New Organizational Paradigm An In-Depth Explanation of the Various Aspects of DAO

An in-depth explanation of DAO's various aspects, a new organizational paradigm.

Author: 0x00pluto

Some of my friends who used to work in web2 companies asked me what DAO is. They hear this concept every day and hope to find a more comprehensive introduction to popularize it. So, I decided to research this topic:

Question: What is DAO?

In the process of digging deeper, I found a lot of articles and materials online (special thanks to the authors of these articles), so I organized these materials according to their structure.

On one hand, I hope it will be useful to everyone, and on the other hand, I want to summarize and improve the learning effect.

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1. What is DAO?

1.1. Definition of DAO

DAO stands for Decentralized Autonomous Organization, which means a decentralized autonomous organization in Chinese. To understand this concept, it is necessary to analyze its three components.

The first time DAO was formally introduced as a concept and defined in a document was in the initial version of the Ethereum whitepaper. Vitalik classified decentralized organizations into two types in the whitepaper, DO (decentralized organization) and DAO (decentralized autonomous organization). Autonomous refers to an organization that relies entirely on code deployed in smart contracts to achieve continuous and independent operation without external interference.

In the future, more advanced mechanisms for organizational governance may be implemented; it is at this point that a decentralized organization (DO) can start to be described as a decentralized autonomous organization (DAO). The difference between a DO and a DAO is fuzzy, but the general dividing line is whether the governance is generally carried out via a political-like process or an “automatic” process.

In the future, more advanced mechanisms for organizational governance may be implemented; it is at this point that a decentralized organization (DO) can start to be described as a decentralized autonomous organization (DAO). The difference between a DO and a DAO is fuzzy, but there is a general dividing line to consider – whether governance is carried out through a political-like negotiation process (DO) or an “automatic” process (DAO).

Ethereum whitepaper version 2014.12

1.1.1. Decentralized

Compared with the common forms of organizational management today, DAO has obvious decentralized characteristics. However, centralization and decentralization are not mutually exclusive. Many DAO organizations rely more or less on centralization to start or maintain and do not achieve absolute decentralization. Therefore, it is more accurate to understand it from the perspective of freedom, that is, to show organizations with a clear scale of decentralization.

1.1.2. Autonomous

“Autonomous” is often translated as “自主” in Chinese, which is also an important word in my past few years of study and work. It represents the “A” in DAO and the “A” in the concept of autonomous world, and also represents people’s expectations for artificial intelligence – autonomous agents.

As a new direction, people naturally have different understandings of autonomy. What exactly is autonomy? Is the meaning of autonomy the same in different fields? Does absolute autonomy exist?

Today, let’s take apart the past and present of this word.

Autonomous – evolved from the combination of the two Greek words “Auto” and “Normos”. “Auto” in Greek means “self”, while “Normos” comes from the Latin word “Norma”, a ninety-degree square used by carpenters. In its original meaning in ancient Greece, “Autonomous” referred to the authority to self-govern, establish its own laws, and not be controlled by larger governing bodies.

Ancient Greece was not a unified nation like modern countries. It was composed of numerous city-states (polis), each being an independent political entity with its own governance structure, laws, and customs. Different city-states had different forms of government, for example, Athens had democracy, while Sparta had a mixture of oligarchy and monarchy, and they often competed or conflicted with each other. The term “autonomous” originated from this period, reflecting the desire of these city-states and their citizens to maintain their unique identities, governance structures, and ways of life in a decentralized and competitive environment.

Over time, the concept of autonomy began to be applied to individuals, referring to the ability of individuals to act according to their own principles or beliefs. The book “Sovereign Individual”, regarded as a classic in the crypto community, extensively explored the topic of individual autonomy from economic and technological empowerment perspectives.

As technology continues to advance, the term “autonomous” has taken on a new meaning – “machines or systems that can operate without direct human intervention or external control”. Today, “autonomous” is often associated with technology, such as autonomous driving systems. These systems operate autonomously and do not require continuous human supervision. This modern interpretation still carries the core idea of “self-governance”, but its background far exceeds the imagination of the ancient Greeks.

The changing meaning of the word “autonomous” demonstrates how culture, technology, and society shape and change the public’s perception.

1.1.3. Organization

Typically, DAO is seen as a decentralized company. Indeed, understanding DAO from a corporate perspective has business and practical significance. However, it is important to clarify that DAO is not a specific organizational entity, but rather a generic organizational form. DAO can be not only a company, but also any organization that requires human participation, such as cooperatives, online platforms, communities, etc.

1.2. Why DAO Emerged

The structure of teal organizations is decentralized, characterized by self-organization and self-management, with small self-governing teams collaborating to achieve common organizational goals. Currently, many companies are seeking development by transitioning to this new organizational structure.

1.2.1. Organizational Paradigm Development

Reaction – Red Paradigm: In the initial stage, a single family, dozens of people, a stage of undeveloped self-awareness, hunting for food, no division of labor, no leadership.

Fantasy – Magenta Paradigm: The stage of consciousness, small families, hundreds of members. Self-differentiation, simple cause-and-effect relationships, no abstract and categorization of cognition, no large numerical concepts. Death is not real. No organization exists.

