Fast forward to today, I have two discord accounts, I am in quite a few discord servers of DAOs and I am constantly overwhelmed by the sheer amount of messages from governance token holders harassing devs about when the prices of these tokens will moon — essentially ‘wen price up”. — a far cry from the coordination and autonomy utopia that I was kinda looking forward to.

coordination, coordination, coordination 🙄

Coordination problems come up in a variety of social and economic situations.

Imagine it’s a really hot, dusty, Saturday afternoon and you just closed from school. You’re standing at the school gates and you need to get to the bus stop to get a bus to go home. You have two options: you can choose to wait for a taxi or start walking to the bus stop.

We can model problems like these as games with payoffs for each action with game theory.

Game theory is the discipline that explores mathematical games, the interaction between players, and their decisions as influenced by incentives or payoffs following strict rules.

In game theory, a game is a set of circumstances where two or more players pick from opposite strategies to get a payoff.

Payoffs are the rewards gotten from different possible outcomes in any form.

You may have to wait in the sweltering heat for 30 minutes before a taxi shows up. Let’s give it a payoff of -2. You could also get really lucky and catch a taxi right outside the school gates which gives a payoff of 2. If you walk, you know it will take 10 minutes and you’ll have a payoff of 0.

The taxi driver also faces a similar problem. Remember, your class is on Saturday and most schools do not hold classes on Saturday afternoons. The driver can choose to stop driving and take a nap at the taxi park which would give him a payoff of 0. He could take a risk and swing by your school just in case any Saturday classes were held and students needed a ride. If he finds any passengers, he will make some money which will give him a payoff of 2. If he does not find any passengers, however, he would have wasted time and fuel, giving him a payoff of -2.

Since there is no communication between the both of you, a coordination problem arises. Coordination problems can be modelled as coordination games.

At the heart of coordination games are two basic ideas: first, individuals gain by choosing the same action; second, rewards differ based on the actions both players choose.

In a coordination game, players get the best possible payoff by all doing the same thing. Here, the players are you and the taxi driver.

The choices and payoffs are visualised in the matrix below.

You want to match the taxi driver’s actions, and he wants to match yours. This creates two Nash Equilibriums (circled in the diagram) — one where you both gain 2 points, and one where you both remain at zero.

The example above is just a brief snippet, however, it highlights a key aspect of the social system — people are trying to coordinate their actions when communication is difficult.

coordination mechanisms

Any time people’s actions depend on each other, coordination can be a problem. As we acknowledge the role of coordination mechanisms in real life, we become more aware of the extent of coordination in real life, and how coordination problems are prevented every day.

A coordination mechanism coordinates the activities of the individuals or organizations within a social system to prevent coordination failures.

coordination mechanism = decision making + communication.

Economic systems revolve around the production, consumption, and distribution of value.

There are two main coordination mechanisms in an economic system.

• markets

• firms

market

A market is a mechanism that relies on prices to convey information between two parties, usually a seller and a buyer.

A functioning market is considered the most efficient method of transferring value within an economy since a seller can get the highest price for their goods while matching the rationally inclined buyer and seller.

Essentially, “in markets, the standard strategy is to drive the hardest possible bargain on the immediate exchange”.

In a market, the buyer and seller have a horizontal linkage where they both rank equally in legal terms.

