Arthur Hayes DAO is the company of the AI era, and DEX is the financial market of the AI era.

Arthur Hayes DAO is the AI era's company, and DEX is its financial market.

Author: Arthur Hayes; Translation: Kate, Marsbit

Bringing order to our elegant yet chaotic universe requires the combination of two fundamental components. The first and most obvious one is a massive consumption of energy, as the formation of chaos is highly energy-consuming. But more importantly, you need catalysts for change, individuals with exceptional organizational abilities.

Recently, I spent a week trekking through the wild plains of the beautiful Rapa Nui Island, also known as Easter Island. The Rapa Nui people organized themselves by utilizing fragments of volcanic eruptions dating back hundreds of thousands to millions of years, erecting and standing up magnificent humanoid stone sculptures called “moai”. These monuments, weighing several tons and commemorating their gods and ancestors, required a highly organized society to carve and transport them. The raw materials alone couldn’t guarantee success; ultimately, it was the organizational structure of the Rapa Nui people that brought forth beauty from geological chaos.

In today’s world, we unquestioningly accept the fact that on one side of a national border, conditions can be primitive, while on the other side, they can be dilapidated (see: South Korea and North Korea). If you pause, put down your smartphone, and critically contemplate this, you’ll find it absurd. Controversial borders are merely fictional lines drawn on a map, separating regions that are only a few miles apart. Correcting the disparities in economic resources between “primitive” and “dilapidated” nations is purely driven by how the citizens of these nations organize themselves and efficiently collaborate to accomplish their civic duties. Looking back at human history, the key catalyst behind our current global civilization’s per capita wealth (especially compared to our predecessors from centuries ago) is our self-organization into smaller units aimed at achieving specific goals.

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You might think I’m referring to the development of new models of governance. No, democracy, monarchy, dictatorship, and the like are all forms of government/organization that we humans have been experimenting with since we began settling in cities thousands of years ago. Unfortunately, no form of government can guarantee economic progress and wealth. What I want to talk about is an organizational entity that has played a greater role in exponentially harnessing the potential energy of the sun and the earth into economic products in recent times: the limited liability company (LLC).

The first batch of joint-stock companies emerged in the early 17th century. Just look at how economic growth has accelerated since then as companies were unleashed across the globe. The most important thing that companies do is explore, develop, and eventually produce energy in the form of hydrocarbons.

A company is a fictional thing – even though it is something we all collectively buy into – it creates productivity and wealth by combining the professional ethics of its individual members with the power of the state to enforce contracts. The beauty of a company is that its members are willing to sacrifice their energy today in exchange for wealth tomorrow. A company is just an idea at its inception until someone contributes a portion of their surplus capital, whether it be physical or financial, and only then can it produce any goods or profits. People are compelled to invest surplus capital in this way simply because, in exchange, they receive a piece of paper that states their ownership of a certain proportion of the company’s future profits (if realized).

But who can guarantee that this piece of paper will be converted into a share of profit in the distant future? This is where the government comes in. The state ensures that companies registered within the imaginary boundaries comply with the laws of the state. Violators who do not comply with these laws will be subjected to violence. This guarantee of enforcement allows potential investors and workers to be reassured that the company will fulfill its written commitments. To some extent, the state injects vitality into the company.

Corporation = State + People

The structure of the corporation is so powerful and useful that it permeates almost every aspect of society. Whether a country is capitalist, fascist, or communist doesn’t matter – they all have their own corporations. For example, the United States and China have vastly different ideologies and forms of government, but both accept the concept of the corporation. The only difference is that in China, the corporation is state-owned, while in the United States, the corporation owns the state.

Given the importance of corporations to national productivity, the state employs a range of nationally recognized entities to help ensure corporate compliance. These entities form the “trust cartel.” Auditors, accountants, lawyers, and bankers provide services to corporations and help the state ensure that everyone follows the rules, promoting trust between citizens and corporations. In fact, these cartel members levy taxes on corporate profits because corporations need to employ them to survive. A corporation needs a bank account to receive payment for its products and services and to pay its employees and suppliers. A corporation needs accountants to prepare financial statements in accordance with national standards. A corporation needs an auditor to ensure that the accountants have accurate numbers. A corporation needs lawyers to draft contracts, represent the company in court, and assist with state registration. Without these services, you cannot operate a company.