Impulse – Red Paradigm: The chieftain and the embryonic form of the empire, the emergence of organized life, self-awareness completely inflated, self separate from the world of others. Death is real. The world is full of danger, force, and power. The way of thinking is either black or white, strong or weak, you or me. Division of labor becomes possible, with leaders, soldiers, and efforts.

Compliance – Amber Paradigm: The age of agriculture, state and civilization, institutions, hierarchical systems, and organized religion. Able to understand cause-and-effect relationships and grasp linear time, anticipate the future. Agricultural development leads to the transition from chieftain to state and civilization. Awareness of others’ feelings and ideas, Piaget. Self-discipline and self-restraint development, moral development. Static worldview.

Achievement – Orange Paradigm: A new appearance, effectiveness replaces being the criterion for decision-making, standards of efficiency and effectiveness. Enhanced cognitive abilities guide action. Enlightenment and the industrial revolution emerge, and World War II occurs. Development and enhancement of free will.

Pluralism – Green Paradigm: The standard of “effective or ineffective” replaces the amber paradigm’s absolute truth of “right or wrong”. Upholding fairness, equality, harmony, community, cooperation, and consensus, a sense of belonging. Breaking tradition, overturning caste, social hierarchy, patriarchy, institutionalized religion, and structures that need to be dissolved. Although orange still dominates in today’s business and politics, green is very prevalent in postmodern academic thought, non-profit organizations, social workers, and community activists. People who act from a green perspective focus more on relationships than results.

Evolution – Teal Paradigm: Characterized by self-organization and self-management, small autonomous teams cooperate to achieve common organizational goals. Overcoming self-fear; guided by internal legitimacy: the measuring criteria for decision-making shift from external to internal; life is a journey that starts gradually: with ambitions, but not ambitious; shedding social masks, constantly growing towards one’s true self, driven by inner force; based on strengths: paying more gentle and practical attention to limitations and living in harmony with them, replacing judgment with empathy and appreciation, shifting from a problem-solving perspective to a perspective of unleashing potential; gracefully facing adversity: focusing on experiences rather than mistakes, changing into tension for personal growth; wisdom beyond rationality: deepening the experience of various states through regular practice; pursuit of wholeness: focusing on the bigger picture, realizing that we are all part of a larger whole; integrity towards life and the integrity of nature: finding a more authentic and humble position for humanity in the universe;

1.2.2. Organizational Forms

Red Organization: Impulsive – an upgraded version of the magenta paradigm. It uses modern tools and ideas. The use of continuous force, no formal registration within the organization, no job titles, not conducive to expansion. It is powerful but fragile, with an absolute leader myth. It is not good at planning and strategy, but reacts quickly to threats.

Amber Organization: Medium to long-term planning, stable and measurable organizational structure. Large systems emerge: large irrigation systems, pyramids, the Great Wall, etc. The development of colonial shipping, commercial warehouses, and plantations, the emergence of Catholicism, etc. The Industrial Revolution occurred. Government agencies, public schools, religious organizations, and armies developed. The development of processes and supply chains, enhanced planning. The development of hierarchical systems, the emergence of global organizations, strict separation of planning and execution, and the emergence of institutions. The emergence of social areas, enhanced identity roles, and relativity.

Orange Organization: Religion, multinational companies – Walmart, Nike, Coca-Cola, are deeply influenced by the “achievement – orange” worldview in terms of architecture, practice, and culture. There is a change in scale, thanks to innovation, responsibility, and the breakthrough of the elite system. The organization is a machine, and orange also has its dark side – innovation and measurement standards (money and society).

Green Organization: Abolish power and hierarchical systems. If the inequality of power always leads to the rule of the upper level over the lower level, then let’s abolish the hierarchical system and give everyone equal power. Let all employees hold company shares in the same proportion, and all decisions must be reached by consensus. No one is in a leadership position (or if necessary, leadership positions rotate). There are three breakthroughs on the orange paradigm: empowerment, value-driven culture, and compelling purpose, and a multi-stakeholder perspective (emphasizing social responsibility).

Teal Organization: Three major breakthroughs: self-management, wholeness, and purpose as evolution. Teal organization model: holacracy, removal of middle management (replaced by coaching roles), minimal functional departments, minimal bureaucracy, team coordination, and knowledge sharing. Self-management: The key to effective management is a system based on peer relationships, which does not require consensus or hierarchy. Wholeness: Teal organizations invite people to show their inner wholeness and work with their “whole selves”. Purpose as evolution: Teal organizations are seen as living entities with their own sense of direction. Organization members are invited to listen to and understand what the organization wants to become and what purpose it serves, rather than attempting to predict and control the future.

1.2.3. Uniqueness of the Blue Organization Structure

• Self-managed team: Does this mean there are no managers? It can be said yes or no. The blue organization operates based on the principle of peer relationships, where everyone has decision-making power over their own work, but also has a responsibility to collaborate with others to obtain the support needed for success. In short, employees self-manage and there are no managers overseeing every detail of their daily work.
• Freedom of speech: Create an environment where employees have the ability and willingness to express themselves, thereby bringing creativity, passion, and productivity.
• Evolutionary organizational purpose: The employees of the blue organization are committed to meeting the needs of end users or customers. They prioritize and make decisions about their work based on whether the results can help the company meet customer needs in the most effective way. Therefore, the blue organization is dynamic and constantly evolving, able to quickly respond to customer feedback in a rapidly changing market.

