Chaordic organizations, community investing & the return of the DAO
Dee Hock, the founder & former CEO of Visa is one of the preeminent practitioners & thought leaders of organizational development. His influence in the formation of Visa from a “set of unorthodox convictions about organization growing in the mind of a young corporate rebel,” to a $500B company that spans 200+ countries, 15,200 financial institutions, with 3.6B cards worldwide, accepted at 70M merchant locations, processing $12.5T of volume per year, across 206B transactions, is something that should be studied by anyone interested in entrepreneurship, organizational design, or FinTech broadly.
In 2005 Hock published a book One From Many: Visa & the Rise of Chaordic Organizations. Hock observed that the highest levels of managements in most organizations, whether they are commercial, political, social or educational were formed of an, “interchangeable, cognitive elite with immense self-interest in preserving existing forms of an organization and the ever-increasing concentration of power and wealth they investable bring.”
Hock’s view was that some of these “new” organizations (as early as the 1970s) were spawning an incredible amount of scientific & technological innovation; serving as change agents, creating enormous diversity & complexity in the way people live, work, and play. This, in turn demands radically different concepts of an organization that can, “more equitably distribute power & wealth, unshackle human ingenuity, and restore harmony between societal organizations, the human spirit, and the ecosphere.”
Enter the chaordic organization. Chaordic is defined as “the behavior of any self-organizing & self-governing organism, organization, or system that harmoniously blends characteristics of chaos & order.” In nature and biology, there is no “chairman of the board of the forest” or “chief executive neuron of the brain,” yet in chaordic systems, structure evolves, life is a recognizable pattern within infinite diversity, and self-regulating. There are millions of examples of chaordic systems in science, but what about in corporations?
Dee had three questions that were critical in the origin story of Visa & the chaordic organization, coming at organizational design from a first principles perspective:
- Why are organizations, everywhere, political, commercial, and social, increasingly unable to manage their affairs?
- Why are individuals, everywhere, increasingly in conflict with and alienated from the organizations of which they are part?
- Why are society & the biosphere increasingly in disarray?
These questions are as relevant today as they were in the 1970’s when Hock first pondered them, but with the adoption of Decentralized Autonomous Organizations (“DAOs”) we may finally have an organizational structure with proper incentive alignment for anyone to create a chaordic organization.
What is a corporation? The word “corporation” derives from corpus, the Latin word for “body” or a “body of people.” According to Webster Dictionary it is a, “a body formed and authorized by law to act as a single person although constituted by one or more persons and legally endowed with various rights and duties including the capacity of succession.” Hock says,
“The truth is that a corporation, or for that matter, any organization has no reality save in the mind. It is nothing but a mental construct to which people are drawn in pursuit of common purpose; a conceptual embodiment of a very old, very powerful idea called community.
Healthy organizations are a mental concept of relationship to which people are drawn by hope, vision, values & meaning, along with liberty to cooperatively pursue them. Healthy organizations educe behavior. Educed behavior is inherently constructive.
Unhealthy organizations are no less a mental concept of relationship but one to which people are compelled by accident of birth, necessity, or force. Unhealthy organizations compel behavior. Compelled behavior is inherently destructive.”
Companies / corporations at their core are communities of individuals bounded together by shared ideology, mission, vision; and beyond that typically not much more than a piece of paper filed in Delaware.
While corporations have existed in one form or another from the time of the Justinian Roman law (527–565) until today, after thousands of years of technological progress, innovation, and globalization, we finally might have the appropriate construct to re-architect corporations / organizations; into community driven DAO’s.
What is community? Hock defines community as:
“Composed of things that we cannot measure, for which we keep no record and ask no recompense. Since they can’t be measured, they can’t be denominated in dollars, or barrels of oil, or bushels of corn — such things as respect, tolerance, love, trust, generosity, and care, the supply of which is unbounded and unlimited.
The nonmonetary exchange of value is the most effective, constructive system ever devised. Evolution and nature have been perfecting it for thousands of millennia. It requires no currency, contracts, governments, laws, courts, police, economists, lawyers or accountants. It does not require anointed or certified experts of any kind. It requires only ordinary, caring people.
In true community, unity of the “single one” and the “plural one” applies as well to beliefs, purposes, and principles. Some we hold in common with only part of the community. Others we may hold alone. In true community, the values others hold that we do not share we nonetheless respect & tolerate — either because we realize that our beliefs will require respect & tolerance or return, or because we know those who hold different beliefs well enough to understand & respect the common humanity that transcends all differences.”
The convergence of corporations & communities has existed since the advent of the corporation. As Hock mentioned some of these were healthy with shared sense of vision and value, and others were unhealthy, often driven together by necessity or force, but either way there’s typically some commonality that links most individuals together at a given corporation.