Economists like Arthur Salter described the entire economic system as being decentrally coordinated by the price mechanism with the functions of demand and supply, and production and consumption aka the economy works itself — essentially a huge market on steroids. firm Sir Arthur Walter’s description only painted a narrow picture of the economic system however as it excluded one important factor — the firm. Despite the awe-inducing independence and autonomy of markets, a lot of economic activity took place in hierarchical organizations, firms. A firm is a form of economic coordination where economic activities are centrally coordinated by an entrepreneur that applies a top-down form of decision-making. — a stark contrast to the independence of the market. In his seminal paper the Nature of the Firm, Sir Ronald Coase attempted to answer the question on everyone’s minds (at least on mine :P) — if markets are so good at allocating resources, why do firms exist? For markets to run efficiently, huge costs had to go into operations. But these costs are significantly lower in a firm. As information flows more freely within the firm, the entrepreneur can more easily find a suitable employee to execute certain tasks. With no or little informal negotiation, the entrepreneur simply orders the employee. The entrepreneur punishes underperformers by demoting or firing them. For some economic activities, the firm reduces transaction costs. networks?? Prices have been the central device of coordination among individual actions. The theory of general equilibrium and neoclassical theories of markets reflect this approach. However, this approach is not suitable when explaining and understanding a number of situations like the distribution of innovations like the telephone, differences in trust and cooperativeness, academic study groups, research alliances among firms, and the extensive use of personal contacts by both employers and workers in labour markets. Networks are a way to map the structure and flow of social relationships between various economic actors and institutions. Connections within a network can be as basic as establishing a connection between buyer and seller, or as complex as a deeply interlinked globally distributed supply chain. Coordination mechanisms typically exist as a mix of others. In the taxi example, coordination is any action that increases the probability that both the passenger waits for a cab and the driver tries to pick up a passenger. An entrepreneur could create an app for the passenger and driver’s smartphone. Like Uber or Bolt. Uber and Bolt contain networks in and of themselves (firm + network). enter cryptonetworks Cryptonetworks combine aspects of markets (e.g., prices and competition) with explicit patterns of connections between individuals displayed in networks and a digital ecosystem usually but not limited to a blockchain. Cryptoeconomic networks can be used to coordinate and scale resource allocation decisions among diverse participants with unique preferences, information, and capabilities on a vast, even global, stage. They make decisions about allocating resources that could be: physical like hardware and electricity financial such as tokens or fiat money social such as attention like governance participation and code contributions soooo wth is a dao and what tf does this have to do with daos??? A DAO (short for Decentralised Autonomous Organisation) is a type of cryptonetwork. DAOhaus describes them as “magic internet communities that allow members to coordinate funds and resources”. In these kinds of organisations, groups of people from around the world most of whom do not know each other can cooperate in ways that had never been possible because of the presence of mobile devices that enable them to communicate in real-time and smart contracts that help facilitate decision making. Members of a DAO are motivated by the recognition of a community of interest i.e the awareness that the interests of each individual member coincide with the collective interest of everyone participating. DAOs exhibit self-governing coordination. The members of the DAO are laterally placed and equal and have the right to vote on proposals to make decisions. DAO members own tokens issued by the DAO that they use to vote called governance tokens to make decisions on proposals. Once decisions are made, they are told to the smart contracts, with code then they can be executed by the smart contract. Smart contracts are digital contracts that do what they are told automatically to help automate the administration of the decision-making procedures. In some cases, it is impractical for the entire membership to directly vote on every proposal and the practical details are entrusted to a body of persons delegated by the members to perform the tasks of decision making. An example of this is the ENS DAO and delegates. The coordination structure can then have vertical links between members and the governance committee (delegates). Nonetheless, this mechanism is different from a hierarchy of a firm since the membership elects the governing body directly or indirectly and can dismiss it. soo, will cryptonetworks grow?? In “The Evolution of Social and Economic Networks”, Matthew O. Jackson mentions how in networks, the payoff to an individual from an economic or social activity depends on the network of connections among individuals The value of crypto networks grows exponentially as we increase the number of people we are connected to, or as in network computing, the number of nodes on the network. In the early development of radio and television, Sarnoff’s Law applied: the value of a broadcast network is proportional to the number of listeners. As the Internet emerged, this gave way to Metcalfe’s Law: the total value of a network where each node can reach every other node grows with the square of the number of nodes. Now, after the evolution of the internet and mobile communications have multiplied the ability to coordinate and create DAOs with people all around the world, Reed’s Law, the link between computers and social networks, has taken over: the value of magic networks on the internet is now growing not proportionately but exponentially and I’m excited about all the possibilities! what about when price up?? As long as decision-making tokens have an economic incentive, enforcing governance in crypto networks is a bit tricky. This can be likened to something called the tragedy of the commons in economics. The tragedy of the commons is a problem in economics when people who all have access to a shared resource choose to go with their own personal interests and harm everyone else. Like fast fashion damaging the environment but people still buying Shein et al. When governance tokens have economic incentives, it can be tempting to sell them (hence wen price up). A possible solution to this problem would be the separation of governance tokens from utility tokens. Or designing non fungible governance tokens to discourage sales or even not ascribing monetary value to governance tokens and not listing them on exchanges. It's all still being figured out. what else haven’t we quite figured out? We haven’t quite hacked voting, on-chain treasury management and even more effective communication tools for really large groups of people cause discord kinda sucks :( what shouldn’t we do? As we’re excited about smart contracts and tokens helping to scale decision-making among large groups of people with similar goals, we should also be careful to stray far from code maximalism. DAOs are technologically enabled social systems, and the most important element is the people who make up the DAO and not the smart contracts.