2. What are the differences between DAO and traditional enterprises?

2.1. Differences between DAO and traditional enterprises

2.1.1. Formation Method

The biggest difference from a traditional company is that DAO organizations do not come together through legal contracts. The core framework of DAO is rooted in “community.” DAO itself generally does not have a formal leadership or hierarchical system. Core decisions are made through blockchain voting based on community opinions. Members of the organization voluntarily provide value within the community and receive incentives in the form of community tokens.

2.1.2. Trust Mechanism

The core advantage of DAO is that the organizational rules are recorded and executed through code stored on the blockchain network, following the principle of “Code is law.” Based on this, the barriers and processes for establishing trust are eliminated, allowing organization members from around the world to participate in the organization under programmatic constraints. “Building trust through technology” fundamentally reduces the time and economic costs of establishing trust between members and between members and the organization.

2.1.3. Information Transparency

DAO is highly transparent in terms of information. Most project codes are open source, and any user can access all the information of the organization. Compared to traditional companies, DAO does not set information barriers, which maximizes internal competition within the organization. Members with high abilities and enthusiasm in the community are more likely to gain influence and support from other community members, leading the development of the business.

2.1.4. Goals, Vision, and Participation

DAOs are generally established with specific purposes, but they do not necessarily revolve around profit, which is fundamentally different from traditional companies. DAO is in a free and open form, where users can join and leave at any time. At the same time, the boundary between participants and owners disappears within DAO members, and participants are generally token holders. In addition to the rewards obtained from participating in building projects, participants can also share the economic benefits brought about by the development of the organization, which further strengthens organizational consensus.

This leads to fast liquidity of DAO personnel and resources, but at the same time, the liquidity continuously filters members, strengthening the consensus of the DAO itself. In this process, the DAO develops rapidly, and participating members can gain economic benefits from the appreciation of tokens they hold or corresponding NFTs similar to membership cards.

The essence of DAO lies in a new form of organizational form that uses tokens to incentivize and quickly consolidate and strengthen consensus on the basis of blockchain technology. DAO is revolutionary in terms of improving organizational efficiency. Imagine a mature company with 1000 employees, where only a few core members and management fully dedicate themselves to the company’s operations with an owner’s mentality. The other employees are more or less like well-planned components, and it is already very good if they can complete their assigned tasks on time and in the required quantity (this is related to the design of the incentive mechanism of the company, but the incentive mechanism itself is a cost). However, for a DAO with a stable membership of 1000 people, with consensus, clear division of labor, and everyone actively contributing their time, energy, and resources to the community, the vitality and capabilities that explode will be unimaginable.

2.1.5. Organizational form

DAO does not require a tightly-knit organizational structure but makes decisions in a decentralized manner. Unlike companies, DAO’s decisions are made collectively, not by the CEO or top management. Rule changes and execution are done in one step. In fact, members who own or have a specified number of native DAO tokens can propose changes to smart contracts, initiate ideas, vote on them, etc. The specific methods vary depending on the specific DAO, thus promoting the development and growth of the DAO.

We can see that no matter how flat a company’s governance structure is, the core purpose of company operations is still to create maximum benefits for shareholders. This to some extent inevitably leads to inconsistency between employees and management in terms of their positions and subjective initiative in their work. DAO relies on voluntary labor of its members based on established consensus, and the quality of labor is exponentially improved.

Secondly, the actual owners of traditional companies are investors, and good companies generally close the doors to individual investors who want to join early. If a company succeeds, all the value belongs to the investors, and employees can only receive limited labor compensation. However, for DAO, each member is both a worker and an owner of the organization, and the distribution of benefits and value is ensured through code, and the decision-making and operation of the organization are completely transparent. In a way, the form of DAO is a more anti-capitalist organizational model, as long as tokens can be legally held.

2.2. Characteristics of DAO Work

2.2.1. Voluntary Commitment is Required

Since the name of DAO is “Decentralized Autonomous Organization,” there are no specific authorities. In a “company,” the “CEO” makes decisions and issues instructions to the “employees.” In a “DAO,” there is no “CEO” to begin with. Of course, there is no concept of “employees” either. In a DAO, the pyramid structure is basically negated. The premise of working in a DAO is that “everyone actively demonstrates their special abilities and contributes to the project.” You are always a “proposer” and a “contributor,” and the DAO needs your suggestions and contributions. It can be said that in order to work in a DAO, there needs to be a high degree of alignment between your project and your interests. Your contribution will be maximized when “what you can/want to do” overlaps with “what the DAO should do.” If you work for a DAO, no one will give you instructions. If you can contribute a lot, you will be recognized as a “core contributor” and will receive rewards and honors.

