Decentralized Autonomous Organizations (DAOs) may unlock financialized incentive structures for better value alignment and distributed ownership amongst contributors, but many struggles still exist in coordination.

Primarily these fall under contribution, governance, and culture.

Legal recognition and regulation is another huge barrier, which is beyond the scope of this article. Aashraya Rau and a16zcrypto have done extensive research on the topic.

Contribution

One advantage DAOs have over traditional companies is their flexibility. Rather than the top-down organizational structure where decisions are made at the top levels and passed down, the DAO is a loose, bottom-up structure that is open, transparent and agile.

This attracts top talent as people are intrinsically motivated to unite and contribute to tasks that coincide with their value systems. They are not "employees" or "workers" because they are not usually obligated to fulfill certain contractual obligations. Payment is typically done per task, on a bounty basis, until a longer term commitment is established for a base salary.

In most well established DAOs, if a contributor is unable to complete their task in the time required, someone else will be ready to step in and take the bounty.

Markets may be efficient, but coordination is not. Any organization up against a deadline cannot afford to hand off tasks or onboard new developers in the middle of a cycle.

Hence the paradox of flexible contribution models.

We all seek autonomy in our work because it gives us a sense of purpose, but if we all have autonomy, who is leading the flock?

Further, whereas an employee in a traditional organization has a lot on the line if they don't fulfill their duties, a contributor in a DAO can very readily pick up and move on. A contributor is a contracted assassin while an employee is a royal guard.

Clearly the problem is rooted in reputation and on-chain accountability. Contributors wouldn't be so fleety if they knew their reputation was on the line. The problem is everyone has grown so accustomed to "up only" that we have convinced ourselves that the next big cheque is around the corner.

https://twitter.com/BowTiedDAO/status/1566074588508872706?s=20&t=gffSPi-pdXMiB0r_8hrpIA

Now that the sugar high has worn off, we are starting to realize collectively that there needs to be better solutions put in place for coordination. On-chain reputation systems such as proof of personhood, and zero knowledge proofs for soul-bound tokens are some of the emerging technologies to make contribution smoother.

Governance

Governance is a tired old discussion in this space. Countless conversations have been held about how best to distribute decision making fairly amongst token holders.

Evidence is in the polls. Most proposals pass with 95% or higher approval. Voter apathy is worse than modern democracy at 1% turnout. Less than 1% of token holders have 90% of the voting power according to Chainalysis.

Clearly the one token, one vote model is not working. Representation should be balanced between token holders and contributors, workers, and users with less tokens.

There have been several instances of unconventional proposals getting passed, such as when Solend protocol's biggest whale was facing a margin call and the DAO passed a proposal to take over the whale's account and liquidate it through OTC desks rather than dumping $20m SOL onto the open market. Another example is when Avraham Eisenberg exploited Mango for $100m and then passed his own proposal to return the funds if the DAO does not pursue criminal investigations. However, as far as most jurisdictions are concerned, code is not law—he was just arrested in Puerto Rico.

As we sit and bicker over whether governance adheres to our core values of decentralization, we are missing the bigger picture.

Not everyone cares about governance. Not everyone has the capacity for governance. By demanding equal rights, we are essentially thrusting power into the hands of the unwilling. This can lead to tyranny of the majority, or even open the door to governance by those unfit to rule.

https://twitter.com/vitalikbuterin/status/1552703630024867841

Crypto's anti-establishment roots has its core supporters preaching equality for all. While the ability to program incentives offers opportunities for shared abundance, humanity has a long way to go before being able to accept such organizational structures. Certain collectives exist in society that are able to prove shared wealth, but overall humans are accustomed to hierarchy in their lives, especially when in the face of uncertainty. Someone needs to be held responsible in times of crisis.

The second paradox exists in the form of democracy. Too much freedom brings too many problems.

The DAO run lemonade stand illustrates this quite well.

https://twitter.com/josephdelong/status/1540311662888161280?s=20&t=J1KNfJGRx0AQbg98ByE0CQ

In order to make our shiny new form of democracy work, we need to learn from the history of governance and traditional shareholder voting models. Voters need to be informed, represented, but not overwhelmed.

