To DAO or Not To DAO, That Is The Question

Decentralized Autonomous Organizations

Think of this article as a choose your own adventure.

Before we get into the meat of the article let’s make two statements to determine that do a DAO is in your future:

1. DAOs require blockchain adoption to be successful.

If you aren’t considering blockchain or confuse blockchain for cryptocurrency (which it is not) then stop reading right now. You choose not to DAO.

2. Web3 will enable the ownership economy.

To continue reading you should hold a belief that enough is enough, and strangers owning our data is not helping and that we should own all our digital assets including data.

If you want third party companies to harvest your every digital interaction, your personal information, and run algorithms trying to determine or manipulate you on what to do next, don’t do a DAO.

Or if you want generative Artificial Intelligence to feed on all the data and assets in the wild that includes your ideas, IP, and any potential code that is out there, you choose not to DAO.

All those that chose not to DAO, read this article instead.

Web3 adoption means that the next decade will be about users getting their data back. If you believe in this, a DAO is in your future.

Now all those with a do a DAO, travel with me back to Japan, 2006.

Japan, 2006

A young Japanese entrepreneur, Daisuike Iwase, just out of Harvard and after a stint with the Boston Consulting Group wanted to take on the decades old life insurance companies that had dominated Japan. His idea was simple: he wanted to sell to the young MTV generation. Iwase-san wanted to make life insurance cool. He also wanted to be the first to provide insurance over the internet.

Iwase-san co-founded Lifenet Japan, with the other co-founder being a stalwart of the Japanese insurance industry, Deguchi-san.

Lifenet Japan’s main business was underwriting four types of insurance, including mortality life insurance, lifetime health insurance, regular medical insurance and disability income insurance. The Company delivers its insurance products through direct sales primarily over the Internet.

Sales initially were not that spectacular and his competitors in the market had a lock on the older generation. The younger generation didn’t see a need to buy any life insurance even though it was being advertised on MTV and could be purchased on the internet.

Then on March 11, 2011, the largest earthquake ever recorded in Japan caused massive devastation, and the ensuing tsunami decimated the Tōhoku region of northeastern Honshu. On top of the already-horrific destruction and loss of life, the natural disaster also gave rise to a nuclear disaster at the Fukushima Daiichi nuclear plant. The Fukushima disaster is considered the second-worst nuclear disaster in history, forcing the relocation of over 100,000 people.

The Japanese MTV generation suddenly faced mortality.

By December 2011, Lifenet Japan policies-in-force suddenly exceeded 100,000.

What does Lifenet Japan’s rise have anything to do with a decentralized autonomous organization (DAO)?

In 2012, at an innovation conference in Tokyo where I presented, Iwase-san proposed 改善, a kaizen, change for the better. He suggested to put all expenditures including travel expenses online so the clients could audit and transparently see where their money was going. He believed ultimate transparency was the way of the future. The customer deserves the right to audit the efficiency of those who’s money funds the company. Also, as Iwase-san explained, having his competitors see their efficiency would force them who haven’t been scrutinized before to become efficient as well. Or face losing lose customers to Lifenet Japan.

Iwase-san also proposed that the insurance plans and its details should be solely owned by the customer. They would own their data and the rights to the assets they paid into every month. He believed that this payment into the company allowed them rights to see everything and he was so bold to suggest — voting rights.

These ideas were pitched but never made it past creative idea stage as Japanese CFOs frown on complete transparency as it puts pressure on the numbers. However, Iwase-san was four years ahead of everyone else (DAOs first formed in 2016) and it was those ideas that today make up the core concepts of a DAO.

What are DAOs?

Decentralized Autonomous Organizations, more frequently referred to as DAOs, is a blockchain-based type of organization or company that is governed by code instead of a typical hierarchical leadership structure defined by law. Usually the governance is made through the use of native crypto tokens (also called governance tokens) and anyone who holds those tokens also holds the opportunity to vote when new proposals are made and to participate in the management of the DAO. In this process, smart contracts are used in order to help DAO members to achieve their common goal. This smart contract is the code that governs.

Why Are DAOs Useful?

DAOs make it possible for strangers with a common goal, to get together and create an organization represented by an encoded set of rules in a public and transparent way without the need to know or even trust each other while removing bureaucratic barriers and time-consuming processes.

Blockchain is the technology that enables trustless interaction and transactions and DAOs provide a way for people to organize themselves in a safe decentralized and well-defined environment with likeminded people. Bitcoin is often considered by its advocates to be the first DAO, because the Bitcoin network opened the way to a peer-to-peer consensus mechanism upon which DAOs nowadays are built. The main benefits and downsides of DAOs are the following:

Benefits

• Trustless: Using blockchain technology, DAOs can operate in a trustless environment and safe transactions can be made between strangers as everyone can see what is happening in real time; hence only trust or understanding in the protocol is needed and not trust in other participants.
• Decentralization: The governance of the organization is decentralized, which allows democratic processes.
• No single point of failure: Its decentralized characteristic prevents a single point of failure and makes it impossible to be shut down by a single entity (without having the control over the majority of the tokens).
• No middlemen: Not relying on middlemen or third parties can make processes more efficient and be cost effective.
• Open source: Thanks to being open source, DAOs are often reliable and up to date because contributors from outside the organization can improve it.
• Cheap to create: DAOs do not require a lot of money to create. In fact, you can even raise money by issuing tokens.
• Automation: Smart contracts permit a high degree of automation with any transactions and decisions taken by the organization.