2.2.2. No Age, Gender, or Nationality Discrimination, Compensation Based on Performance

Another important characteristic of working in a DAO is that you can participate anonymously. In the past, when working for a company, it was necessary to verify a person’s identity, but in a DAO, this common sense is outdated. When you work for a DAO, there is no need to provide more personal information than necessary. Because DAO is anonymous, payment is also made based on contributions. Regardless of your age, gender, or nationality, what matters is your contribution to the DAO. The prehistoric work ethic, such as “arriving at work earlier than others and showing loyalty” and “being loyal to the boss,” has become completely outdated. Welcome to a flat and performance-based society.

2.2.3. Rewards are Usually Tokens

Last but not least, the price of contributions is “tokens issued by the project.” If you work for a company, you will “receive fiat currency through bank transfers.” When working in a DAO, it is common sense to “receive tokens in a cryptocurrency wallet.” Accepting fiat currency as a reward can be considered a special case. The tokens received as rewards can be sold on the spot or held and managed as they are. If you believe that your project will grow, you may not sell it but buy more. These tokens are usually called “governance (voting) tokens.” The more you contribute, the more governance tokens you receive. You can reflect your intentions and interests in important decisions of the project. Using tokens as rewards creates a certain kind of gameplay, which is also an innovation of DAO.

2.2.4. Governance Model of DAO

Early DAOs generally adopt a relatively centralized off-chain governance model, using tools to achieve weak constraints on the project team by the community; mature DAOs tend to lean towards on-chain governance, achieving fully decentralized voting and result execution.

On-chain governance is the execution of decision-making through smart contracts, where the voting results of the community directly determine the direction of smart contract operations, without being influenced by any central authority.

The process of online governance can be understood as a series of code and smart contract executions that are on-chain, transparent, automatic, and tamper-proof, from proposal uploading to proposal implementation.

2.3. Differences with Enterprises

3. Real-world Applications and Challenges of DAO

3.1. Real-world DAO

If we follow the definition in the original Ethereum whitepaper, none of the current DAOs can be considered DAOs.

The world is constantly evolving, and the term “Autonomous” has undergone a transformation from self-governance to automated operation (governance) in the real world. In the crypto world, it has undergone a reverse transformation.

Starting from the real world, many DAO operators no longer insist on pursuing fully code-based autonomous operation, but instead give more space to the social layer, and the meaning of “Autonomous” has returned to the autonomous governance of the organization. This may also be because non-automated DAOs are considered the mainstream that current technology can support, and the concept of DAO was removed in a subsequent update to the Ethereum whitepaper, further blurring the definition of “Autonomous” in DAOs. With the popularity of the concept of network state in recent years, “Autonomous” in DAOs has increasingly taken on the meaning it had at its birth in ancient Greece.

3.2. Advantages of DAO

1. Transparent governance: DAO members vote on various proposals and encode the community governance rules derived from the voting results in smart contracts on the blockchain, making them visible to all members. This achieves transparent governance and breaks the information asymmetry between participants.
2. Democratic and highly participatory voting: Traditional organizations generally make important decisions through the votes of a few individuals, while DAOs can allow all or most members to participate in partial decision-making and display the voting results to participants.
3. Matching rewards based on contributions from participants: With the support of blockchain technology, members’ labor and rights are accurately quantified, allowing members to receive rewards that match their contributions.
4. Difficult to tamper with rules, reducing friction costs: As the saying goes, code is law. In a DAO, established rules cannot be tampered with unless a large majority of members vote to change them. All parties should operate the DAO according to the predetermined rules or consensus, which not only reduces transaction costs and communication costs but also reduces the possibility of friction or disputes among members.

3.3. Challenges Faced by DAOs

3.3.1. Challenge of “Code is Law”

The world is complex. Cryptographic technology has brought about more efficient and fair distribution of ownership, as well as stronger coordination capabilities. Communities with different cultures and interests have started using these technologies to organize and collaborate. Although participants in the crypto space generally agree with the concept of “code is law,” how much business logic can actually run in smart contracts given the complexity of the world? It has been impossible for a long time to expect that an entire organization’s work can be done and sustained automatically through a set of smart contract code. Many decisions and executions in the community may have more complex and comprehensive content that cannot be fully constrained by code and smart contracts.

3.3.2. Inefficient Decision-Making Mechanism

Members of DAOs are often distributed around the world, with a wide distribution of time zones and a high degree of internationalization. If the community needs to make and execute decisions quickly, the entire process of voting, compiling, and uploading executable code may be too long, resulting in insufficiently timely and effective actions.

Currently, most DAOs use a “one coin, one vote” decision-making method, which often requires each member to participate in every decision. This may lead to a less efficient decision-making process. In addition, the following problems arise: (1) Members have a low willingness to participate in direct decision-making, as not all proposals are directly relevant to the interests of each member. Therefore, it is also impossible to ensure that each member invests a significant amount of time and effort to understand proposals and make decisions. (2) The knowledge, social experience, and professional insights of members participating in voting may be insufficient to support them in making correct votes, and the voices of professionals may be drowned out due to holding fewer governance tokens. (3) The number of proposals generated during the operation of a DAO may increase, and members may not have enough energy to participate in the decision-making of each proposal. It is necessary to differentiate different types of proposals based on professional fields and urgency, reduce the management burden on members, and avoid members being overwhelmed by the increasing flow of information and falling into a negative emotion of FOMO (Fear of Missing Out).

