Decentralized Autonomous Organizations (DAOs) and Corporations (DACs) represent a disruptive and somewhat subversive conceptual innovation for both for-profit companies and non-profit organizations. See my previous post for a short outline of DAOs and DACs. This post is focused on operational and business models for “real world” DACs, with open questions that need answers.
“DAOs/DACs (decentralized autonomous organizations/corporations) are a concept derived from artificial intelligence,” reads a short conceptual explanation in “Blockchain: Blueprint for a New Economy,” a 2015 book by futurist Melanie Swan. “Here, a decentralized network of autonomous agents perform tasks, which can be conceived in the model of a corporation running without any human involvement under the control of a set of business rules.”
“In a DAO/DAC, there are smart contracts as agents running on blockchains that execute ranges of prespecified or preapproved tasks based on events and changing conditions. Not only would groups of smart contracts operating on the blockchain start to instantiate the model of an autonomous corporation, but the functions and operation of real physical-world businesses could be reconceived on the blockchain, as well. As Bitcoin currency transactions reinvent and make the remittances market more efficient, DAOs and DACs could do the same for businesses.”
OK that sounds super cool and worth doing, but how does one, you know, DO it? In practice?
“An Operational Framework for Decentralized Autonomous Organizations” was laid out in 2015 – before the high drama of the fast rise and swift fall of The DAO in 2016 – by William Mougayar, the author of “The Business Blockchain: Promise, Practice, and Application of the Next Internet Technology.” A revised version of the 2015 post outlining the nuts and bolts of bootstrapping and running a DAO is in the book section “The DAOs Are Coming.”
In June 2016, after the fall of The DAO, Mougayar wrote about “What We Can Learn From the DAO Experiment, DAOs and Decentralized Governance.”
“I have warned twice publicly about the DAO, primarily that the amount of money raised was too high,” noted Mougayar. “Second, I felt that the complexity of its governance and sole dependence on smart contracts were a ticking bomb. I thought there was too much on the table all at once. I strongly believed that the same experimentation benefits could have been achieved with much lower risk, while preserving a similar diversity in user participation.”
“You don’t need $150M+ to initiate an experiment in autonomously funded and operated organizations based on smart contract governance with unproven code and inexperienced managers. In my opinion, $10-15M would have sufficed, and yielded the same benefits and lessons, even if it might have gathered less headlines and public attention.”
That sounds like wise advice, in the “learn to walk before you try to run” sense. In the book, Mougayar notes that a successful Initial Coin Offering (ICO) or token sale is only a first step: a successful DAO needs a solid architecture, a watertight software implementation, and above all a sound business model. Success is measured by increasing market price of a DAO’s (or DAC’s) native coin or token, but must be ensured by good business models and practices.
A key objective of a DAO is value creation or production, and to make that happen, there needs to be a specific linkage between user actions and the resulting effects of those actions on the overall value to the organization, as symbolized by the value of the cryptocurrency that is underlying it. That is where entrepreneurial creativity needs to take place, and where business models will be concocted.
It’s easy to see how distributed production models can be applied to, for example, the publishing and software development industries, which are already distributed (though not necessarily decentralized) to a large extent.
But distributed technologies are escaping the world of bits and invading the world of things. Today, programmable electronic components, systems on a chip, sensors, CNC mills, and 3D printers, allow distributed teams to design, prototype, and test complex systems with hardware and embedded software. The design files can then be sent to a cheap contractor for mass production. In the age of 3D printing, a distributed team can become the next Boeing.
Therefore, while many early-stage DAOs are focused on blockchain development itself, it’s interesting to follow Swan’s suggestion and try to reconceive “real physical-world businesses” as DAOs and DACs. If blockchain software can be developed by a decentralized autonomous entity, why not consumer gadgets, IoT systems, or stealth fighter planes?
Things are easier for a DAO focused on developing blockchain software: projects can be fully tracked internally, supply chains are mostly internal, and it can be expected that most financial transactions use the DAO’s native tokens, leaving it to individual participants to exchange tokens with cash and back.
Meanwhile, in the Real Physical World
On the contrary, for a “real physical-world business” things aren’t so simple. There are external providers that must be paid in cash, off-chain inventories, off-chain incomes and expenses must be recorded, and all that. The thing is, a DAC is regulated and managed by its own smart contracts, but the rest of the world isn’t.
To thrive as a real physical-world business, a DAC – I am now switching to the term “DAC” to emphasize commercial aspects – must have a bank account, be able to own property and all sorts of assets, including IP and shares in external public and private companies, and comply with the regulations of a well-chosen jurisdiction, while still operating as a DAC.
Even if a solution to these open questions is found, who records external incomes, expenses, and assets in the DAC’s blockchain for all participants to inspect, and how to ensure that the operators don’t cheat?
An interesting 2016 CoinDesk article lists some relevant “Key Questions Every DAO Founder Should Ask,” with tentative answers limited to UK law. In a next post, I’ll analyze these and other possible answers.
I think this topic – how to design and build a DAC able to thrive as a real physical-world business – should be analyzed theoretically and also with pilot projects, bearing in mind Mougayar’s wise advice and learning how to walk before rushing to build the next Boeing as a DAC.
Image from Wikimedia Commons.