But what about the convergence of community & investing? Last summer we wrote about The Financialization of Everything where a new generation of investors has grown up in a world where everything from sneakers, to trading cards, to eSports virtual skins, watches, cryptocurrency, fractional art, real estate, private credit, equities, & now NFT’s etc… can all be invested in & speculated on, via a variety of different platforms and marketplaces; and as Howard Lindzon has recently said “speculation is entertainment.” Financial gains are one part of the equation, but for most it’s not the only thing; there’s also a semblance of tying one’s identity back to these communities as something bigger than themselves that they’re a part of.
We can’t look at the convergence of community & investing, without accounting for the macro landscape, and perhaps none of this should come as a surprise given where we are in the macro cycle, which we wrote about last month in, The everything bubble & TINA 2.0. As a result of $32T+ of fiscal & monetary stimulus we’ve seen significant price appreciation in everything from lumber, to used cars, home prices, global equity indices, meme stocks, VC backed companies, cryptocurrencies, NFT’s, etc…
While there’s ample capital in the system, one of the biggest questions is where does it all go given valuations & price appreciation? While “everything’s up,” one of the most persistent themes that has spanned asset classes is the concept of investing in companies, protocols, collectables, etc… that have an avid community or cult-like following.
What do AAPL, NKE, PTON, TSLA, GME, AMC, BTC, ETH, SOL, DOGE, SHIB, Jordans, cars, watches, art, sport collectables, wine, whiskey, cryptopunks and Donald Trump’s DWAC have in common? An avid and passionate community of followers, fans, users, etc… that’s willing to put their money where their loyalty is.
Reddit founder Alexis Ohanian said the r/Bitcoin subreddit community was one of the reasons why Coinbase looked viable to him back in 2012; “turns out building the community is more than half the battle.”
On Twitter we’ve seen celebrities / influencers like Jay-Z, Snoop Dogg, Serena Williams, Steve Aoki, Gary Vee, Jason Derulo, Logan Paul, 3LAU, all invest in and at one point use a Cryptopunk as their profile picture; representing some combination of an investment, entertainment, or social signaling. They aren’t alone, with hundreds of millions of dollars being spent on what some refer to as merely a “pixelated .jpeg.” These .jpegs come with social status, gated access to private communities, and over the last 10 months significant financial returns. But what is it about cryptopunks that has crossed the chasm from crypto into mainstream culture? It’s not as if these celebrities use cars, watches, or stock purchases as their profile pictures. Is there something unique about crypto that lends itself to the convergence of community & investing?
This isn’t relegated to crypto, and doesn’t need to be something that the corporation looks to intentionally foster. For example, looking at DriveWealth’s 3Q21 report the top 10 owned stocks in the US amongst their self-directed investors look very similar to those in APAC, LatAm, and EMEA. Most of which are companies with strong brands that users / investors have affinity towards, with a mixture of meme stocks that have captivated a global audience. Whether it’s TSLA, AAPL, AMZN, MSFT, NKE, or even AMC/GME, these shareholders are investing in something beyond DCF’s, target IRR thresholds, risk / rewards, and relative valuations.
There was no greater embodiment of this ”community investing” trend than the recent merger between DWAC & Trump Media group, valuing the company at a $875M EV. The stock traded up 357% day one & another 107% day two, ending the week +845.9% with a total EV of $8.2B for a handful of slides and the promise of the “Trump brand.” While some in the financial press tried to rationalize the move about what the team may build, and what % of Trump voters would pay $10/month for access to him, many now view it as a proxy to express a “pro-Trump view” and even more traded on the hope that others would.
Whether it’s Elon Musk on SNL talking about DOGE to the point where sell side analysts need to factor it into their estimates ahead of Robinhood’s quarterly earnings, Rally Rd setting a world record of $2.0M for the sale of the 1985 Super Mario Bros video game, GME trading at ~$12.9B, or Knicks fans (NSFW) acting like the won the NBA finals after a season opening double OT win against the Celtics, it all comes down to community, narratives, and speculation as a new form of entertainment.
Enter crypto where the convergence of community & investing is stronger than any other asset class.
It’s unclear who to credit with the coining of this phrase, but it’s become common across the VC & HF ecosystem, “follow the developers.” Following the “human capital” was something done for quite some time, and that used to be Wall Street (e.g., Goldman Sachs, Morgan Stanley, JPM), followed by Big Tech (e.g., Google, Amazon, Facebook, Microsoft), followed by fast growing startups (e.g., Uber, Airbnb) to faster growing startups (e.g., Stripe, Plaid, Coinbase, Robinhood, Doordash), and now into Web3.0 / crypto. These periods of human capital inflows have also corresponded with significant financial capital inflows; all while moving out the risk-curve for both. Per usual Hock said it slightly more eloquently:
“Without question, the most abundant, least expensive, most underutilized, and constantly abused resource in the world is human ingenuity. The source of that abuse is mechanistic, industrial age, dominator organizations and the management practices they spawn.”