3.3.3. Technical Security Issues

Code vulnerabilities can lead to security issues and even result in significant losses for DAOs. In 2016, the famous project “The DAO” encountered a severe crisis before it was implemented, which led to the first large-scale governance of the Ethereum network and ultimately caused a hard fork in Ethereum.

3.3.4. Unclear Legal Regulations

From a practical perspective, there is also a problem that the applicability of DAOs in legal terms is not yet clear. For example, DAOs often create “community wallets.” However, the ownership of these wallets cannot be defined. When income accumulates in the community wallet, who should pay the applicable taxes? These are inevitable topics in the development process of DAOs.

3.3.5. Insufficient development of tools for operating DAOs

By early 2022, when you actually try to run a DAO, you will realize the challenges of tool scarcity.

Although various tools have been developed, the question remains whether DAO participants can fully utilize these tools. For example, implementing mechanisms such as “visualizing the contributions of DAO members and automatically allocating tokens” may be a daunting task. Manpower and bottlenecks are inevitable, and we will give up on decentralization. In addition, unfortunately, many projects currently have to use centralized services such as Discord and Google Docs for communication.

3.3.6. Barriers of cryptographic knowledge and common sense

Participating in a DAO requires a minimum level of knowledge about cryptography. However, for most people, “Metamask” is a foreign concept. Even if they are interested in DAO, most users will feel frustrated because they cannot fund Metamask and connect funds to the desired chain.

“Working in a DAO” is very different from “working in a company.” For those who have a conventional knowledge work style, this knowledge will also become a major obstacle to participating in DAOs. Therefore, it can be said that creating a DAO and Web3 startup from many countries is very difficult.

3.3.7. Lack of corresponding talent

The construction and development of DAOs are not exclusive stages for a few individuals (technicians). The entire mechanism design behind the operation of DAOs also requires support from professional knowledge in fields such as economics, sociology, and political science. Currently, the main participants in DAOs are still primarily from technical backgrounds, which leads to imperfections in overall top-level design and detailed design. It is unable to fully map all the functions and requirements that already exist in the real society and cannot completely solve the problems generated under the company’s decision-making mechanism.

3.3.8. Ending oligopoly – it’s not just a slogan

Although traditional blockchain projects shout “decentralization” every day, the ultimate outcome is often “getting rid of others’ centralization and becoming a new center themselves.” The emergence of “whales” firmly grasps control of the project in the hands of a few people, while the majority of the public can only become “speculators” under the control of the house. Over time, the public loses interest in the project and becomes silent.

The original intention of the emergence of DAOs is to change this situation. Traditional industrial projects need “chain reform,” while blockchain projects need “DAO reform.” The focus of this reform is mainly on the need for a “fairer” economic model, a “more reasonable” Access Control Layer logic, and a “more transparent” financial and decision-making process system.

“Ending oligopoly” is an easy slogan to shout, but the act of ending oligopoly itself is even against human nature because “everyone hates oligopoly, but everyone wants to become an oligopolist.” The true charm of DAOs lies in unifying countless scattered individuals into a whole, thereby realizing organizational value. People should “enjoy being in it” rather than “satisfying their desire for control” in DAO organizations.

In the future world of DAO, everyone’s life will be closely tied to a large number of DAO organizations. Who wants to live in an “autocratic dictatorship” society?

3.3.9. DAO Governance Should Adopt Corporate Logic

When I see many people making money and feeling proud in participating in DAO projects, and cursing and blaming when losing money, ignoring the value concept of DAO itself and focusing on speculation, it reminds me of the lottery store near my home. It is crowded with people in the evening, some are excited, some are sighing, but they are reluctant to leave. It can be said that “welfare lottery” has similarities with many DAO projects nowadays.

Is this ridiculous? However, this is the reality. DAO gives the ecology more possibilities and has real application value. Therefore, we cannot solely focus on speculation in order to eventually achieve higher returns (of course, I do not oppose speculating when there is a clear signal, because in the early stage of a new track, there will be a lot of arbitrage opportunities caused by cognitive and information discrepancies).

I believe that the governance of DAO should be more in line with the logic of corporate governance, rather than the logic of traditional blockchain projects. The huge difference between the two lies in the level of division of labor and organizational coordination.

I believe that everyone has worked for a company or has already established their own company, so they must know that a healthy company will have three relatively complete systems: a business system, a decision-making management system, and a financial system.

No company can grow and become stronger with deficiencies in these three aspects. This is because after the organization becomes larger, the friction cost of business, decision-making, and financial management will become very high, and once it exceeds the boundary, the efficiency will become quite low.

In traditional blockchain projects, those that can become stronger mainly fall into two categories. One category is platform projects supported by actual companies, such as Ethereum Foundation and Polkadot’s LianGuairity/Web3 Foundation; the other category is products that focus on a specific technical implementation or a specific function, such as Zcash. However, in the field of blockchain, in the future, we need a fully decentralized autonomous entity that can bear huge value, and that is DAO.

Compare the business system, decision-making system, and financial system of traditional companies to DAO, which respectively correspond to the proposal system, voting system, and treasury. Currently, leading DAO solution providers such as Gnosis and Aragon are developing underlying solutions. The most mainstream one currently is the combination of GnosisSafe + Snapshot. So if some projects claim to become huge decentralized organizations but these business frameworks are not seen, it is most likely a scam.

