The year of the…

2022 is memorable in many ways - wars, plagues and societal breakdown. For the crypto enthusiasts, 2022 is most likely to be known as the year of the DAO (also, the year of The Merge, it will be a busy year). This note starts to explore the question of what DAOs could mean for business by looking at 5 different ‘dimensions’ of a DAO.

To take a step back, the word for 2021 was NFTs, and the outsize impact of those three letters on popular consciousness - and private fortunes - was profound. Formerly impoverished artists (and not that impoverished VCs) are making millions providing at least a glimmer of optimism that money and fun don’t have to be a zero-sum tradeoff.

While NFTs have shaken up media and entertainment, DAOs - Decentralised Autonomous Organisations - seem to offer the potential to shake up organisations across all sectors, large and small. (For good explainer articles, go here.) They’re self-managed, internet native communities, owned, governed and operated by their members (generally holders of the DAO’s token).

DAOs vs. cooperatives

They have many similarities to cooperatives, which have been around for years, in that they’re for-profit, member owned and operated. But a big difference is that governance in cooperatives is by the people, whereas in a DAO it’s generally by tokens. This handy chart from the article - in Web3’s garish colour scheme - illustrates the point.

The article goes on to list practical ways that DAOs and Coops can learn from each other, and suggests a hybrid model could benefit both types of organisation.

A sticky start

The first DAO experiment - The DAO - got off to a rocky start, highlighting the importance of solid code and security measures in decentralisation. Another ‘failure’ - an effort to buy a copy of the Constitution - raised eyebrows, and made it clear this genie isn’t going back in the bottle. New experiments are popping up every week.

Dimensions of a DAO

Here’s four dimensions of DAOs to look out for in the coming months:

B2B vs B2C

Many of the DAOs today are designed to work on crypto infrastructure itself, the largest being Uniswap, which is a decentralised token exchange tool (my Ape for your Dog…). The more ‘fun’ ones, such as Constitution one above, or the ‘digital country club’ FWB, tend to be community led and B2C.

Degree of Openness

DAOs can be invite-only, open to all, or a hybrid - for example requiring the user to hold their coins to gain access and / or complete an application process before granting access to the Discord server. Having a low barrier to entry is a design choice, and may not be the right way to approach building a new company if exclusivity is desired. The bigger and more engaged the DAO is the more likely it is to generate novel insights and innovation at the edges.

Digital vs physical

Some DAOs are anchored in place, others are designed to remain entirely digital entities, and naturally some hybrid models are forming that connect real and virtual worlds. CityDAO is testing the model for collective ownership of real places (starting with a parcel of land in Wyoming), while Praxis Society is looking to take a curated, high impact online community and give them a parcel of land where they can be brilliant together, Galt Gulch-style. The buzzy, and extremely valuable Bored Ape Yacht Club DAO are in discussions about turning some of their tremendous wealth into real-life clubs - yachts for bored and now rich apes. One of the most innovative one I’ve seen is Particle Collection, which is democratising artwork; buying originals such as Banksy’s iconic Love Is The Air, digitally slicing it into 100x100 squares, and selling the 10,000 ‘particles’ as NFTs, which the original artwork is put into a mission-locked non-profit. The experience goes physical again, as the painting is then toured around the world, with its schedule voted on by its new 10,000-owner army.

Complete vs incomplete

The final dimension starts to get into contract theory. Ronald Coase brought to us the idea that firms exist in order to minimise transaction costs. With DAOs and the benefits of transparency and efficiency that blockchain promises, maybe this suggests we don’t need firms at all. Enter another Nobel-winning Brit, Oliver Hart (et al) who brought us incomplete contracts theory, which says (grossly paraphrasing) you can’t specify everything in a contract, so firms will likely be around for a while. As far as this relates to DAOs, some are deterministic and programmatic - they’ll run and run according to their smart contracts, while others - the incomplete contracts - will require humans in the loop for oversight and management. This post by Jesse Walden summarises this, and he suggests the more interesting areas to explore are the incomplete ones.

The DAO space is nascent and rapidly evolving, and while all this talk of apes, libertarians and country clubs might seem now just like a lot of noise and fluff, it’s worth paying attention. After all, the most interesting trends shaping our world often start out looking like toys.