The Digital Leviathan: DAO and Social Justice Potential
This report analyses the concept of DAO concerning the evolution of human social organisation and its potential benefit for social justice, whether DAO is the “killer application” of Blockchain
As Vitalik, “Make Ethereum Cypherpunk Again”, argues, the crypto community is straying away from its cypherpunk root, leaning toward protecting bags of incumbents, and obsession with DeFi costs Crypto opportunity for broader adoption. This paper reviews blockchain from a different perspective, not a making machine but a technology to increase global cooperation, which potentially drags us out of long-term global economic recession and builds a fair society.
Introduction
The term “Decentralised Autonomous Organization”, or DAO, is used to identify a digital native organisation enabled by Blockchain or Distributed Ledger’s Smart Contract technology, which ensures transparency, security and enforceability without trust in a specific third party (World Economic Forum, 2018). The organisation is usually built by people pooling digital assets like crypto tokens or NFTs to fulfil a common cause, like funding the development of software projects (GitCoin Funding, n.d.), buying a copy of the U.S. Constitution (Chappell, 2021) or paying the legal fee for a famous dissident (Volpicelli, 2022).
The history of DAO started in April 2016 with the launch of The DAO, which, after a few weeks, pooled over 11.5 million ETH, equivalent to 150 million USD (Staff, The Economist, 2016). However, The DAO saga ended bitterly when a hacker exploited its smart contract and potentially drained all the assets, resulting in the fork of Ethereum into two different blockchains, Ethereum and Ethereum Classic. While Ethereum Classic kept the “code is law” ethos and allowed the hacker to drain the fund, Ethereum modified the block and prevented the hacker from doing so. This event raised the first significant philosophical debate on how much we can sacrifice to uphold the immutable principle of blockchain. After that, DAO was considered a failed concept, and it only emerged again after the 2019 “DeFi Summer” (Atam, 2022).
Today, DAO is a much-debated concept. Is it a hoax, a complicated scam to rug naive individuals, or will it be the game changer for how humans work together? This report analyses the concept of DAO concerning the evolution of human social organisation and its potential benefit for social justice. It also discusses what DAO can and cannot solve. Finally, it asks whether DAO is the “killer application” of Blockchain.
DAO is an evolution of human organisational tools
In the legendary Leviathan (Thomas H., 1651). Thomas Hobbes said, “If there be no Power erected, or not great enough for our security; every man will and may lawfully rely on his own strength and art, for caution against all other men”. The existence of Power or the organisation is to protect man’s peace-seeking through honour, not the harm of others. Alternatively, without organisation, there is no peace, progress or significant achievement. Nonetheless, how do we build organisations? What are their primary functions, and what keeps them from falling apart?
Regardless of the cause, we build organisations by pooling resources together into a Treasury; hence, we expect that a governing body will use the Treasury to fulfil our wishes. The Treasury can accumulate tangible or intangible assets, such as money or the right to control our usage of time and resources. The governing body then will aggregate our preferences and perform actions accordingly.
For example, a government is born once its Central Bank starts printing fiat money, and its citizens agree or are forced to trade their works and products using this new form of faith. In ”The Curse Of Cash” (Rogoff, 2017, #22), Kenneth explained the importance of this enforcement under the Mongo and Ming dynasties “highly credible threat of death for those dared disobey”. Most governments ask their people to delegate someone to give opinions for themselves or directly post mails to their citizens every three months to pool views on specific issues (Switzerland Parliament, 2021). Since an authority can only stay in power if it is consented to by the people (Rousseau, 2004), aggregating its people's opinion is the method to keep the government's legitimacy. Another example is religion. Religion is born once a group of people accept a doctrine on life, letting the church have a voice in how they live and start making donations or volunteer work for it. Conversely, the church talks to its followers frequently to understand their needs and change the masses accordingly. Even though the social contract between the church and its people is not formally defined in detail, it is very delicate and requires much attention.
These observations put forward a question: Since the Internet, born in the early 1990s, has already made it cheaper and faster to build an organisation, why was DAO not there earlier? It turned out that there was an industry name, “Online Dispute Resolution” (ODR), with the hope that we could build online organisations to increase the efficiency of dispute resolution. One notable example is the iCourthouse in the early 1990s to replace the traditional court system (Kleros, F. A., Founder &. CEO at, & Assas, B. D., Professor at Université Paris 2, n.d.). However, ODR failed to become mainstream because of a lack of enforcement power. Think of the UN General Assembly, whose decisions have no enforcement power. ODR and UN General Assembly, none matter and fail to become significant. DAO happened in 2016 because of crypto monetary power, where a decision made by a Smart Contract is now potentially weighing a few hundred million USD without the intervention of any third party. Understanding DAO require understanding the importance of the Treasury and its enforceability.
This report proposes the following analytical framework for DAO with the People (Community, founding team or any stakeholders) pooling resources to build a Treasury, interacting with on-chain voting systems to trigger smart contracts, hence enforcing the People's will.