3.3.10. Coordinating and Unifying the Ambiguous Goals of DAO

Before we begin this discussion, we need to first determine what are ambiguous goals and what are deterministic goals. In fact, these two concepts are relative.

For example, when I want to eat a McDonald’s Filet-O-Fish burger, it is a deterministic goal, but when I want to eat at McDonald’s, it is an ambiguous goal (I don’t know what to eat); when I want to eat at McDonald’s, and I want to eat until I’m full, the latter is an ambiguous goal. The inspiration from this dialectical relationship can explain what “DAO-ify” means, which is the “ambiguification” of governance goals, and the determination of the degree of “ambiguification”.

Both of these behaviors are equally crucial and determine how much benefit or risk DAO can bring on the basis of the existing mechanisms. This process is also the “coordination and unification of ambiguous goals”.

Let’s take a specific example. If I want to establish an investment-type DAO organization, then the top-level of my ambiguous goal is to obtain race dividends (i.e. make money), and although this ambiguous goal has the highest degree of freedom, it also has the greatest difficulty in governance. Only the big shots with sufficient background can hold it (BITDAO seems to be such an organization at present).

However, for me, I definitely cannot accomplish this, so I can only lower the level of the ambiguous goal. For example, I want to establish an investment DAO for speculating on NFTs. Given my abundant experience in investment (being chopped), I think I can manage it well, and thus I establish the ambiguous goal of my DAO.

After setting the ambiguous goal, what is more important is that I must firmly maintain my ambiguous goal (not changing my mind frequently) and attract more like-minded people to participate. At the same time, I also need to believe that the community can autonomously move towards this goal.

Many DAO organizations have good starting points, but due to the founders being too dominant and particularly fond of micro-managing (excluding dissidents), they eventually lead to the decline of the DAO. As long as the founders or teams provide guidance and protection in terms of direction and strategy, they should not interfere with tactical matters. More than 70 years ago, there was such a person in our land of China, and in the end, he went to Taiwan.

When I first encountered DAOs, I had a question. I thought that when a large number of scattered individuals find it difficult to coordinate and unify deterministic goals, wouldn’t it be even more difficult for ambiguous goals?

Later, I remembered some interesting stories from Kevin Kelly’s “Out of Control” that I read in college: for low-level animals like bees or ants, with a scattered organization that coordinates (signal transmission is point-to-point) and ambiguous goals (make some honey or find something to eat), they can demonstrate astonishing consistency. Although it is difficult for us to depict or deduce the underlying principles mathematically, it can indeed be achieved. Therefore, we should believe that under the governance of ambiguous goals in DAO organizations, consistency can eventually be achieved and continuously developed towards the goals.

3.4. Legal Challenges of DAOs

3.4.1. “Fully Wrapped” DAOs, also known as Automated Companies

DAOs that can be fully wrapped are neither decentralized nor autonomous.

From a national perspective, any DAO that can be fully “wrapped” by one or several legal entities is no different from a traditional company. By designing a comprehensive corporate structure, DAOs subject themselves to national governance, and the state can decide to ignore (or revoke) legal personality or pierce the corporate veil to hold DAO contributors legally liable.

This is why the legally designed DAO limited liability companies, from Wyoming to the Marshall Islands, are destined to fail. DAOs face legal risks because they are incompatible with the national governance agreements behind today’s legal and financial systems. DAOs are not backward compatible. Legislative patches may fix some decentralized issues, but any solution relying on centralized state actors will inevitably sacrifice the values represented by decentralization and autonomy.

It should be clear: traditional companies are not wrong, and there is nothing wrong with building your company on traditional legal and financial protocols! Not all companies should become DAOs. In terms of executing vision, bringing products to market, and coordinating complex behaviors across time and space, hierarchical command structures may be far more effective than democratic communities. Delaware’s corporate law has been honed over decades and has become the world’s best corporate regulatory system, empowering the most successful economies in history. There is no shame in playing this game.

Some traditional companies call themselves DAOs because they automate their administrative and governance intelligence through tokenization and smart contracts. When a manufacturing company automates its assembly line by replacing workers with robots, that fact alone does not constitute a reason to modify the company’s organizational structure. The same logic applies to software companies attempting to automate their operations by replacing lawyers and accountants with smart contracts. Because these companies are neither decentralized nor autonomous, I am inclined to call them automated companies (which aligns with Vitalik’s description of decentralized organizations and can often be called “traditional companies dressed in the guise of decentralized applications”), but regardless of the name, they do not pose fundamentally new legal issues, as existing corporate law can handle everything.

Therefore, fully wrapping DAOs in one or more entity structures may be the best way for key contributors (such as founders, CEOs, or highly prominent developers) to maintain effective control over protocols or finances, or to interact with the external world on behalf of DAOs through asset acquisitions or employee hiring. Proven corporate entity structures provide the best protection against attempts to hold these key contributors personally liable for the actions of the DAO.