Perhaps this is why we’ve seen such an influx of human capital into the crypto ecosystem. There is no industry more meritocratic than crypto. You can be a 15-year old developer in Nigeria, an MIT Turing Award winning professor, a high school dropout, or Nobel laureate, and for the most part you’re judged by your contribution to the communities you are a part of and nothing more. In discord, telegram, and signal chats, no one has the time to worry about your resume, political ideologies, country of origin, race, sexual orientation, etc… The only thing that matters is whether or not you’re driving the community and collective goals forward; whatever they may be.
While there are pockets of maximalism that are abundant (predominantly BTC & ETH maximalists) collectively there’s a lot more camaraderie and memes about “making it” with tons of “GMI,” “WGMI,” and “WAGMI” populating crypto twitter and private groups, rooting for the collective success. There isn’t this pervasive narrative that in order for someone to win, someone else has to lose, as there is in most other asset classes, and ironically this collective openness & support has become more vocal not less as the stakes have gotten larger & the market has grown in size.
Just as there are few if any more meritocratic industries than crypto, there are also few markets that are as narrative driven as the crypto market. This should come as no surprise given the ability for fast followers to utilize open-source code and iterate once concepts gain any bit of traction. The crypto market is venture investing with liquidity, combined with day traders, that’s global in nature, with greater retail participation than institutional, with behavioral finance on full display 24x7x365, that sits at the convergence of speculation & entertainment; all the while top human capital is flocking into the space at unprecedented rates trying to build new financial market & Web 3.0 infrastructure. Hock talks about the concept of the reduction of “life float” taking from the concept of “float” in finance he refers to as the reduction in time it takes for something to change from one form to another:
- First life forms appeared ~4.5B years ago.
- It took evolution ~½ that time (2.2B years) to make the first tiny step from the non nucleated to the nucleated cell
- It took ½ that time (1.0B years) to create the first simple vertebrate
- It took 500M years to produce primitive fish & reptiles
- In 200M years evolution produced dinosaurs, birds & complex plants
- In 100M years mammals
- The same pattern is apparent with respect to information float, and scientific & technology float
- Most importantly its’ relevant for cultural float. For most of recorded history it took centuries for customers of one culture to materially affect another, today what’s popular in one culture can sweep the gold instantaneously.
In an industry that’s built on the premise of being “open” & “permissionless” it should come as no surprise that “cultural float” is an incredibly small window, with fast followers abundant, copying ideas that work, iterating, and trying to build their own sense of community.
Narratives have been pervasive throughout the totality of crypto’s history. In 2018, Nic Carter & Hasufly put together a great visual of how Bitcoin’s narrative has changed over time ranging from e-Cash, to a P2P payments network, to censorship-resistant digital gold, a private & anonymous darknet currency, a reserve currency for the crypto industry, a programmable shared database, and ultimately an uncorrelated financial asset.
This inspired others to do the same for ETH ranging from Bitcoin 2.0, to a distributed world computer, DAO’s, crypto crowdfunding (ICO’s & STOs), utility tokens & collectibles, and open finance / DeFi.
Over the last 2 years there have been a few narratives that were not only pervasive but saw significant human & financial capital inflows, driving new communities namely:
- 2020- DeFi Summer
- 2021- Rise of alternative L1s, DeFi on those L1’s, and NFT’s
We expect 2022 to be the year of the DAO, and tie all of this together, but first a very recent history recap:
2020: DeFi Summer
In January of 2020 Total Value Locked (“TVL”) in DeFi was $600M, in May it was $700M; progress but still very much on the fringe of crypto (that was a good day for ICO’s in 2017). Then DeFi summer kicked off, terms like yield farming became common parlance and by Labor Day TVL was $7.0B or +10x from the start of summer, and by year-end it hit $21.5B. It felt astronomical at the time, but today at $233B, it looks like a blip on the long-term chart & has found real signs of product-market fit within the crypto industry.
Like anything else that shows signs of product-market fit, since DeFi started to go parabolic last summer we’ve seen mass experimentation & inflows of human & financial capital. DeFi Llama tracks over 570 projects with TVL ranging from several thousand dollars, to tens of billions of dollars and everything in between. 18 months ago you’d be hard pressed to find 30 teams working on DeFi primitives.
DeFi is no longer contained to the crypto echo chambers. Just last week Goldman Sachs wrote a report entitled Opportunities & Risks in Decentralized Finance.
One of the trends we’re more excited about in the coming years is the convergence of DeFi & FinTech, or “Embedded DeFi.” We’ll see some companies build on completely novel financial primitives never touching the legacy banking system, run on stablecoins with excess capital deployed across yield farming bots to optimize returns while balancing risks. Others will bridge the gap with the “DeFi Mullet” e.g., FinTech in the front & DeFi in the back. For all its innovation, the crypto industry has still struggled significantly with UX, and large Neobanks, Digital Wallets, and Brokerage products such as Cash App, Chime, Chipper Cash, Coinbase, eToro, Flink, NuBank, PYPL / Venmo, Revolut, Robinhood, Toss, Uala, etc… have 100’s of millions of users that they can onboard to this new finacnial market infrastructure, once the proper regulatory construct is identified.