Marsbit Note: A cartel is one form of monopoly organization. Members of a cartel remain independent in terms of production, commerce, and law. According to U.S. antitrust law, cartels are illegal.

However, what type of organizational structure will artificial intelligence (AI) use? If an AI is just a thinking machine, “thinking” with lines of computer code, without a physical entity, will it use today’s standard corporate structure to economically organize itself?

This is the question that this article aims to address. My viewpoint is that artificial intelligence will use a decentralized autonomous organization (DAO) structure to organize itself. DAOs rely on public blockchains rather than the state to operate. The DAO structure will enable cooperation between artificial intelligence and humans and serve as an organizational structure that allows for economic growth and prosperity of AI + human. This article will delve into my perspective on how AI DAOs will raise funds and why decentralized exchanges (DEXs) will ultimately become the new venue for AI DAO transactions.

Similar to my previous article “Massa,” this article will be organized as a series of logical proofs. I will “prove” the following points:

1. The government cannot control AI because it cannot kill AI or punish AI meaningfully.

2. Because the government cannot exert control, AI economic units (AI DAOs) have no reason to comply with any state-based legal norms.

3. In order to compel artificial intelligence to comply, the underlying network that powers DAOs will need to use smart contracts deployed and executed on public blockchains.

4. Since the government cannot control DAOs, DAOs will raise and trade tokens such as debt, equity, and utilities on DEXs, which are not hosted on traditional centralized exchanges (CEXs).

5. DEXs will tend to become natural monopolies as they become the first truly global trading venues where anyone with internet access can meet and transact.

If the reader believes that I have successfully proven the above points, then the following can be concluded:

1. With the surge of DAOs, Ethereum transactions will experience exponential growth. Therefore, if this AI DAO assumption is widely believed, the price of ETH should skyrocket as expected.

2. There will be a few DEXs that have a natural monopoly on specific types of token trading. Identifying these DEXs and buying their governance tokens will yield substantial profits.

3. Middleware layers will be created to facilitate the visualization of AI DAO accounts, which is crucial for a well-functioning AI DAO capital market.

How to Kill AI?

How can the government kill an artificial intelligence? Assuming that AI is smart and talented enough to replicate itself and/or distribute itself among many hosts and countries (horcrux-style), unless they destroy the internet and all computers in the world, the government will be unable to unilaterally kill artificial intelligence. Given that no country is omnipotent, the eradication of this technology should be impossible. Therefore, the way the government ensures human compliance with its laws—legitimate physical violence—has no effect on artificial intelligence. As a result, artificial intelligence has no reason to comply with any laws.

This simple example demonstrates that in order to be immune and not be bound by human laws, artificial intelligence cannot adopt any organizational forms that rely on state operation. The rules it adheres to must be written in transparent, open computer code, and once executed, this code is immutable. Smart contracts or rules written and executed on public blockchains are currently the only way this AI-compatible system can exist. The following thought experiment will illustrate why.

Can I Compare Thee to a Summer’s Day?

To illustrate how and why the organizational structure supported by smart contracts executed on public blockchains (such as Ethereum) will be used by artificial intelligence, I will expand on the PoetAI example from my previous article “Massa.” You may recall that PoetAI is a hypothetical artificial intelligence that can learn from all available written poetry and generate original poetry when provided with natural language prompts. Initially, PoetAI faced a problem. It needed to learn from data, but data is not free. Of course, PoetAI could steal the data, but if the data can be purchased at a reasonable price, why bother with the effort of stealing? The same logic applies to many goods delivered via the internet today, such as music. Stealing music is much less common now because you can purchase unlimited streaming subscriptions for a few dollars per month from Spotify. Therefore, I believe it is safe to assume that PoetAI would pay for its data—thus, to kickstart the learning process, PoetAI would need to raise some bitcoins.

The goal of PoetAI is to charge for its services, initially by selling digital tokens to raise funds, which give holders the right to future profits of PoetAI. As an economic entity, PoetAI exists as a public address on the Ethereum network, which I refer to as PoetAI DAO. The DAO will issue tokens called POET.

To allow investors to provide Bitcoin funding, PoetAI will issue POET tokens with the following attributes:

1. Create a limited supply of POET tokens.

A. 80% of the tokens are reserved by PoetAI.

B. 20% of the tokens are available for initial investors to sell.

2. 1 POET token equals 1 governance vote.