3.4.1. Ecosystem: Enterprises as DAO Members

If these members do not enjoy any additional rights or powers compared to other DAO members, then a decentralized autonomous organization can welcome a company to become its member without sacrificing decentralization or autonomy. From the perspective of the governance contract of the DAO, company members can be treated the same as other members. Drawing from the experience of C-Corps, I call these entities D-Corps (I welcome better names).

The most common form of D-Corp is DevCo, a development company that employs a core team of developers. In fact, most DAOs that require professional developers are not started in the form of a DAO. They usually originate from regular tech companies, and most tech companies are C-Corps or LLCs in Delaware.

Once the DAO architecture is built, and the DAO is established, a critical choice must be made: whether the development company will become the enterprise wrapper for the DAO.

If the answer is “yes,” you may have an automated company or the aforementioned traditional enterprise.

If not, the development company should transfer governance responsibility to the DAO from a technical and legal perspective. The most important steps are as follows: (1) isolate the assets of the development company from the assets of the DAO, (2) clearly transfer control of the governance contract of the DAO from the development company and its employees to the DAO and its members.

After these steps, the development company can (and often does) continue to provide services to the DAO as the main service provider and be paid from the DAO treasury based on the contracts provided by the DAO. Similarly, the DAO can welcome other companies as members; we see this when a DAO requires certain key services (such as legal entity structure) that individual operating members cannot independently provide. Therefore, they either bind themselves to the entity company that employs them or form a D-Corp branch with members of the DAO. In this way, the organic ecosystem of the D-Corp can come and go freely as members without sacrificing decentralization and autonomy.

The ultimate goal is for each D-Corp to be an alternative service provider for the DAO. Carefully designed architecture and governance structures are crucial to avoid centralization risks. If the development company continues to have critical control over the DAO’s finances and veto power over governance voting, then the true meaning of a DAO ceases to exist (of course, this is okay, but it should be a decision made with eyes wide open).

Bridge-Corps is another type of DAO member, named so because they allow the DAO to connect to traditional legal and financial protocols that cannot be fully utilized on-chain. They serve very narrow and limited purposes and can be dissolved at any time when no longer needed. Unlike corporate DAO members, these entities are legally independent, although in practice they are subject to a series of self-imposed limited tasks and binding DAO voting obligations.

Very few DAOs start as decentralized organizations, let alone true autonomy. Usually, starting centralized and going through decentralization is easier. Bridge-Corps are crucial for effective decentralization, as in this transitional phase, there is a need for enterprises to undertake tasks such as opening bank accounts, signing contracts, hiring employees, paying taxes, appearing in court (and many other functions). Initially, a single entity can perform all of these functions, but the requirements of decentralization make it only a temporary solution. By distributing assets and risks among multiple entities through a series of Bridge-Corps, it ensures that malicious actors have no place to intervene. As on-chain solutions emerge and are adopted by DAOs to solve the same problems, Bridge-Corps can step down.

A foundation company is the most common tool for bridge companies. It is the most naked general legal entity that DAO can use to open accounts and sign service contracts. Other entities are also becoming more popular, such as Guernsey purpose trusts holding intellectual property assets, and British Virgin Islands limited companies that can issue tokens.

3.4.1. Going corporate: “True” DAO

For decentralized autonomous organizations, the purest and most legally risky entity structure is one that fundamentally has no corporate structure.

DAO is an inherent anarchist concept. The “autonomous” in the term DAO does not mean “automated”, but rather the literal meaning of “autonomous”. Autonomy is an anarchist term and concept, as can be seen from the “autonomous center” set up by anarchists in the Pacific Northwest in the summer of 2020, Hakim Bey’s “temporary autonomous zone”, and similar uses of this concept. A true DAO does not mean being attached to a national charter, nor is it limited to following a specific set of narrow laws. A true DAO should not dissolve just because the Secretary of State of Wyoming thinks it should. – Gabe Shapiro|Wyoming law DAO-saster

An intangible DAO is the ultimate ideal form of an unlicensed order, a distributed enterprise coordinated entirely through incentive mechanisms. In terms of scale, DAOs provide stability through composability, avoiding the risk of organizational hardening, and contributors and organizations can seamlessly transfer resources and talent to where they are needed.

This is the promise of mature DAOs: to form a stable legal order without the need for coercive intermediaries.

Today, few DAOs can achieve this ideal state. Almost all intangible DAOs operate as wrapper or ecosystem mechanisms as temporary protection mechanisms against legal risks. Intangible DAOs have few legal precedents. Truly decentralized and autonomous organizations will not be strangled by the fate, no one or entity will be coerced, and there are no obvious channels for outsiders to command and control the resources of the DAO. In other words, centralization and governance behavior itself is the most significant legal risk that DAO cannot ignore, leaving obvious vulnerabilities to litigants, regulators, banks, and other coercive market actors.

If governance is a source of risk, then eliminating governance can reduce risk. Several projects are adopting this approach, such as Reflexer (see their “ungovernance” process and being seen as “ungoverned” from the start). These projects’ experiments are closely watched by lawyers who hope to generalize these experiences.