2021: NFTs / Alternative Layer 1s / DeFi / Play-to-Earn / L2 / Sidechains
In 1Q21 NFT’s crossed the crypto chasm, becoming one of the first innovations to break into mainstream culture. In February NBA Top Shot started things off with $230M of sales, hitting $45.7M in a single day, you had Beeple sell his First 5000 Days for $69.4M at Christies (the third highest price paid for a living artist ever), and it culminated with an SNL skit that they ultimately auctioned off as an NFT, with most calling the top.
While it was certainly the top for NBA Top Shot, “OG” NFT’s like Cryptopunks really started to pick up steam this summer & early Fall, in addition to all the celebrities using punks as profile pictures, the story comes full circle back to Visa, which, re-rated the “floor” buying a punk for $150,000 at the end of August.
Everything in the world has a supply function relative to price (with the exception of BTC); when there’s demand for a product, the market is very good at creating relentless supply, and that’s the current state of the NFT market. It feels like each day there are hundreds of NFT drops that are being “minted” and sold out in mere seconds. We’re seeing copy cats ported across chains, coordinated pumps, etc… The excess will come out of NFT just like it did ICO’s and DeFi before it, but we’re starting to see real infrastructure being built behind the scenes to onboard creators, and non-crypto natives, which is exciting to watch for ‘22.
As DeFi continued to gain steam from 2020, and NFT’s increasingly became popular, there were complaints about low block space & ETH’s gas fees being too high. We saw many “ETH 2.0” competitors raise money in 2H17–1H18 that finally launched on mainnet in ’19 & ’20, which had their own community of investors & developers supporting them (some more than others).
Like many things in crypto the narrative mattered more than the underlying “fundamentals” and we’ve seen a material re-rating of L1 alternatives this year, with “$200B+” of value created. Those that felt as if they had missed BTC & ETH were looking for the next 10–100x+ return and looked towards alternative L1’s as the place to deploy capital.
This wasn’t just “value” in the underlying assets but DeFi / NFT’s have grown on these protocols as well. Take Solana which now has $12.5B TVL, and the most robust NFT ecosystem outside of ETH. Protocols like Saber, started this summer and have already amassed billions in TVL. Traction is happening much faster at this part of the cycle, as each new community has the benefit of following what worked & didn’t in those that came before it. We’re also starting to see the benefits of some of these other chains, doing things that can’t be done on ETH such as Serum’s on-chain order book on SOL, and the countless front-ends / derivative products that have been built on top of it.
ETH has one of the strongest communities in crypto and for good reason; the ICO was largely accessible to anyone that wanted to participate (although there was likely <7,500 unique participants), and given the price appreciation it made a lot of early supporters incredibly wealthy. This has provided ETH with an arm of developers who will work on ETH forever to fulfill the original mission. While there are endless positive aspects of that community, like most there’s also some drawbacks and ETH maximalists are abundant. Just as early Bitcoin proponents were skeptical & pushed back on ETH, history has rhymed and many early ETH proponents refer to most other L1’s as “vaporware”, or try to pushback on the “centralization” of competitors. ETH has been working on ETH 2.0 since 2015, and as part of that work, the community is working on countless paths towards increasing scalability & reducing fees through a variety of L2’s. While not a core theme of 2021, in response to the rise of competitive L1 alternatives, L2’s continue to see more capital & interest from dApp developers with Polygon & Arbitrum aggregating $5B in TVL.
If NFT’s crossed into mainstream culture, “Play-to-Earn” crossed into mainstream life. Axie Infinity was doing $11,500 in “revenue” per month in Dec of ’20, they left October at $144M, with aggregate revenue in excess of $900M now. There are millions of players around the world, with as much as ~60% of them from the Philippines. These individuals are often earning well in excess of minimum wage, and it’s been noticed so much so that the government is looking to find a way to tax earnings. It’s no surprise we’ve seen a lot of funding for subsequent play to earn communities. NFT games will become increasingly popular, and just as DeFi has attracted talent from TradFi, we’re starting to see founders with backgrounds at top game studios, coming into the industry.
Axie has been one of the most interesting case studies of community. It costs 3 Axies to play the game which has become very expensive for many to play a game they don’t even know if they’ll like, while others simply can’t afford the “buy-in”. The market developed the concept of “scholarships,” where a manager / breeder provides Axies to others enabling them to earn SLP, and in return often pay some % of their earnings back to the scholarship provider (ranging from 30–50%).
Enter YieldGuide Games (“YGG”) which is a play-to-earn gaming DAO, for investing in NFTs used in virtual worlds & blockchain-based games. The organization’s mission is to “Create the biggest virtual world economy, optimizing its community-owned assets for maximum utility & sharing its profits with its token holders” The YGG DAO utilizes smart contracts to automate the functions fo the guild including reward issuance, and eventually, advanced functions like NFT rentals.
