As an advocate of DAO, I have argued with others about DAO in various occasions, but I have never systematically expressed my views on DAO. Today, I will take the time to talk about it.
Before discussing what DAO is, let's first discuss how to understand a rapidly evolving concept. First, we should not understand it in a static, literal way, such as what the "D" represents and what the "O" represents. The extension of the concept of rapid evolution will quickly surpass the original literal meaning. Secondly, we should not criticize DAO based on our own interpretation, as it is easy to fall into a straw man attack, setting up a target and attacking it ourselves. We should understand it with an open attitude, first understanding what problems it is trying to solve, and then considering the possible evolutions.
So why do we need DAO? What problem does it solve?
To understand why we need DAO, let's first understand why we need companies. Why not just have a boss hire some workers, why establish a company, and what does the company provide? The company provides an abstraction of a "legal person," allowing the company to be an independent legal entity, able to own assets and assume liabilities. This abstraction relieves entrepreneurs and shareholders of unlimited liability, creates possibilities for stock ownership and IPOs, and allows the lifespan of a company to surpass individuals and families. Therefore, companies have become the main entities in modern economies, and most contracts are related to companies.
From this perspective, DAO aims to simulate a subject in the crypto world through programming, which can own assets (rights) and assume responsibilities (obligations), thereby decoupling from individuals.
So why can't we continue to use the company model in the crypto world?
- The mechanism of corporate legal personhood relies on the judicial system and the financial system to be effective. The judicial system has the power to enforce corporate property, but it does not have the power to enforce it on public chains.
- The enforcement power of law is constructed by countries, and cross-border enforcement has always been a problem, while public chains are globalized.
- Smart contracts themselves have enforcement power and can construct dispute arbitration mechanisms with lower costs and higher flexibility than the judicial system.
From this perspective, DAO is not only an abstraction of a subject, but also requires a set of governance protocols to resolve disputes. The specific governance mechanism is not the key; the flexibility of the program can implement any type of governance mechanism, but this governance must be "bootstrapped," a complete autonomy.
So why haven't we had DAO in recent years? The crypto world seems to be developing well without it.
If we observe the startup teams and investment models in the crypto world, they are roughly equivalent to the "primitive tribe" stage, relying mainly on personal relationships and personal integrity. Since the law cannot intervene or the cost of safeguarding rights is too high, entrepreneurs and scammers abound. However, because this is a rapidly developing market, encountering "pitfalls," learning from them, and then finding the next opportunity can generally cover the "pitfalls," so it can still be managed. But as the size of the crypto field grows and the number of practitioners and users increases, the original model is no longer effective, and this is the opportunity for DAO.
It can be foreseen that with the explosion of projects and the expansion of team size, disputes between various capital providers and startup teams, disputes among founding team members, and disputes between teams will all become highly probable events. Defining rules and dispute resolution solutions in advance through DAO is a wise approach.
Let's deduce what possibilities DAO may have from this perspective:
- Raise funds through DAO and define rules for fund allocation and use in contracts to avoid team rugs (exit scams). Many DeFi projects have already achieved this.
- Define organizations, member roles, and contribution allocation contracts through smart contract DAO. Example: sushi's CEO election.
- With DAO, contracts between DAOs can also be defined through contracts. Example: Compound's security company bidding.
- Tools around DAO will flourish. The entire toolchain around enterprises can be migrated to the DAO ecosystem and can provide greater value because these tools can connect data between different DAOs through the chain.
- Financial services around DAO will emerge. For example, with on-chain employment contracts and business contracts, implementing credit loans is not difficult. Credit loans are essentially mortgaging future income.
- Models combining DAO and law will appear, and private arbitration services will emerge. Although DAO is an autonomous entity, it can seamlessly integrate with the legal system of common law. Under the current legal system, private arbitration is difficult to exist because if the arbitration result has no enforcement power, it is meaningless. But smart contracts provide enforcement power, so only an organization or individual recognized by both parties is needed to provide arbitration services. Example: DAO legislation in Wyoming.
Looking at the evolution of current DAOs, we can see that they are either based on project exploration (such as governance mechanisms of public chains or DeFi projects) or based on asset exploration (starting with a certain amount of assets and then figuring out how to govern them, such as fragmented NFT projects), or by airdropping a group of users and then experimenting.
Although the blockchain is not yet ready to accept a large number of users, it has no problem in supporting transactions and dispute resolution between DAOs. From this perspective, applications to DAOs will develop before applications to individuals. It can be predicted that the most active projects in 2022 will be in the DAO field. The crypto world has created DeFi and will now create DAO, which will become the engine of economic development.
This article is translated from my Twitter and Weibo:
