DAOs are Dead! Long live DAOs!
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Introduction
I chose the title of this article to describe my personal journey in the DAO space, which has started in earnest around the year 2020. Although I have been researching, writing and speaking about DAOs for much longer, I truly jumped into this curious subset of the wider crypto ecosystem only quite recently. The article is heavily biased and influenced by my own personal experience and shall in no way make a general claim about the reality of DAOs.
Beginnings
“If it is correct — as I believe it is — that a fundamental element of human nature is the need for creative work, for creative inquiry, for free creation without the arbitrary limiting effects of coercive institutions, then of course it will follow that a decent society should maximize the possibilities for this fundamental human characteristic to be realized. That means trying to overcome the elements of repression and oppression and destruction and coercion that exist in any existing society — ours for example — as a historical residue. Now, a federated decentralized system of free associations incorporating economic as well as social institutions would be what I refer to as anarcho-syndicalism and it seems to me that it is the appropriate form of social organization for an advanced technological society in which human beings do not have to be forced into position of tools, of cogs in the machine; in which the creative urge that I think is intrinsic to human nature will in fact be able to realize itself in whatever way it will.” — Noam Chomsky in conversation with Michel Foucault in 1971 [1]
Decentralized Autonomous Organizations — or DAOs for short — have been a topic of discussion for decades. I first stumbled upon the idea ten years ago, when Daniel Larimer framed Bitcoin as a Decentralized Autonomous Corporation (DAC). [2] Shortly after, young Vitalik Buterin attempted to systematize different forms of organization, autonomy and agency, introducing the term DAO for the first time [3].
In 2016, a team of early Ethereum developers formed around Christoph Jentzsch, to put the idea of a deliberately designed DAO to the test and coining the infamous sentence “Code is Law”. While the experiment of “TheDAO” failed spectacularly due to an exploit in the code [4], the idea of DAOs had been spread around the world. [5]
A year later, MakerDAO — who’s origins go back as early as 2014 — officially launched to the world, setting themselves up to become the largest and arguably most impactful DAO to date.
Today, DAOs are an active internet subculture, that attracts exactly the free, creative minds that Chomsky predicted back in 1971. According to the industry website DeepDAO, there are currently more than 12.000 organizations that identify with the term DAO, managing a collective wealth of $ 28 billion USD in cryptocurrencies. With 6,8 million holders of voting rights in these organizations and 2 million active voters & proposal makers, DAOs have taken on a life of their own.
What’s a DAO in 2023?
At Common Ground we’ve started out with the vision to build communication and coordination software for communities. Back in 2021 when we conceptualized the idea, our ideal customer was a DAO. A year and a half later, we’ve revisited our initial assumptions and made a few adjustments to account for the reality of 2023. What happened?
Hallucinations
It’s not just Large Language Models that suffer from hallucinations. At the peak of the last bull market, many believed that DAOs would experience a cultural breakthrough similar to what NFTs had achieved in the world of art and pop culture. We saw experiments like ConstitutionDAO emerge, which were able to fundraise a staggering $ 40 million USD for the noble goal of taking one of the last two privately owned original copies of the US constitution out of the market and into a public, collective form of ownership in the hands of a DAO. An ecosystem calling itself “ReFi” — short for regenerative finance — grew to a significant size, exploring new pathways to sustainable governance and financing of community-owned infrastructure.
Shortly after, however, the crypto industry got hit by a few major setbacks: the new industry giants that were produced by the last funding cycle imploded one by one. It started with the algorithmic Stablecoin terraUSD, whose death spiral wiped out $ 45 billion USD of market cap in less than a week. As a consequence, major players like 3 Arrows Capital and Voyager Digital filed for bankruptcy. A few months later, the leading exchange FTX blew up in a massive fraud scandal, destroying any trust the general public had established in the wider ecosystem.
While the implosion of centralized institutions like FTX, 3AC and Voyager should have reaffirmed the importance of decentralized, transparent organizations, a lasting depression replaced the enthusiasm that had once surrounded the crypto ecosystem. After the burst of the 2017 ICO bubble, the funding mechanism for crypto startups had been captured by traditional Venture Capital — which — with the end of ZIRP - became very conservative when deploying capital into new ventures. Investments today are mostly directed at core infrastructure plays like layer1 or layer2 blockchains, based on the concept of zero-knowledge tech. Social experiments in the form of DAOs are not en vogue at the moment. The quarter-over-quarter doubling of new DAOs as witnessed in 2021/2022, came to a screeching halt.
Cultural appropriation
Despite the premature end to the DAO spring we had seen in 2021, there was at least some level of cultural penetration the ecosystem had achieved. Of those 12.000+ DAOs listed by DeepDAO, a significant number *does not* adhere to the strict definition of a DAO.