The DAO token holders are able to vote on decisions related to the guild’s business & governance, as well as participate in DAO-related activities. The DAO’s assets (tokens, NFT,s virtual land parcels) are managed by the YGG Treasury, and will require sign off by DAO participants.
If this sounds like a foreign language, many of these terms are likely to become much more common over the next year just as AMM, YieldFarming, Pools, LP tokens, etc… have become over the past year.
2022 Return of the DAO
In the forward of Hock’s book Peter Senge predicts we could be at an inflection point of a democratic age where “we will need a willingness eventually to embrace the seeming chaos of an organization that no one runs and where we all share responsibility.”
If we didn’t know he wrote that in 2005 it could have very easily been about DAO’s. DAO’s are the ultimate culmination of community, investing, and the chaordic organization. The Internet has always been a place where people went to find community, or as Seth Godin has written & spoken at length about their “tribes.” From AOL & Yahoo chat rooms / message boards, to Facebook / WhatsApp / and Telegram groups; whether it was cooking, comic books, climate change, open source software, or the Mets, people found solace talking to other people who shared a common interest.
Both Web 1.0/Web 2.0 allowed you to find that community, with Web3.0 / DAO’s you can own a piece of that community. DAO’s provide an elegant structure to bond a decentralized group of strangers together around a common mission, vision, and set of values, with incentive alignment, in a trustless fashion. We expect to see countless experiments with DAO’s, decentralized social networks & communities.
DAO Introduction & History
What is a DAO? Linda Xie provides an oft cited definition of a DAO or a “Decentralized Autonomous Organization” as a “group organized around a mission that coordinates through a shared set of rules enforced on a blockchain.”
While that may sound different than the chaordic organization concept Hock pioneered in the 1970s, or what Senge was describing in 2005, at its most simplistic level they are all discussing the same concept as a new way to govern communities / organizations, share value, and align interests. The biggest difference between DAO’s & corporations is the emphasis on decentralization, which drives decision-making power that belongs to anyone and everyone, without the hierarchical structure, and politics seen in more conventional organizations.
DAO’s are “default open.” While corporations might provide varying degrees of gated access in share drives, slack channels, etc… most DAO’s are open not just for community members but for the world to see; the definition of “building in public.” Imagine a board meeting that everyone could see (this is something Hock pushed for), or product sprints that the world could view.
DAO’s enable individuals to collaborate, manage projects, own assets, invest, and operate like any typical corporation, but this concept of openness, transparency, and governance is at the core of who they are and what they do. This means any member in the community has access to information which includes decisions around: (i) roadmap (ii) governance (iii) budgets, etc…. which are often governed through the combination of (i) token incentives, (ii) commitments (time & monetary), and (iii) voting power (typically ⅔ vote).
DAO’s are not a new concept in the crypto community, in fact DAO’’s are mentioned in the opening paragraph of the ETH white paper in 2013 (linking to an article Vitalik wrote for Bitcoin Magazine about bootstrapping a DAO) and Vitalik continued writing about them in 2014 saying, “it is safe to say that ‘DAOism’ is well on its way to becoming a quasi-cyber-religion.” He’s not necessarily wrong, but was definitely too early in his proclamation.
Vitalik highlighted that over the past 200 years, the industrial revolution, and technological innovation allowed us to replace human labor with machines on a large scale. For the most part, this automated “the bottom,” removing the need for rank & file manual laborers, and replacing them with professionals to maintain the robot. He poses the question, “can we approach the problem from the other direction: even if we still need human beings to perform certain specialized tasks, can we remove the management from the equation instead?”
Arguably the most famous DAO to-date is still The DAO, which launched in April 2016 as a “decentralized venture capital fund.” Members contributed ETH & received DAO tokens in return that could be used to vote on which protocols, projects, companies, etc… would be invested in; ultimately raising 10.7M ETH at the time worth $120M (today that would be worth just under $45B). The only human involvement came from a group of volunteers called “curators” who would check the identity of people submitting proposals, to ensure projects were legal before “whitelisting” them. In July of 2016 a user was able to exploit a vulnerability in the DAO code, hacking ~⅓ of the funds into a subsidiary account. The ETH community decided to hard-fork Ethereum to restore funds to the original contract (you can see the irony in the decentralization criticism of other L1 chains) resulting in a fork of ETH into Ethereum Classic, and ending the DAO, and for a long period of time investor interest in DAO’s.
On the topic of decentralization, one of the things the crypto community fails to discuss with any nuance is that decentralization isn’t binary. There are dimensions of decentralization & we’re seeing different L1 protocols experiment with different levels of decentralization. Looking at traditional corporations one can argue they too experiment with different levels of decentralization. Sure there’s a CEO and a Board of Director, and shareholders, but how many day-to-day decisions is Jamie Dimon making about JPM’s commercial banking, investment banking or sales & trading activities? He delegates most decisions to people and teams empowered to make them. Those people are incentivized either via cash compensation, equity, or some combination therein.