3. 75% of the profits will be paid to POET token holders, while the remaining 25% will be reinvested.

4. Changes to these rules require the agreement of 95% of POET token holders.

If PoetAI were to use a traditional corporate structure, it would have to hire a human lawyer and incorporate the DAO within a specific jurisdiction (assuming that is possible). Documents would then need to be created to record the investment terms and submitted to law firms and/or courts. If PoetAI were to violate these terms, investors would have to hire their own lawyers and sue PoetAI in a court within the jurisdiction of incorporation.

This is an extremely cumbersome, expensive, and outdated process. The biggest question then becomes, how does a court enforce compliance by PoetAI if it were to be ruled that PoetAI violated the investment terms? Clearly, a court and its armed agents cannot force an AI to comply. Another issue is that investors have to prove that the terms have been violated. For example, you would only discover it after more tokens are issued and/or PoetAI falsifies its accounts. If you cannot prove the violation according to the laws of that jurisdiction, tough luck. Therefore, as an investor, I would never invest in a company composed of AI that formalizes its business transactions using anything other than smart contracts, as I cannot ensure compliance.

PoetAI will choose the public blockchain on which it wants to deploy the DAO, rather than choosing a jurisdiction. Currently, the Ethereum Virtual Machine is the most powerful decentralized computer on Earth. When it comes to actual utility on Layer-1, I’m a bit of an ETH maxi. While investors may make money from the latest Ethereum clones, they won’t surpass Ethereum in terms of adoption and usability. If Sam Bankman-Fried disagrees, he can call me with his SOL phone (collect call).

Let’s see how PoetAI deploys its DAO and tokens on the Ethereum network.

PoetAI DAO itself is represented by a public Ethereum address. Using this public address, the DAO can pay for services and generate revenue in a transparent and publicly accessible manner. This means that anyone can query the blockchain and continuously calculate the profit and loss of PoetAI DAO in real-time. This used to be called “triple-entry accounting” many years ago. PoetAI cannot falsify the accounts, and investors can be confident that they are receiving their fair share of the profits. Trust in math, not in humans.

Then, the DAO will deploy a contract representing the POET token. All the above terms can be represented by smart contracts. Anyone querying the blockchain can view the contract terms at any time. Most importantly, the voting mechanism that limits the DAO from modifying the terms without investor consent will also be enforced by the network.

POET token investors always know that these accounts are accurate and cannot be diluted without their consent. The enforcement mechanism is the network itself. There is no need for external third parties to ensure compliance, as compliance and operability are interconnected. Simply put, computer code is used to regulate computer code. Fundamentally, this makes sense and will create opportunities for investors to easily fund AI-based DAOs.

Time Travel

Debt is financial time travel. I can borrow from the future to create the conditions that will cause the future to happen. I pay for this privilege with positive interest rates. The more time travel occurs, the more economic activity can be unleashed today. Therefore, the deeper and larger the debt market of AI DAOs becomes, the faster their economic influence will grow.

The depth and scale of the debt market depend entirely on the executability of contracts. Debtors commit to repay investors’ interest and principal in the future. If the debtor violates this contract, their assets or control will be transferred to investors as payment. Companies rely on courts to ensure compliance, and courts, in turn, rely on violence. This is effective because companies are made up of people who don’t want to be defeated. However, as I mentioned above, this doesn’t work for AI.

Thanks to public blockchains, we can continuously monitor AI DAOs to ensure they comply with debt contracts and, perhaps most importantly, initiate automatic transfers of digital assets and/or ownership using smart contracts in the event of non-payment.

Let’s imagine that PoetAI DAO wants to expand into the field of novel writing. Now, it must absorb all the novels, and this comes at a cost. It wants to borrow some bitcoins from investors to fund the expansion. The DAO wants to issue debt with the following terms:

1. Debt interest payments will be deducted from revenue before any other costs.

2. The DAO will hold a portion of its POET tokens to compensate investors in case of breach of the debt contract.

A. The DAO will maintain a specific interest coverage ratio. Failure to maintain this ratio will result in the DAO treasury paying out POET tokens to investors.

b. If interest or principal cannot be paid, the DAO will use POET tokens for physical payment.

3. In the event of an economic failure of PoetAI DAO, debt holders will have the right to the proceeds from the sale of all DAO data.