In the original meaning of the term, DAOs are a necessary outcome of a higher-level artifact, namely a decentralized protocol that requires continuous governance as an input to keep going. In that sense, a DAO is a means to an end. MakerDAO is a great example for that: Maker the protocol would not work without continuous adjustments to some parameters of the system. [7] In order to keep adjusting these parameters without becoming a regulated financial intermediary, Maker necessarily has to make these adjustments in a decentralized fashion based on votes. There is no way not to be a DAO.
Ignorant of this puristic view of DAOs, a lot of projects and communities started to refer to themselves as DAOs before the big bust of 2022, despite not having any technological artifacts to take care of. The point of them identifying with the term “DAO” was to signal a certain set of values to members and potential contributors. I would summarize these projects as online communities that have a purpose and goals they want to achieve, that are governed by their members through votes and that (may eventually) have a treasury to pay their contributors. Sometimes, these community DAOs incorporate legal entities to disambiguate any questions on tax and legal liability.
Some people get really mad about this form of cultural appropriation. Here’s an example:
Personally, I don’t see this form of appropriation of the term DAO as a problem. Sure, it does make some discussions more cumbersome because you never know what kind of DAO a person means when engaging in a debate. Do they mean the general, values-based form of a DAO, or do they mean an autonomous piece of software that depends on continuous governance as an input for its functioning?
On the other hand, it’s cool that a broader cultural circle is absorbing the values and principles behind decentralized organizations. This is what mainstream adoption will look like. Watch this video of a bunch of e-sports commentators grappling with the phenomenon of NounsDAO.
Which begs the question: is NounsDAO a DAO in the strict meaning of the term? In my assessment it’s not. Although NounsDAO is to my knowledge an unincorporated non-entity that purely operates on-chain, it doesn’t govern a separate technical artifact, it’s raison d’être, like an on-chain marketplace or stablecoin. It’s not a means to an end — unlike MakerDAO, Aave, Compound or Uniswap. Sure, there is a continuous auction of new Nouns NFTs being maintained as a technical artifact. But this is a purely self-referential piece of code. It has no extrinsic purpose, except to grow the treasury and membership base of the project.
Famously, NounsDAO only governs itself. So in the end, NounsDAO is exactly a DAO of the less strict kind: an online community that is governed by its members through votes and that has a treasury to pay its contributors [6].
Interestingly, NounsDAO even started without an express purpose and with no defined governance system. The whole point of Nouns is to find its purpose over time and to not rush into governance too quickly.
So does that make Nouns less of a DAO? Certainly not. It’s probably the “realest” DAO of all. It has virtually no purpose except to be itself. It doesn’t have to make an on-chain service work, there is no pressure to perform, there is no need for back channeling or other clandestine stakeholder coordination for governance votes to pass in a seemingly “decentralized” way. Nouns is a large-scale experiment in being really what it claims to be. That’s a first for the crypto space.
DAOs for the rest of us
So, how have we adjusted our vision of the ideal customer on Common Ground? In 2021 we started out believing our ideal customer was a DAO. In 2023, we believe our ideal customer is a community regardless of whether they call themselves a DAO or not and regardless of whether they know what Web3 is. We strongly believe that over time, all of these communities will benefit from some of the innovations that DAOs have uncovered in the last decade. For me, some of those innovations include:
- community bank accounts aka multisig wallets
- uncensorable payments and donations with low transaction fees
- digital collectibles aka NFTs
- quantifiable reputation as a means to build trust in communities
- self-sovereign identities and portable social graphs
- strong identities with (decentralized) proof of personhood
- democratic community moderation and collective decision-making
- community-owned platforms and infrastructure
- coops operating at “web-scale”
This may not sound like a tectonic shift and in a sense it’s not. But the ramifications for how Common Ground will present itself to the outside world are significant.
Conclusions
In summary we can say that DAOs exist on a spectrum. Of course, the transition between these can be fluid.
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Footnotes
[1] https://www.youtube.com/watch?v=xpVQ3l5P0A4
[2] Unfortunately, the original material seems to have vanished. I believe that he introduced the idea in an episode of Let’s Talk Bitcoin, an early Bitcoin Podcast with Andreas Antonopoulos.
[3] https://blog.ethereum.org/2014/05/06/daos-dacs-das-and-more-an-incomplete-terminology-guide and https://medium.com/@VitalikButerin/i-invented-the-term-in-2013-and-daniel-larimer-came-up-with-dacs-s-organization-corporation-a-ef86db1524d5
[4] The hack even made it into the New York Times, which was a big deal back then https://www.nytimes.com/2016/06/18/business/dealbook/hacker-may-have-removed-more-than-50-million-from-experimental-cybercurrency-project.html
[5] See for example the famous SEC report on TheDAO https://www.sec.gov/litigation/investreport/34-81207.pdf
[6] Here’s a list of parameters that are continuously fine-tuned by MakerDAO governance https://makerburn.com/#/changes
[7] There is a treasury with a net worth of about $ 60 million USD on the Ethereum blockchain https://etherscan.io/tokenholdings?a=0x0BC3807Ec262cB779b38D65b38158acC3bfedE10