Apple doesn’t rely on its shareholders to vote on the technical framework for the next generation iPhone. Amazon doesn’t openly solicit shareholder feedback for each step of its fulfillment center growth plans. Instead, shareholders are asked to make a small set of periodic decisions, such as electing a board of directors who are tasked with serving in an oversight role on behalf of shareholders.

— Andrew Hall and Porter Smith

Solutions have started to emerge with representative democracy through delegates, contributor driven governance (Optimism’s Citizens’ house), and quadratic voting mechanisms.

Culture

Culture is what makes people stick around. DAOs have an inherent advantage here but there is still a lot of work to be done.

People choose to stay at companies for chiefly extrinsic reasons—they need a salary to pay their bills. If the corporate culture fits their values, bonus. That creates an intrinsic reason to stick around—purpose.

With DAOs, it depends on if they have war chests. In times when capital is flowing freely, there is an abundance of unqualified bounty hunters chasing easy returns

Unfunded DAOs tend to attract contributors for intrinsic reasons—those who believe they are contributing to something that will create positive change. The chance of a 100x return is always present in the back of their minds, but they wouldn't work for a cause that they didn't personally believe had potential.

However, the ambiguous organizational structure of DAOs presents an even larger problem for unifying contributors. We have already established that members gravitate towards causes that coincide with their value systems. What keeps them there?

Even flat organizational structures need leaders with a strong vision to hold the team together. Leaders help shape and disseminate culture to unite people under a common goal in an organization. Obviously, DAOs need a position of authority as well.

Where do we go from here?

DAOs are living in limbo between a decentralized, idyllic resurgence of hippy culture and a centralized, tightly knit process-oriented startup. Programmable incentive structures and on-chain reputational tools provide us with many advantages over traditional organizations. We just need to lose the ideology and build the utility.

Decentralized Autonomous Organizations (DAOs) have been getting a lot of attention lately because their structure enables transparency in contribution and governance across the organization. Participants are able to contribute openly to tasks and bounties depending on their interest and availability while the blockchain provides transparency in earnings. Token holders are able to propose and vote on key topics regarding the direction of the organization.

This is a huge step forward because it enables a more direct form of democracy in which everyone has the ability to get involved directly. Although it is not without its drawbacks (e.g. voter apathy, tyranny of the majority), it is evidently a vast improvement from traditional organizational structures.

Organizing codes and principles show the evolution of human psychosocial “DNA” as we become more advanced and self-aware. 

Survival Band and Tribal Order are more primitive organizing principles which center around basic survival needs. Human organizations operating on this level tend to be centered around the amygdala response—otherwise known as “fight or flight”—as people react instinctively out of need for survival and with little concern for future development. Typically humans do not operate on this level unless faced with the threat of conflict or loss.

Exploitive Empire and Authority Structure are focused more around power building. This is more commonly seen on the political level (empire building, whether kinetic or cultural) and the corporate level (pushing down costs across the supply chain in order to remain competitive). Power is derived from the work of others to serve those at the top of the food chain, and power is entrenched out of fear of losing to competitors.

Strategic Enterprise and Social Network are where we found the limit of our organizational abilities until recent years. At this stage scarcity still exists through meritocracy, consumption of resources and obsession with status, but more awareness of equality and sharing of those resources has emerged. A greater focus on human values and community is manifested, but coordination tools are still lacking.

Systemic flow is when the concept of abundance starts to emerge. Concern about work-life balance emerges at this stage, and we start to see more flexible, humancentric organization models emerge such as Google’s cross-functional team based organization and remote work policies. Technological innovations emerge that provide opportunities for greater distribution of wealth, organizational structures flatten as authority no longer feels threatened, and tighter forms of group coordination emerge that keep teams oriented towards processes rather than leaders.

