DAOs: a novel human organization

How DAOs use novel org structures to realign incentives around progress.

DAOs: a novel human organization
Photo by Joshua Rawson-Harris / Unsplash

There is a problem with incentives in society: we're overfitting to profits.

We've created a model where the biggest incentives rarely lead to progress.

Have you ever wondered why scientists are so often underpaid? In an optimized society, those that contribute most to the advancement of civilization ought to be rewarded most fruitfully. Not only do scientists contribute to the advancement of their fields, but they also represent some of the only resources we have for higher education.

This doesn’t stop at scientists–the transition away from fossil fuels shouldn’t be made difficult because those with the power to change the industry are heavily incentivized to maintain the status quo.1 Harmful algorithms shouldn’t be so difficult to change because those that control them can choose profits over social responsibility.

If we want progress at the current stage of human civilization, we’ll need to drastically rethink our incentive mechanisms.

A technological solution

Over the past few years, decentralized autonomous organizations [DAOs] have emerged as a novel vehicle for mobilizing human beings around shared objectives. Using DAOs as a new model for human organization, we have the potential to do something drastically different.

The key distinction between DAOs and traditional organizations is the programmability of rules and incentives. Rules are defined in open source code making them impossible to game.2 Decentralization happens through on-chain governance mechanisms, enabling democratic [or meritocratic] systems.

DAOs take all the best features of a blockchain and encode them into org design. While there are many distinctions between DAOs and traditional organizations, the vast majority of these derive from programmability. In essence, DAOs are an example of how technology is becoming an extension of ourselves–the next development in the organizational hive mind where decisions are immutably embedded in the database.

This is further emphasized by a DAOs ability to facilitate community entrepreneurship–where entrepreneurship is the effect of value creation/extraction and the community is the organizing force behind it.

Typically, we think of this as a single person with an idea who goes on to form a business. But this can work differently with a DAO; not a single person, but a community can start a venture.

This is functionally unique–traditional organizations form top-down; founders set goals and objectives at the start and only involve new people when there is work for them to do. DAOs organize from the bottom-up; goals and objectives are set by the community and they figure out who can do what after.

I’ve been amazed at what this can achieve for effective altruism. The early days of OpenAccessDAO [OADAO] have been a fascinating experiment on how a single idea and passion-fueled community brings their minds together to forge the way forward for decentralized science.

Other DAOs, like ConstitutionDAO, have demonstrated how we can quickly raise large amounts of capital for such agendas without having to operate as a non-profit.

DAOs provide freedom from a system that tends to lack the organizational metabolism needed to be optimally effective. Non-profits must abide by the rules of a centralized authority, which is mostly incentivized by the government. In other words, we put altruistic work at the bottom of the economic food chain.

Not only do DAOs break away from legacy incentive structures, but their breadth of utility empowers them to create entirely new ones.

Take KlimaDAO for example, which seeks to battle climate change by participating in the carbon credits market, effectively working to offset emissions while issuing returns to token holders. To ELI5 , KlimaDAO is paying people to fight climate change.3

What an incentive.

Or maybe your cause is to fight homelessness, so you work with NFT creators that help generate revenue for the cause like GoodWorkDAO. Or maybe you're interested in longevity, so you form a DAO to 'collectively research, finance and commercialize longevity research in an open and democratic manner' like vitaDAO. These are among many hypothetical scenarios where DAOs create novel incentive structures for their communities.

We are now seeing the beginnings of how DAOs enable brand new ways of incentivizing progress. And there is still so much more potential to be realized.

The death of hierarchy

For thousands of years, dating back to antiquity, hierarchy was the predominant structure for human organization. So dominant in fact, you saw almost no other form anywhere in the world until now.

Even today, hierarchy remains prevalent in organizational structure. But as the seed of bureaucracy, hierarchy led to losses in productivity, innovation, and everything in-between.

