHAIN GOVERNANCE – 2.1.2 DAOs as platform cooperatives https://65eocu3ftlpiygeym3g5kply6zy2dtdjyrhbm4m26cb6bt3msyla.arweave.net/90jhU2Wa3owYmGbN1T149nGhzGnEThZxmvCD4M9slhY or „Blockchain and the Rise of the Internet Cooperative“ https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3750540 [4a] Example of simple escrow via smart contract: http://escrowmyether.com/ or more complex from financial institutions https://www.deutsche-boerse.com/dbg-en/investor-relations/announcements-and-services/press-releases/DZ-BANK-BayernLB-and-Deutsche-B-rse-prove-functionality-of-digital-smart-derivative-contracts-2637128 [4b] Example of voting with smart contract: https://dapp.vote [5a] https://p2pmodels.eu/analysis-of-the-potentials-of-blockchain-for-the-governance-of-global-digital-commons/ [5b] https://vitalik.ca/general/2021/08/16/voting3.html [6a] Eg. Public Goods Funding https://gitcoin.co/grants/explorer/collections?collection_id=2 and community-managed treasury https://edgewa.re/ [6b] Eg. for governance token: https://gov.radicle.network/ [7a] Biggest current(2021) decentralized exchange: https://info.uniswap.org and the old v2 version that is still in use https://v2.info.uniswap.org [7b] Biggest current(2021) decentralized crypto lending platfrom https://app.aave.com/markets/ [8] "One merchant (here considered a mere agent attending to the change of form of commodities, a mere buyer and seller) may by his operations shorten the time of purchase and sale for many producers. In such case he should be regarded as a machine which reduces useless expenditure of energy or helps to set production time free." Capital - Volume II - Chapter 6. The Costs of Circulation [9] "In truth, however, value is here the active factor in a process, in which, while constantly assuming the form in turn of money and commodities, it at the same time changes in magnitude, differentiates itself by throwing off surplus-value from itself; the original value, in other words, expands spontaneously. For the movement, in the course of which it adds surplus-value, is its own movement, its expansion, therefore, is automatic expansion." Capital - Volume I - Chapter 4. The General Formula for Capital [10] Introduction to Circulation and Accumulation Theory: Reading Marx's Capital Vol I with David Harvey Class 10 https://www.youtube.com/watch?v=_1JeKZU5N1Q [11] "Critique of Capitalism" from Nancy Fraser https://www.youtube.com/watch?v=mspR7LIP8NY [12] Expressing Capital as a Class Relation: Reading Marx's Capital Vol II with David Harvey Class 3 https://www.youtube.com/watch?v=wLJH-jnKORI [13] Example of fees of the largest lending platform https://docs.aave.com/faq/#what-is-the-cost-of-interacting-with-aave-protocol and of fees of the largest exchange platform https://docs.uniswap.org/protocol/V2/concepts/advanced-topics/fees As you can see from the two examples, you currently(2021) paying an interest to those who offer their capital for exchange or lending, but no fee to the platform itself. [14] Capital Vol III - Chapter 27. The Role of Credit in Capitalist Production [15] "Furthermore, capital appears as a commodity, inasmuch as the division of profit into interest and profit proper is regulated by supply and demand, that is, by competition, just as the market-prices of commodities. [...] Competition does not, in this case, determine the deviations from the rule. There is rather no law of division except that enforced by competition [...] There are no "natural" limits for the rate of interest. Whenever competition does not merely determine the deviations and fluctuations, whenever, therefore, the neutralisation of opposing forces puts a stop to any and all determination, the thing to be determined becomes something arbitrary and lawless." Capital Vol III - Chapter 21. Interest-Bearing Capital