For fully wrapped DAOs, company law can almost completely solve their legal problems. For DAOs without legal entities, the situation is completely opposite. We still have a long way to go, but it is increasingly clear that decentralizing the rights to DAO resources and automatically eliminating human discretion is still one of the best ways for DAOs to achieve autonomy. Consensus is forming around “legal decentralization”, which is an emerging legal practice that helps DAOs reduce legal risks and achieve these goals.

Even after achieving decentralization, autonomy, or “degovernance”, risks still exist. After all, tax officials must have a share. Because true DAOs have natural immunity, the target may shift from the DAO to the contributors themselves – let’s go back to the limited liability issue discussed in the first part.

Fortunately, our community is rapidly iterating solutions to protect contributors who do not have the option of package-style, D-Crops, and bridged architectures.

4. Outlook for DAOs

The original definition of DAO represents an ideal, an expectation of technological empowerment, although it is not currently achievable, it is a beautiful and pure pursuit.

And now that hundreds or even thousands of DAOs have been born, we have sacrificed the robustness of the technological layer and compensated with the cultural layer, allowing community members with shared values to organically combine, and through blockchain technology, achieve stronger coordination, incentives, and ownership distribution, creating many patterns and achievements that did not exist in this world, which is also fortunate for this era.

In the past, my view was that with the development of cryptographic technology and the improvement of infrastructure, DAOs will gradually reduce their dependence on humans. Perhaps today we are still using gnosis’ manual multisig method to manage community treasuries, but tomorrow we may have an automated proposal system and treasury system. The day after tomorrow, we may put the roles in the DAO on the chain in a certain way, realizing the automation of key role permission allocation. The automated system gradually erodes human roles, and ultimately, at some point, DAOs will transition from being human-run to being completely code-run.

However, with observations of more projects and the development and changes of different DAOs over the years, I have begun to feel that the current community DAOs and the envisioned DAOs that operate automatically should be fundamentally different species, and they will take completely different paths in the future, rather than merging at some point.

Human-centric DAOs do have a lot of room for increasing automation to improve efficiency, coordination, and trust, but the value creation entity is always the community, every individual in the community. People are always important.

On the other hand, for DAOs that are completely code-run, their starting point may be something else, such as – Autonomous World

4.1. AW (Autonomous World)

Autonomous World – “AW”, also commonly abbreviated as “AW”. This concept was first proposed by 0xLianGuaiRC in 2022. After a year of fermentation, it began to be discussed more and more. The Autonomous World is a relatively complex concept, and many people see it as a concept in the direction of full-chain games, but I don’t think so. It is an intersection of multiple fields such as technology, culture, politics, and philosophy.

In the concept of the Autonomous World, the world does not specifically refer to the place where human beings live, but rather a container, a place that accommodates rules and narratives. The world where human beings exist is certainly a world, but “The Three-Body Problem” is also a world, existing in books, Bilibili, Tencent Video, and people’s minds. “Chinese Paladin” and “The Lord of the Rings” are also worlds. The world is not necessarily related to stories, for example, chemistry can also be considered a world. It also provides a container and has its own rules.

After briefly outlining the concept of the world, let’s look at what an autonomous world is. In terms of definition, 0xLianGuairc believes that an autonomous world is a world with a “blockchain underlying”.

4.2. Rules

Autonomous Worlds have hard diegetic boundaries, formalised introduction rules, and no need for privileged individuals to keep the World alive.

An autonomous world has strict narrative boundaries, formalized introduction rules, and does not require privileged individuals to maintain its existence.

This sentence describes the three core features of an “autonomous world”:

1. Strict (Hard) narrative boundaries: This means that this world has a set of fixed and immutable baseline rules. They do not change over time or circumstances, providing stability to the world.

2. Formalized introduction rules: This indicates that there is a set of clear and fixed rules for entering and participating in this world. These rules include how to become a part of this world and how to interact within it.

3. No need for privileged individuals to keep the World alive: This world is self-sustaining and does not rely on any specific individual or organization to maintain or manage it.

From this perspective, Autonomous World is actually closer to the original definition of DAO – autonomously operated under preset rules, without relying on specific individuals or soft rules or similar political coordination processes. Or, DAO itself is a form of autonomous world.

What is the charm of such an autonomous world? I believe it is objectivity.

The real world we live in is objective, no one owns this world, and it does not exist because of a particular person or organization. The fundamental laws of physics are the basis for maintaining the existence and operation of this world. Everyone can exert influence on this world under the agreement of these physical laws and make this influence a factual reality in this world.

References

https://www.techflowpost.com/article/detail_13902.html

http://www.wodepm.com/?p=334

https://www.zhihu.com/tardis/zm/art/65488840?source_id=1003

http://sfmagazine.imachina.org.cn/news.php?cid=18&nid=420

https://zhuanlan.zhihu.com/p/447297191

https://www.zhihu.com/question/265353843/answer/2336586888

https://www.grandwaylaw.com/guofengshijiao/3830.html

https://www.01caijing.com/article/286724.htm

https://foresightnews.pro/article/detail/29604

https://zhuanlan.zhihu.com/p/469094420

Translated:

https://www.grandwaylaw.com/guofengshijiao/3830.html

https://www.01caijing.com/article/286724.htm

https://foresightnews.pro/article/detail/29604

https://zhuanlan.zhihu.com/p/469094420

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