The problem with more hierarchical structures is incentive alignment. If the head of trading is compensated based on trading P&L are they more or less likely to take on incremental risk, which could be to the detriment of the firm as a whole? If Credit Suisse’s prime brokerage unit is compensated based on AuM, and working along their swap desk for financing, that might result in Bill Hwang / Archegos generating notional exposure in excess of 10x his capital base?
How do DAO’s fix incentive alignment? It’s too early to say if they do or don’t, but community members are rewarded with tokens based on investment, participation, contribution, and broader activity. For most DAO’s any token holder has the ability to submit proposals, vote, and share in the upside. Doing something solely in the interest of a “proposer” likely wouldn’t garner the ⅔ vote needed to pass; imagine if ⅔ of CS employees had to vote on whether or not to continue to extend Hwang leverage? Or if ⅔ of JPM had to approve the CDS positions from the London Whale?
DAO’s & Employment:
Some have referred to DAO’s as the “creator economy for knowledge workers.” In a world of remote work, with the average tenure for a typical employee continuing to trend lower, DAO’s enable both employees / employers to “try before you buy.” This no longer ties individuals to a single company, but may enable them to tie themselves to both a functional expertise (e.g., UI/UX design, finance, security, law, etc…) and an end-market of interest (e.g., DeFi, Web3.0, etc…) allowing them to operate seamlessly between DAO’s.
DAO’s such as VectorDAO have emerged, which is a group of designers that go out and help startups design their front-end in return for allocation in round or tokens. While some might view that analogous to a design firm / agency that’s compensated in equity, these members often become more closely integrated in the communities through which they assist.
Some will develop functional expertise in the core areas of a DAO including community design, governance, incentive alignment, etc…
DAO’s & Investing:
It only makes sense that one of the areas the market is most excited about is the re-introduction of investing DAO’s.
The “next” YC will likely be a DAO. There’s no reason for that level of centralization in a single entity, with just a handful of individuals reaping the economic benefits. The core value proposition of YC beyond the “signaling” is the community of founders in your cohort, the 3,000+ companies & 6,000+ founder alumni, the Bookface platform, “expertise database,” curated founder communities by category, the founder slack, an embedded client base, and years of learnings. A properly constructed DAO, with member vetting, would be a much more elegant solution to this if you could incentivize the community members to be accretive to the “service” element. What if those 6,000 alum were the ones responsible for backing the next generation of companies, and as opposed to a stale slack channel they might have turned notifications off for, they were actively engaged members due to their stake & economic alignment?
There’s also the ability to fund different types of companies via a “YC-esque” DAO construct. Historically end markets like Biotech, Climate Change, and Deep Tech more broadly haven’t found strong PMF in YC because the “playbook” is very different, they are capital intensive, and it the feedback loops are much slower. Within a DAO construct, the community self-selects in to these types of missions. For example, Klima DAO recently launched as a “collective of environmentalists, developers, and entrepreneurs aiming to pool their knowledge & expertise to drive changes in the carbon markets.” They look to serve as a bridge between Web 3.0 and the traditional carbon offset markets, enabling flows of capital to be directed to high-impact carbon projects. Their KLIMA token is an algorithmic reserve currency backed by carbon offsets, with the treasury backing every Klima token by at least one tonne of carbon offsets. New KLIMA can only be minted as long as there are enough tons in the treasury to back them. The protocol profits by issuing bonds, e.g., if KLIMA trades at $100 and the price of carbon is $10, a user must bond ~9.5 tonnes of carbon to mine one KLIMA, assuming a 5% discount. This is a prime example of the convergence of community focused on a common mission / vision (carbon offset) & investing. Right now there are ~1,088,345 tonnes of CO2 in the Treasury, so having a real world impact along the way (assuming they are accepting the “right” types of carbon credits which is a separate story altogether).
We’re going to see more and more of these “Service DAO’s” which provide DAO to DAO integrations, and DAO to DAO sales. These DAO’s will have specializations such as VectorDAO in design, and countless other areas of functional expertise. Some believe this will “cannibalize” the venture landscape more broadly as DAO’s provide services to each other, in exchange for tokens, aligning incentives for mutual success, and a community of individuals bought into that success, rather than a handful of partners at a given fund. The VC industry has heard this before, first it was crowdfunding, and then it was ICO’s, that we’re supposed to disrupt them. We’ve seen the early stage disrupted by Solo GP’s, rolling funds, super angel rounds with consortiums of founders, and the later stage by hedge funds / cross over funds investing earlier & earlier, add DAO’s to the mix. Top tier VC’s that are truly value add to founders will always have a prominent role in the ecosystem, but round composition / allocation is already starting to change for crypto native companies.
You’ll have DAO’s consisting of Web 3.0 & Web 2.0 founders, which if structured properly would be a rolling fund on steroids. You’ll have operators band together with various domain expertise, and likely new ideas spurn from these investing DAO’s themselves.