Downsides

• Vulnerable to attacks: This is a downside to being open source, because hackers can see the code and use bugs (if there are any). The longer and the bigger a DAO becomes, the more reliable it is.
• No clear regulations (legal uncertainty): There are few laws and regulations regarding DAOs at the moment, which can make a DAO stand in a legal gray area. Many countries are in the process of creating new regulations for that type of organization, so anticipating the impact of those laws is important. Setting up a DAO in a strict legal environment could be a serious challenge.
• Decentralized decision making / time for transactions: Sometimes it is better to have a centralized decision making process. For example, in a time of crisis, when an important decision needs to be taken in a very short amount of time, a democratic decision making process might not always be the best option. The lack of a “single leader” might also create difficulties when it comes to sharing and reaching a common vision.

DAOs just a fancy co-op?

A friend and fellow innovator here in Knoxville, Alex Abell, called DAOs a fancy co-op.

A cooperative (co-op) is a business or organization owned by and operated for the benefit of its members. Profits or earnings are distributed among its members.The co-op can be a for-profit business or a non-profit organization.The co-op runs similarly to a corporation, because members purchase shares and elect a board of directors and officers. It differs from a corporation because typically each member gets one vote.

A co-op is usually formed around a business idea such as buying property, renting apartments, or selling food from shared farms.

The difference for a DAO is that technology is required to be tied to the idea. Or often its on technology that the idea is born. For example, it’s not unusual for individuals to float the initial ideas on platforms such as Twitter or Discord first; if there’s enough appeal, others join the online conversations, as they would on a traditional messaging board or in a chat room.

From these self-organizing groups using technology forums they decide to form a core group of developers to build a blockchain network or join one that already exists to offer transparency and immutability around the sharing of ideas and casting of votes.

Each group must then ask a series of questions to define a DAO that is right for purpose:

Questions before a DAO

“What type of DAO do we want to be?”

Answering that question will make you build the architecture of the organization, define its core values and purposes but also its accessibility and functions.

“How will the voting rights be distributed?”

The easiest way to do it would be to attribute each token one voting right. However, you can be more creative than that and design your unique voting right distribution system. For example, you could decide that one wallet = one vote or that active members receive a multiplier ratio (e.g. 1.5) which would multiply the number of tokens they have by the established ratio to get their number of votes, which incentivizes members to be more active.

“How will new proposals be accepted?”

One way to do it is by using a threshold for the propositions to be accepted. Most of the time this threshold is 50% of the votes in favor of the proposals, but it can also be 66% or any other number. If there are multiple proposals “competing” between each other, the voting process can be held in multiple rounds, or the one with the most votes directly gets accepted.

“How will the treasury be managed?”

Many voting decisions will concern resource allocations, and the treasury system of tokens assigned to those within the DAO should be designed with the idea that DAO’s projects are often long-term oriented. Resources are often allocated to develop new projects and recruit people.

“Who is a person and who is an organization and who are both?”

You must first determine who is a person, who is an organization, and how both relate to each other before you can assign ownership of anything. Meaning that now people are able to own digital assets and own their data. Ownership solutions lead you to “who owns what”. The “who” part is related to identity management and the “what” part is referring to digital assets which are digital tokens.

Are decentralized autonomous organizations (DAOs) a new concept? No.

Just a fancy digital co-op with its own digital representation of money.

Are blockchains a new concept? No, they are just accounting ledgers that are copied thousands of times spread across servers all over the world.

Is digital democracy a new concept? No, it’s the second reason why the internet was invented. The first being that the internet served as a communication device if there was ever a World War 3.

What is new is the idea that after three decades being at the mercy of every Silicon Valley startup and digital monopoly, that there’s a way to slowly start roll back ownership of digital assets to those who created them. This includes creative IP, your organic resemblance (face, body, and voice), and the health records that determine how long your existence will be here on Earth.

Also having the ability to voice your opinion and it matter in the digital world can change how things get done. It’s about establishing a firm consent in the digital world. Only then we can begin to cross over from digital assets to physical ones such as land rights, creative license, and monetary value.

More than a decade ago, Iwase-san at Lifenet Japan pitched that ultimate transparency and digital ownership is the way of the future.

Owning the assets that determine who you are and where you are going creates independence, freedom. You should be the one deciding what algorithms to make determinations about your future.

Leaving those assets in the hands of others and third-party vendors to run their own algorithms, having shareholders who are focused on profits to make decisions about you as a collective, prevents you from being your own.

Life is truly lived when you get to choose your own adventure.

“What a terrible era in which idiots govern the blind.” — William Shakespeare