Figure 1: An Analytical Framework on DAO
Involving a DAO has two main activities: (1) Building the Treasury and (2) Identifying and enforcing the crowd’s preferences through Smart Contracts. Building the Treasury means taking assets and distributing the governance power to contributors fairly and effectively. Identifying the crowd’s preferences involves designing and implementing workflows, voting mechanisms and “smart contracts” to enforce the people’s will.
In the real world, distributing governance power involves many parties across a large geographical area, making it logistically complicated. The same happens with the voting system. It is already a humongous task for the Swiss to deliver direct democracy to 9 million people. Just think how difficult it is to deliver Direct Democracy to countries larger and lacking infrastructure like Vietnam, with 90 million scattered over 331,212 km2, of which 75% are mountainous areas. Therefore, choices are limited. Realistically, every country holds elections every few years, trading effectiveness (and tolerating corruption) for practicality.
However, DAO invites limitless creativity at a radically low cost. Once we eliminate logistical constraints, we no longer have to stick to delegate voting as the only option. For example, we can try Liquid Democracy (Blum & Zuber, n.d), where participants can change their delegates based on issues rather than fixed terms. Different problems require different expertise, and the flexibility to change representatives reduces conflicts of interest. Some problems are moral-based, which makes it harder to delegate to someone else. In this situation, DAO enables direct voting at a meagre cost. The research “Representation, Peer Pressure and Punishment in a Public Goods Game” (Kim, Hyoyoung and Iris, Doruk and Lee, Jinkwon and Tavoni, Alessandro) showed that if one decides for themselves aka direct democracy, then the total society cooperation increases. With DAO, we can realistically apply Swiss-style democracy globally.
DAO is bringing Social Justice benefits to the public by giving us more choices in designing a society.
Challenges to adoption
There are over 19,000 DAOs with total assets in all Treasuries estimated at approximately 29 Billion USD (DeepDAO, n.d.). Most Treasuries only keep crypto assets, and the majority value of many are their self-issued tokens, whose value is highly volatile. These DAOs are similar to countries whose majority of Treasury is their fiat, which is usually financially vulnerable (except the U.S).
Figure 2: Top DAO Treasury. Source: DeepDAO.io
MakerDAO was one of the first DAOs to keep real-world assets in their treasury in U.S. bonds with a total value of 4.5 Billion USD (Sandor, 2023). However, this created a problem since spending those assets requires humans, and thus, enforceability is compromised. Because of that, many observers do not calculate the value of real-world assets in the treasury.
Figure 3: Maker DAO Asset, Source: Dune Analytic
This observation shows DAO's most significant challenge: the disconnection to the Real World limited Treasury building and enforcing the community’s will. This issue was born out of a lack of clear legal guidance to recognise Smart Contract enforceability despite a few countries starting to allow DAOs to incorporate.
Figure 4: What sovereignties to register a DAO in 2023, source: legalnodes.com
It is easy to blame lawmakers for ignorance. However, the reality is more complex. DAO and Blockchain industry generally hold ‘code is law’ practice; should we call a Smart-Contract exploit ‘illegal’? In the case of a teenager ‘stealing’ $16M worth of treasury from a DAO in 2021 (Thurman, 2021) through a programming bug, there is no decision on whether the act is illegal. The intention is undoubtedly ill, but he did no wrong since he played by the technology rules and ‘code is law’. Many things from this court are open questions, but there is one thing for sure: We can not punish anyone for their thought; otherwise, we go straight back into the Dark Ages.
The disconnect between Smart Contracts and Reality makes it harder for the Treasury to accumulate assets and for DAO to expand its membership. For example, UK citizens cannot access Binance, one of the most popular crypto exchanges. Some websites providing User Interfaces to Smart Contracts are limited to UK users because of concerns about the legal state of the blockchain.
Figure 4: Limit to Smart Contract UI from the UK. Source: Kamino Finance.
In today's technology, Smart Contracts can rarely trigger IoT and enforce People’s will in reality, reducing the Treasury's power and making DAO less attractive in attracting new members. This problem comes from the lack of integration with Blockchain with IoT devices. However, digitalisation is an unstoppable trend (Figure 5), so the future looks bright for Blockchain and IoT integration.
Figure 5: Number of IoT devices. Source: Stata.com
One notable example is Helium (Dano, 2023), an IoT-integrated blockchain network where each node is an internet-sharing device. Many things we rely on today are already 100% digitalised control, for example, electricity, satellite, and cross-ocean cable. It is not difficult to imagine a future where a DAO’s decision can trigger machines to make real-world impacts.
Another challenge for DAO is its lack of technology and practice to run effectively. The DAO tool market is tiny because there is no proven business model yet, and most of the leading products like Aragon, Snapshot, Tally, Realms, and Squads are free to use. Therefore, innovation in DAO is scarce, and the best talents in the crypto market are not in DAO.
There is a myth in Blockchain that DAO is 100% autonomous. However, it is not valid. Much of the work in a DAO relies on an operator team, and they often lack the skill and practice to perform the job well. A few challenges they face daily is that DAO members usually come from many cultures, and clashes are often. The nature of each proposal can vary from moral-based to efficiency-based, which requires very different approaches. To prepare for these problems, DAO operators need much training, but now they are receiving next to none.