We tried adopting flatter organizational structures with less hierarchy and more trust in middle management, but every founder who tries to retain that startup-like flexibility learns that hierarchy inevitably creeps in. As if there was no other trade-off between efficiency and complexity, we simply cannot fathom how to organize ourselves without hierarchy.

Some say hierarchy is older than the trees, embedded in our genetic codedriving our behavior. In fact, hierarchy is one of the most natural structures in the universe. It exists in major biological systems and physical ones too. Your internal organs follow a hierarchy from molecules to cells to tissues to organs. Most multi-star systems follow a hierarchy in which stars can be divided into two groups, each orbiting a system's center of mass, while those smaller star groups can then be divided into even smaller subgroups which themselves can be divided, and so on.

In human systems, hierarchies are a function of authority. For the system to operate, it must abide by rules. A system that doesn’t abide by rules, whether explicit or implicit, isn’t a system at all–it’s randomness. Rules must be enforced in human systems. We make mistakes and need feedback mechanisms that allow us to correct them. At the same time, we must incentivize desired behaviors.

This results in the occasional paradox: sometimes what constitutes good behavior is actually rule-breaking; because sometimes, the rules themselves are broken.

This happens when rules are designed by a centralized authority: they are inherently biased.

This isn’t to say that decentralization is always the best solution. Sometimes there truly is only one person [often a founder] who knows exactly what needs to be done to achieve an organization's mission.

That doesn’t mean they can’t be wrong sometimes.

Centralized authorities have their advantages. They're the reason China could execute COVID policy so much more efficiently than the U.S. The same spectrum of governance that predicts nation-state behavior predicts organizational behavior as well.

Traditional organizations document rules and standard operating procedures, requiring employees to sign and agree with them [something they rarely do their due diligence on]. But it's a formality–the rules can still change at any time, with little to no notice at all, for better or for worse. And usually, by a select handful of individuals; typically, executives.

DAOs change all of this.

The way of the DAO

In a DAO, rules don't require a centralized authority to dictate, change, or enforce. Rules are not documented, they are programmed, providing an alternative to traditional hierarchical organizations. Work becomes trustless, open, and optimized for equity.

Traditional organizations won't be going away any time soon. DAOs might even offer improvements over legacy structures implementing governance systems on top of them. A best of both worlds scenario may be possible by trading efficiency for meritocracy.

Imagine a company where decision power is weighted on merit rather than politics.

DAOs make this possible through governance features–issuing tokens or NFTs that allow members to vote on collective decisions. The distribution of governance power can be even further defined by its own set of rules, making it possible for DAOs to optimize their decision-making process.

Most people don’t like the corporate world because the system robs us of our agency. DAOs empower people to take back their agency, slash hierarchy, and incentivize progress. They fundamentally alter the meta-rules of human organization.

Equity, democracy, and social responsibility might be important org values on paper, but somewhere along the way, we lose our capacity to shift things in that direction. Centralized authority modeling Friedman capitalism might be a reason this is hard, but organizations of a certain size might be too complex for humans to make good collective decisions using traditional models. DAOs offer us the features required to change this.

Shifting to technology-first governance models means the ability to form more equitable, sustainable organizations with vastly more potential for human progress.


Many thanks to Phil Mohun and Stanley Bishop for sharing their thoughts with me on this essay. Thier expertise working with DAOs like Bright Moments [which helped me break into this space and learn about these promising capabilities] gave me the confidence to post this without fear of sounding like a congressman interrogating Mark Zuckerberg.

Footnotes

  1. How the oil & gas sector incentivized politicians in 2020.
  2. DAOs are based on programs called smart contracts running on the Ethereum blockchain. Gaming these systems is actually a non-zero probability. Just like a lawyer with a physical contract, if a smart contract is poorly designed, a good hacker might find a loophole. Though this will get more difficult with time as smart contract security & development grow as a field.
  3. For the best in-depth explanation of KlimaDAO that I could find, refer to this Twitter thread. Their website and blog are also good resources.

Additional resources for learning about DAOs.

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