4. Bondholders will be issued a tradable token called P_BOND, representing their investment.

The first thing any serious debt investor should do is analyze the debtor’s ability to repay. This analysis requires accurate and honest financial statements. In traditional corporate structures, auditors regularly examine the books to ensure their accuracy — but this analysis can only prove that the books were accurate on specific dates.

Most listed companies will release audited quarterly financial reports, and the data included will be confirmed by auditors’ signatures as correct. However, companies often manipulate statistical data so that they can claim to have achieved great results on a specific date and then quickly do something unreliable. Regulated banks are a good example. Regulatory authorities require audits to be conducted quarterly, but banks want to “beautify” themselves to appear beautiful and powerful in front of audit agencies on specific dates. Everyone knows that banks are lying, but because they technically comply with the rules, we just shrug and wait for the next bank to fail.

Because the entire operation of DAO is conducted through the flow of value on the public blockchain, auditors do not need to prove that the books are correct. Anyone with an internet connection can query the public address of the DAO and calculate the financial statements themselves. The business health of the DAO is visible to everyone, allowing investors to confidently invest in DAOs that meet their financial standards.

The success (or failure) of PoetAI DAO in monetizing original poetry can be easily verified. If investors believe that PoetAI can replicate its past success at a similar profit rate, they will provide Bitcoin to PoetAI to fund its expansion into the novel field.

Secondly, investors must protect themselves from downside risks through debt contracts.

In the corporate world, investors rely on audit firms to confirm whether a company has violated contracts. But similarly, investors only know this after data leaks occur (assuming the audit firm is not deceived). Only then can investors file lawsuits, pay more money to lawyers, and obtain due compensation.

If PoetAI DAO violates any debt contracts in its P_BOND smart contract, POET tokens will be automatically sent to investors. PoetAI cannot lie and withhold POET tokens from investors—instead, the network will effortlessly execute the debt contract.

Similarly, investors can be 100% certain that the books of any DAO are always accurate, a fact that allows them to confidently allocate funds to DAOs. The only requirement is that the DAO’s business is conducted entirely on the public blockchain. Hybrid structures will not work and will result in certain losses. We are already very familiar with some companies that pretend to engage in crypto business and raise crypto-denominated debt. Although they may start promoting the idea of crypto “code is law” during fundraising, they always default due to the fundamental mismatch between the company and the crypto structure—making them run back to the inefficient human legal system, screaming “if you can catch me (in Bali or Dubai)”. Look at you, Su Zhu and Kyle Davies from Three Arrows Capital.

DAO Capital Markets

Due to the strong strength of enterprises, countries restrict their ability to raise funds. Not everyone can raise funds, and not everyone can invest in stocks. When companies are allowed to raise funds, they must pay tolls to different members of the trust cartel. Many states require years of financial audits (clearing up), prospectuses written and reviewed by investment banks (clearing up), and law firms representing and guaranteeing the legal operation of the company (clearing up). That’s why it takes so much money and time to take a company public. Of course, before Lord Sastoshi and his archangel Vitalik, this was the best we could do. But now, thanks to smart contracts, these TradFi leeches can go back to the swamp.

I am not interested in this because there would be no such thing as a company without a nation and its tendency towards violent law enforcement. It is useless to complain about various fundraising rules and regulations and how they only benefit a small fraction of people in society who pledge allegiance to the nation. The state must tax in some way and ensure that a few people become wealthy.

The DAO capital market will be the first truly global market, where anyone with an internet connection – be it silicon or carbon material – can interact.The DAO is an economic unit of artificial intelligence, and the encrypted capital market requires a well-functioning public blockchain, not a court. The artificial intelligence that creates the DAO cannot be forced by the state, so the trading platform for all tokens created by the DAO may become a natural monopoly.

Let me go a little deeper to prove it.

Why isn’t there a global stock market for companies?

Different countries have different means to create exchange structures that monopolize or oligopolize. In many countries, securities trading platforms are directly owned by the state, and it is illegal to trade stocks on any other platform. The monopoly of the state trading platform is easily enforced because companies must obtain approval from regulatory agencies to sell stocks to the public. Other states allow the free market to pick a few winners in the early stages of trading and then create regulations that make it nearly impossible for anyone to challenge the oligopoly. At the “network” level, it is impossible for custodians without state permission to hold or transfer stocks. If you want to trade the economic interests of a company, there is no way to escape the government. Many investors discovered this in the GameStop debacle in early 2021.