What DAO can and cannot do?
Given the nature of the Treasury’s power, DAO is strongly applicable in industries without real-world interaction. One notable example is the Mobile Application Market.
Figure 6: Mobile market
The quarter revenue of mobile apps in Q3 2022 is approximately 31.5 billion, all coming from the digital world and potentially disrupted by Blockchain. DAO can help innovate this market by providing a novel approach to building and running new games and apps. For example, Loot Project (What the Loot Project Is Teaching Us About Decentralization, 2023) was an innovative project that sold game items as NFT BEFORE building any actual game. The project expected item owners to form DAOs and make games that serve existing fan bases. A few big players like Google and Apple dominate the mobile application market and are hesitant to adopt blockchain. Recently, the first batch of 20,000 Solana phones, the first Blockchain native mobile phones, sold out (Hayward & Graves, 2023), giving hope that Blockchain can disrupt the mobile market and bring adoption to DAO.
Besides mobile apps, purely digital industries like the creator economy, advertising, finance markets, or highly digitalised logistics industries (e.g., smart cities and green energy) have enormous potential for Blockchain to disrupt and use DAO. For example, JuiceBox (JuiceBox.Money, n.d.) is a platform to raise funds for a DAO with a particular one-time payment purpose. The notable success is the AssangeDAO (AssangeDAO | Juicebox, n.d.), where 17,422 ETH, the equivalent of USD 38 million, was successfully raised to support Assange legal fee. Another criterion for DAO application is where code is the only law, for example, the cooperation of people coming from sovereignties without official government cooperation. For instance, DAOs with members from developed countries can directly fund farmers in undeveloped countries, thus bringing more fair trade and wealth.
DAO is not helpful when it involves real-world assets, where ‘code is law’ is not desired or expected. DAO is also redundant where the number of parties involved is small or the collective output has no enforcing power. For example, real estate is a market where building Smart Contracts is easy, but pursuing law changes to recognise that ‘code is law’ is daunting. Most governments restrict how much a foreigner can own land within the country for valid reasons such as national security. This requirement directly goes against the anonymity and enforceability of the blockchain code; hence, the application has a long way to go. Another example is applying DAO for private companies. The number of shareholders in a private company is usually small, the goal of a private company is well-defined as profit-making, and the law is protecting shareholders quite well, so DAO brings little benefit. However, as the world is moving digital, the impact of real-world assets is becoming smaller than digital ones. The mobile market is a vivid example because it did not exist 20 years ago, but now its impact on the world is significant. As technology takes time to develop, it might be possible that by the time Blockchain technology is mature enough, the real-world assets market will be too small to be a problem.
On the other hand, DAO is potentially disruptive for organisations where an effective process of aggregating opinions is a game changer. Examples are Societies, Unions, Non-Profit Organizations and Governments. While the Government is the most prominent opposition to Blockchain, it is the one that benefits the most from applying Blockchain technology, specifically DAO. Most governments now honour the “trias politica” model, where the legislature, executive, and judiciary are three separate branches. However, keeping the power balance of these branches and running an effective governing body is daunting. DAO offers a possibility where all three branches are simplified and partly automated. Innovative voting systems that quickly and cheaply aggregate crowd opinion will complement the legislature. Moreover, it is feasible to design on-chain complex workflows with a series of checkpoints, each an opinion aggregation, so participants can (1) fully understand the consequences of their opinions, (2) cooperate on a large scale and (3) be confident that their opinions are transparently recorded and enforced. Both the judiciary and executive can be semi-automated by Smart-Contract technology. Besides the efficiency, a DAO-applied government can iterate its decision-making process cheaper and faster since data for analysts is publicly available, and change implementation is convenient.
Figure 7: A system to design on-chain workflow, each node is an opinion aggregation. Source: SyncVote.com
Conclusion
DAO is an organisational tool enabled by Distributed Ledger Technology. However, the name “Decentralized Autonomous Organisation” does not correctly express its nature, making it harder for this tool to be adopted. This report proposes a new name, “Digital Organisation” (DO), to acknowledge that no organisation is and should ever be fully automated and to respect that DO is the progress of human organisational skills in the Digital Age.
The history of computing gives another hypothesis: DAO is the killer application that Blockchain technology is missing to become mass-adopted. Every newer public blockchain after Ethereum is an Operating System, and every OS needs an application that brings an immense increase in productivity to become mass-adopted. The first popular Operating System for personal computers was Apple II, which only gained traction after the release of VisiCal, a spreadsheet application (The Story of VisiCalc, 2021, 14:20 - Steve Job interview). Microsoft Windows, on the other hand, famously dominated the world through its Office suite.
In the case of blockchain, DeFi is not bringing a lot of productivity boost and is inviting friction with incumbents. However, DAO will immensely boost the productivity of existing organisations and invite the possibility of opening new ones with people from different geographic regions, working together and producing value together, online and on-chain. The Network State (The Network State, n.d.) or SuperteamDAO (SuperteamDAO, n.d.) are examples of this new organisation type.
As the world falls into economic depression and becomes more politically polarised, increasing productivity by leveraging DAO to improve global collaboration is a potential solution.
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