The LAO is an example of a more recent DAO focused on investing with 15,119 ETH contributed thus far ($62.3M), having made investments in over 100 different protocols, some of which are public on their website & others are private to non LAO members. Even in a VC ecosystem awash with funding, a $60M+ fund to invest in the earliest stage crypto protocols is an impressive raise.
Different DAO Structures:
The DAO Landscape / ecosystem is constantly changing & evolving with new categories seemingly created by the day. DAO is becoming a catch all term that can mean both “community” and “investing” concurrently.
Just as there are multiple types of DAO’s (Service DAO’s, Investing DAO’s, Protocol DAO’s, Creator DAO’s, Collector DAO’s, Curator DAO’s, Gaming DAO’s, etc…) there will be endless experimentation as it pertains to openness of information.
We’re starting to see some DAO’s gated only for token holders, other channels within Discords might be gated by quantum of ownership, length of ownership, contribution, etc…. We’re seeing different voting structures, presumably we’ll see the same thing with different application structures, as well as what it takes to continue to be a member of a DAO, what happens on-chain, vs. what is off-chain will continue to be debated, etc...
Given the ability for DAO’s to self-organize in real-time, governance experimentation, and the alignment of output / community value, tied to economic reward is going to be fascinating to watch play out.
Will DAO’s serve as a structure to combat fake news? Can something like The Athletic be built in a chaordic fashion, without receiving venture funding? Will affinity groups self organize and device away for the most active community participants to be compensated?
After the 2016 hack of The DAO, it took quite some time for them to regain the interest of human & financial capital. According to DeepDAO there are currently 169 DAO’s, with $12.8B in AuM ($5.3B of which is new this month), $1.9B over the last week. This chart looks very similar to some of the DeFi TVL charts from last summer; on the precipice of exponential growth.
Many of these communities are still in their infancy with just 47 DAOs over the $1.0M threshold. Right now we have this new-ish structure, that the market doesn’t quite know what to do with, but like everything else in crypto, once a group of individuals finds product market fit, you’ll be sure to see fast followers.
What’s Missing From DAO’s?
We’re still in the early inning of DAO’s. While we said corporations are merely communities of individuals bounded together by a piece of paper filed in Delaware, they are also able to perform three basic functions:
- Enter into legal contracts
- Benefit from limited liability
- Pay Taxes
Today there’s no obvious path for DAO’s to do this on a federal level in the US or globally. While we’ve seen some initiatives at the state level, e.g., Wyoming legislature granted legal company status to DAOs, provided they are organized as Wyoming LLCs., there’s a long way to go before they will be recognized as formal legal entities.
At their core DAO’s & communities at large need:
- A place to converse
- A way to manage money / resources
- A way to vote
Platforms that provide these services will be critical. We need people to continue to work on the infrastructure layer of DAO’s, providing a “Shopify/Wordpress” experience, allowing any group in a no-code environment to launch and create their own DAO’s, if nothing else for the purpose of exploration. Telegram groups that have been talking about crypto for years? Create a DAO and invest alongside each other. Fantasy sports leagues? Finally enable real-time parallel sports wagering. Sports card fans? Go out and buy that high-end Jordan card that you all think is undervalued. The concept of the DAO operating system is important. Templatizing the difference between an Investing DAO, a Social DAO, Collector DAO, Service DAO, etc… needs to be done in a way in which the code has been audited and stress tested. Between Stripe Atlas & LegalZoom anyone can set up an LLC today, for DAO’s to take hold, the same infrastructure needs to be in place.
If DAO’s are truly able to replace or ride shotgun along corporations as a primary place for individuals to work, the concept of benefits for core members will be important (e.g., healthcare, payroll, retirement, etc…). When is someone considered a “core” team member, vs. merely a participant? How is time allocation / impact measured (if at all)?
Governance experimentation is going to be critical. How are new & existing members assessed? Where is the ideal place for DAO’s to converse? What about token economic incentives?
Similar to DeFi, the number one drawback of DAO’s today is the lack of regulatory clarity. There’s a difference between people volunteering with DAO’s due to ideological alignment, for incremental economic upside, vs. committing themselves full time to work for a DAO, without the ability to enter into contracts, pay taxes, legal liability, etc…
There are countless benefits to decentralization, flat hierarchy, default openness & transparency; however there are also benefits to hierarchy & centralization. Companies like Apple, Amazon, Facebook, Google, & Microsoft, have amassed trillions of dollars of market cap not just within the construct of a centralized entity, but predominantly founder led, with larger than life personalities, responsibility for key decisions. Centralization allows for decisions to be made definitively, without discourse or debate. Theoretically when management knows all the prospective uses of capital / product roadmap, this should lead to more optimal resource allocation. If DAO conversations are happening in private chats / beyond gated channels, when proposals are put forward to vote, do all the members know what’s in the collective best interest?
For investing you often hear about the concept of being “non-consensus and right.” Definitionally that can’t happen in an Investment DAO if you require ⅔ vote for a proposal to pass, leading to group think. If you bet the right end market; this might not matter. What about individuals that look to circumvent the DAO and invest direct? How do you avoid the adverse selection process that most crowdfunding platforms have succumbed to?