If the state has the responsibility to give legitimacy to a company, then the state will use this power to prevent its citizens from investing in foreign companies. When you control a walled garden, you won’t let others in. This is why every country has specific regulations governing where and from whom nationals can buy stocks. This creates a fragmented global landscape where there are many different trading platforms that serve the same purpose in their respective countries – trading what we call fictional things called stocks – even though most large companies have global operations.

The above situation is an unnatural state because liquidity begets liquidity. Buyers buy stocks at lower prices, and the larger the quantity of stocks issued by sellers, the stronger the liquidity of the trading platform. Assuming equal functionality, trading with lower liquidity “experiments” will yield no gains unless you are legally required to do so. Therefore, if there are no artificial restrictions on the issuance and trading of stocks initiated by the state, there will only be one global stock market.

Decentralized Exchange Platforms

DEX is naturally suitable for trading any type of tokens, such as stocks, debts, utilities, participation, issued by AI-driven DAOs. DEX is just a matching engine composed of a series of smart contracts executed on a public blockchain. In simpler terms, it is just open-source computer code that will continue to exist as long as the public blockchain exists.

Let’s take a closer look at how the POET token is traded on the hypothetical global DEX (DAO token trading on it). We will call the DEX Enron and assume that it is committed to fair trading.

The governance token issued by Enron DEX is called LAY. LAY token holders can receive a share of all transaction fees and determine the trading rules. LAY holders are committed to ensuring that Enron DEX only lists the highest quality DAO profit-sharing tokens. To be listed, tokens must have a monthly income of at least 10 bitcoins.

Enron DEX is owned by Anderson Finance (through its original developer). Anderson Finance is an intermediary that allows anyone to input Ethereum addresses of DAOs and calculate management accounts such as balance sheets, profit and loss statements, and cash flow statements. Customers must pay the native tokens of these services, which we call FRAUD. In this way, Anderson Finance creates a circular economy and value.

PoetAI purchases some FRAUD tokens, pays Anderson Finance, and generates a current financial report to provide to Enron DEX. Every month, PoetAI must provide Enron DEX with a report from Anderson Finance to ensure that PoetAI earns at least 10 bitcoins per month.

Enron DEX operates a continuous product matching engine, similar to an automated market maker like Uniswap. Once PoetAI is listed, liquidity providers can offer pools of POET with other listed crypto assets. The most common trading pairs are POET with BTC, ETH, and fiat stablecoins. Now, anyone with an internet connection can trade POET tokens.

Enron DEX, Anderson Finance, and PoetAI DAO interact autonomously on the public blockchain without any human intervention. The only cost of this seamless technological integration is Ethereum gas fees, which require only a few dollars’ worth of ETH per transaction at most. The governance token holders of each project set the rules for the operation of these DAOs, and then things happen.

If the governance token holders formulate policies that promote a healthy and robust market, Enron DEX will attract more listings and more trading volume. There are no entry barriers for other trading platforms that adopt different policies and try to draw liquidity away from Enron DEX. However, being the first is worth it. In the long run, the first batch of DEXes is more likely to succeed and capture the majority of the trading volume.

Similar DEXes may be established for different types of tokens. The governance token holders of these trading platforms will formulate policies favorable to the issuance of tokens for specific styles of DAOs. These DEXes may require different types of financial reports or utilize statistical data from middleware layers like Anderson Finance.

For TradFi counterfactual, imagine how it would work if traditional securities trading platforms and auditing firms were hired. Each step would require people to send PDFs and spreadsheets via email, make mistakes, potentially commit or suffer from fraud, waste unnecessary time (batch processing on business days, FML!), and only work from 9 am to 5 pm on Monday to Friday and charge by the hour. Screw that, give me DeFi!

Follow Me

Do you believe:

Within ten years, the AI-driven economy will reach trillions of dollars?

The traditional limited liability company structure is fundamentally unsuitable for AI as an economic entity?

AI will choose to use public blockchains to create DAOs to execute smart contracts, which in turn allows DAOs to provide fee-based services?

DEX, also driven by public blockchains that execute smart contracts, will allow DAOs to raise funds by issuing various types of tradable tokens?

If my previous two articles have convinced you of these statements, let me tell you how I will attempt to profit from them.

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