DAOs embody this type of organizational structure as they operate similarly to cross-functional teams by dividing groups into product/project based organizational structures and coordinating in more of a matrix style with less need for middle management. This encourages greater openness for communication between contributors across the organizational structure, regardless of status.

As contributors are empowered to make decisions and work autonomously, they are able to find greater meaning in their work and therefore can create more significant value for the organization—if their values align.

More than ever, employees want to make a difference. 75% would rather work for a cause that they resonate with. However, this is becoming increasingly difficult with large corporations, as evidenced in how distrust is growing for businesses and institutions.

DAOs enable contributors to shop around and find a clean fit for their values. They are able to contribute part time to a few tasks or bounties to see if they resonate with other contributors, and if the feeling is mutual, a longer term commitment can be undertaken.

Once contributors start earning tokens, they also become part owners in the organization. These tokens represent a share of their ability to steer the DAO through participating in governance votes. Additionally, anyone with a certain threshold of tokens can make a proposal, and if the majority vote in favor, it passes. This takes the concept of autonomy to a whole new level.

In fact, this creates a power dynamic in which no individual is bigger than the organization itself. If the masses move on and leave the leader behind, the driving ethos of the DAO can hold it together—providing, of course, that the rest of the group can remain united and not fall into chaos.

DAOs are the closest organizational structure we have to Holistic Organisms. Their financialized incentive structures are the first iterations of true Holacracy, or distributed governance by the people. They are the natural next step in the evolution of human organization systems.

However, they are not without their drawbacks. In the following article I will examine issues with contribution, governance, and culture.

Originally published in the July edition of Metaverse HQ Magazine

Play-to-earn gaming has been making waves in the web3 space lately, especially since Axie infinity passed $4 bil in sales and Facebook announced that they were changing their name to Meta, effectively doubling down their bet on the Metaverse. This was seen by many as a signal of the guaranteed success of this fledgling industry.

However, the unfortunate effect of this boom was the swarm of low quality games that emerged as a result. Ranging from full on rug pulls to glorified button clicking, many of these projects couldn’t last as they struggled to acquire enough users to pass the inflection point. Planning a sustainable game economy is not easy work: essentially it is like playing the central bank of an imaginary nation—a nation that, if desired, users can very quickly pack up and abandon while asset values spiral to zero.

Furthermore, much of the backlash that has come against play to earn gaming is rightly justified: what is the point in monetizing something that isn’t even fun? Those who have been playing for years are used to high-fidelity games with complex storylines, immaculate graphics, and immersive design. “Earning” is not a factor for them in gameplay—their main objective is to become absorbed in what Brooks Brown at NOR calls “The Magic Circle”, where a person “feels free to explore, to experiment, to create” in an experience of immersive narrative that facilitates a state of flow.

So it is not surprising that many have seen the surge in play-to-earn games as cash-grabby. Gamers are inherently distrusting of attempts by studios to extract value, as evidenced in the intense retaliation of the community against Electronic Arts’ attempt to justify their pay-to-play model of unlocking loot boxes as an intent “to provide players with a sense of pride and accomplishment for unlocking different heroes.” This turned out to be the most downvoted Reddit comment of all time.

What many critics fail to notice about blockchain gaming, however, is that if developers execute carefully and are able to build a sustainable in-game economy, it offers much better opportunities for equitable gameplay that benefits all members of the ecosystem. Traditional game design is very top-down in nature: a studio invests millions of dollars into developing a “sticky” imaginary world that keeps users coming back. Lifetime value of the game needs to exceed the cost of user acquisition to be profitable, so many studios come up with innovative ways to extract value from players through microtransactions, such as loot boxes to unlock further gameplay.

The blockchain offers the tools for a bottom-up, community driven approach to development of sustainable in-game economies. Other than the obvious advantages that NFTs offer in terms of interoperability across ecosystems, asset provenance and the ability to foster creator economies, there is also the benefit of an additional social layer forming beneath the games: DAOs that have governance power and are therefore able to influence important decisions within the ecosystem. This is intrinsically motivating for players as it provides them with a sense of ownership and accomplishment.