While a world of individuals being able to seamlessly jump between organizations to follow their passion, and concurrently work on multiple projects sounds ideal to some, it’s a nightmare for others. This may overwhelm them, and deter what initially attracted them to these communities to begin with. COVID-19 was a societal accelerant in many ways, but we’ve seen a notable drop off in labor force participation. If a group of individuals can bounce seamlessly between multiple “white collar” jobs, what happens structurally to unemployment?
Without the convergence of the economic alignment part, are DAO’s much different than Web 2.0 communities? While “speculation is entertainment” should the convergence of community & investing be so closely intertwined?
We’re so early in the experimentation process we still don’t know what we don’t know. What will happen when there are contentious decisions with significant capital on the line? This is why we need to see mass experimentation, to determine what works and what doesn’t.
The concept of a chaordic organization clearly isn’t new, nor are DAO’s, but in 2022 we expect to see record levels of human & financial capital, forming communities & DAO’s to push Web3.0 & DeFi forward. DAO’s are the ideal structure to bring chaordic organizations to the masses & we’re excited for the experimentation that lies ahead. While there’s been a ton written on DAO’s, just like DeFi & NFT’s, it’s more important to start doing. Join Discords, learn, become part of these new communities, contribute, etc…
If anyone’s building in this space let us know.
Other Dee Hock Quotes / Lessons
Highlighting some other quotes from Dee Hock that although written predominantly in the late 1990s / early 2000s, show Hock’s ability to see around corners, with near perfect articulation for Bitcoin, Web 3.0 DAO’s, and crypto more broadly:
- “Realization slowly dawned that money had become alphanumeric symbols recorded and transported on valueless metal & paper. This still left a gap in understanding, for symbols themselves had no value. Anyone could write down letters and numbers; printing presses & computers could spew out infinite quantities. It eventually emerged. Money had become guaranteed alphanumeric data expressed in the currency symbol of one country or another. Thus, a bank would become no more than an institution for the custody, loan, and exchange of guaranteed alphanumeric data.”
- “If electronic technology continued to advance, and that seemed certain, two-hundred year old banking oligopolies controlling the custody, loan, and exchange of money would be irrecoverably shattered. Nation-state monopolies on the issuance and control of currency would erode. It mattered little that traditional banks or governments might be the settlers of last resort — the ultimate handlers of huge, accumulated transfers of monetary value. The vast preponderance of the system would fall to those who were most adept at handling and guaranteeing alphanumeric value data in the form of arranged particles of energy.”
- “I knew that no bank could create the world’s premier system for the exchange of value. No hierarchical stock corporation could do it. No nation-state could do it. No known organization could do it. But what if a fraction of the resources of all the financial institutions in the world and a fraction of the ingenuity of all people who worked for them could be applied? Jointly they might do it, but how?”
- “If institutions have no reality save in the mind, might their genetic code have something to do with beliefs — with purpose and principles? What is the nature of a principle?”
- “In light moments, I now refer to it as the theology of chaordic organization writ simple. Heaven is purpose, principle & people. Purgatory is paper and procedure. Hell is rule and regulations.”
- “Corporations as they were bear little resemblance to corporations as they now are. The original concept of corporation was a collective entity intended to attract people and resources needed to realize a desired social objective beyond the ability or resources of a single individual.”
- “Over & over again I explained the purpose, principles, concept, and structure and repeated my mantra: ‘You will not like everything about the organization, and you will not like everything it does. But one thing on which you may depend is that it can be trusted. No member of any class will have greater or lesser rights than any other. No director will have a greater or lesser voice. Management will have no control over composition of the oard. The minimal autonomy necessary to the common good will be surrendered by each member to yourselves as a cooperative whole. You the participants, and you along, will make all decisions through the most open and equitable structure that hundreds of participants could device. Deliberation and debate will be open to all and controlled by none, particularly management.”
- “No part knew the whole, the whole did not know all the parts, and none had any need. The entirety, like millions of other chaordic organizations, including those we call body, brain, forest, ocean, and biosphere, was self-regulating.”
- “It was just another attempt to centralize power & control. It had always seemed to me that one of the principal tricks of evolution was to preserve the substance of the past by clothing it in the forms of the future. Creating a single, monopolistic, electronic payment system seemed precisely the opposite — an attempt to wrap the substance of the future in order to perpetuate past forms It was contrary to all my beliefs about the nature of organization & the possibilities inherent in electronic communications. Exchanging authorization information & monetary value in the form of electronic particles out to be a highly decentralized, competitive business. Trying to design & impose a single, monolithic system on such an essential flow of information seemed absurd.”
- “Three months before the next annual meeting of members, I screwed my courage to the sticking point and asked the board for permission to conduct each board meeting that was contiguous with the annual meeting of members in open forum, with the board surrounded by the people they were elected to serve.”