However, neither model is necessarily better than the other. The traditional approach brings capital to attract talent, centralize decision making, and therefore execute more swiftly. Once a core team and an initial product is formed, the integration of blockchain incentive structures offers developers the tools to extend lifetime value through slowly transferring monetization and ownership to the community. Through a process of progressive decentralization, game studios are able to tap into the passion of their community to ensure the ongoing development of the game ecosystem remains relevant.

Until a sustainable model can be found that manages to integrate the best of both worlds, the blockchain approach won’t be able to cross the chasm of adoption. We are starting to see initial primitives form as several high profile partnerships emerge between blockchain and AAA game studios, such as Frontier and Ubisoft, but the full on development of a AAA game typically takes 2-3 years. So yes, we are still quite early.

Over the coming months as more early primitives emerge that set the stage for the next wave of gamefi, play-to-earn as a term may even cease to exist. The term in itself signifies an obsession with profit rather than actual gameplay and often leads to mercenary capital chasing the highest yields, just to farm and dump. Play-and-earn is focused more on entertainment and skill as it aims to provide an enjoyable game experience along with the opportunity to own assets that can be later sold for profit if a player desires.

Here are several things to be on the lookout for as we move towards more sustainable game economies:

Is it even a game? Many games have emerged that could not actually be called “games”. They are more along the lines of memeified DeFi: complex game theory mechanics, lockup periods, ve-tokenomics, etc. This ends up more like glorified button pushing because there isn’t much “fun” to be had in these games. However, there may be a space for narrative wrapped DeFi in the future to make it more comprehensible for the masses.

Sink or tax? There is a lot of talk about designing “sinks” in games: essentially an in-game activity to consume resources and keep players in the game for longer periods to grind higher levels. However, many games make the mistake of designing sinks that only enable users to earn more tokens—essentially a tax on their earnings. If you are spending tokens to level up or buy items that only earn you more tokens, it’s a tax, not a sink.

Vanity items? An example of a sink that is not a tax is a skin. Vanity items create another dynamic of digital identity within the game that makes players proud of their characters. Remember, if the only objective is to earn tokens, it’s not fun.

Loops? All resources should have clear use cases. If a certain in-game action leads to producing a consumable that has no sink, it’s frustrating for gamers and bad for the in-game economy. There also should be complexity in game mechanic design so there is no dominant strategy for an easily farmable profit loop.

Social elements? Games are more fun together. In the good old days kids even used to watch each other play games. Nowadays we have leaderboards so there’s motivation to reach the top. It also gives users a sense of accomplishment.

Guilds? Even better is if there is an element of community where players have to strategize together or collaborate to get to further stages of the game. Positive sum game mechanics and elements that require group coordination commit users to further gameplay. However, there also needs to be antitrust rules within the game to disincentivize monopolistic behavior.

Mortality? PvP battle elements also create high levels of engagement as players expend resources to get a chance at winning those of another player. But there also needs to be a limit to how much a player can play or how much a resource can be used.

Scalability? Scholars offer a low cost entry model in which players can rent assets from more wealthy players in return for a percentage share of profits earned in game. There should be an easy way for new users to get involved at little to no cost. If they have to buy an asset that is worth hundreds of dollars to start, the economy will likely deflate.

Equality? Whales should not be able to dominate the game. If you can buy assets that make you better than everyone else, what point is there in playing anyway? There has to be a level playing field and opportunities for truly skilled players to dominate, not just those with deep pockets.

Play-and-earn? Is the game actually fun? Do players want to play it, even if they aren’t earning? This is the million dollar question right now as developers are racing towards the next Axie sized market opportunity.

The blockchain gaming ecosystem is still very nascent. Remember, player disappointment was quite common in many of the early game primitives that were introduced in arcades and early consoles. We are now experiencing similar growing pains with lots of failed experiments—this is to be expected. As the industry matures, a multitude of peripheral economies will emerge along with it. This presents an enormous opportunity for investors and developers alike.

I’m not here to argue about this. It’s partially the nature of faulty incentive structures and obfuscated tokenomics that drive the actions of all market participants—not just the VCs. Everyone needs to cover their basis.

Crypto is still in the early stages: much like the dot com era there are plenty of growing pains and Wild West type of risks, which is certainly one of the reasons why it has gotten such a bad rap over the past few years, especially from the uninitiated. It’s dog eat dog out there if you want anything better than beta… and the majority fail to outperform ETH.

But you don’t have to participate in such ruthless markets or constantly be trying to frontrun the mercenary capitalists to make a living in this industry.

DAOs: The solution

Arguably the next step in the evolution of human organizational structures, the DAO (Decentralized Autonomous Organization) presents a whole new paradigm for how we look at work.

By flattening the hierarchy of traditional corporate structures and putting responsibility solely into your hands as a participant, DAOs provide tools to get involved and apply your skills for the greater good of the ecosystem. If there’s a concept that you believe in, a DAO might be the springboard you need.

On the individual level, a DAO enables contribution to be rewarded proportionate to effort. Participants unite under a common cause and work to take that product to market. Yes, this sounds much like a company, but the difference here is the financial incentives—those who believe more in that cause can get better rewarded if they work harder and contribute more.

Contributions are tracked and compensated with tokens—like an equity share. Typically a team uses a tool like Coordinape and operates in fixed periods called epochs. At the end of each epoch, each individual allocates these tokens to the other members according to how much work they did. These tokens represent a share of equity from the treasury upon launch of the product.

As a result, there is a more egalitarian compensation structure and greater flexibility around the concept of work since people can opt in as much or as little as they want and be rewarded accordingly.

Organizational issues

However, the “opt-in” culture and the “work as you please” construct are not without their problems.

Since compensation is retroactive—most DAOs begin with little to no funding—many are unable to dedicate more than a few hours and tend to be rather flighty. Corporate structure at least gives us the guarantee of commitment with salaried employees and regular working hours.

https://c.tenor.com/lStl8rfOx_YAAAPo/sky-car-how-close-are-we-to-flying-cars.mp4?height=280&width=498&autoplay=true&loop=true&muted=true

Because participants tend to have full time jobs and treat a DAO like their side hustle, getting it off the ground is the hardest part of all. On the one hand, you don’t want to bring too many people in because it can cause confusion in project direction and dilute equity. But on the other hand, you need people available to help when work needs to get done.

Oftentimes DAOs start off as a tight-knit group working in a closed community, and then once a product is taken to market, those who resonate with the concept naturally gravitate towards it and help bring it to the next level.

But I don’t know how to code

Tech companies don’t have only code wizards working for them.

DAOs are usually broken down into various working groups based on skills. There is of course, the product and development team that is responsible for the code. But also working behind the scenes is the community management, content creation, marketing, business development, and on and on.

Artists especially have a great opportunity with DAOs. They can leverage a community of skilled individuals who appreciate the art to bring their work to the world and get better value for it. When an artist has work that resonates, people are naturally attracted and want to help build that concept.

So how can I start?

That’s the most difficult question to answer. DAOs don’t often post job opportunities.

The best way is to be integrated with communities to hear about these things. The first project I joined was by asking someone from a community I’m in.

Lots of sub-DAOs emerge from already successful projects. Protocols like Curve and TreasureDAO have spawned a number of sub-DAOs / guilds that base their core offering off the initial protocol.

Keep in mind that one of the key concepts in crypto is decentralization. This means information is often distributed across different sources which can be frustrating to sift through.

So if you already spend a lot of time in crypto but don’t know where to start, reach out and ask someone. Information may be asymmetric but us people are here to support each other.

Start with people you know in the Twitter or Discord communities that you spend time in. Look for opportunities to work on a common project you both believe in. Don’t worry if you feel underqualified—nearly everyone is. Just get started.

Or you can look on sites like CryptoJobsList, Cryptocurrency Jobs, AngelList Talent.