DAOs - Blockchains Final Frontier by@kameir

DAOs - Blockchains Final Frontier

April 20th 2021 34,463 reads
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Christian Kameir

Blockchain VC @ Sustany Capital

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Bitcoin not only introduced the concepts of blockchains and decentralized currencies to the internet, but also demonstrated that organizational structure, and capital formation can be accomplished through the operation of computer code alone. Bitcoin’s node operating software automatically compensates anyone who records a new block on the chain, using is native reward system, confusingly also labelled bitcoin (it is good practice to use the lower case 'b' to discern the coin from the blockchain's name). As of today, each new block entry is compensated with 6.25 bitcoin — that's currently worth $270,000.

While the Bitcoin blockchain software is open-source code maintained by developers volunteering their time, these engineers have limited power over the network’s functions and evolution. All changes to the software’s code must be adopted by a supermajority of Bitcoin miners in order to become effective throughout the network. Today these node operators are distributed over 105 countries, maintaining more than 10,000 Bitcoin blockchain nodes. Many of these nodes are comprised of data centers filled with industrial-grade hardware using application-specific integrated circuits (ASICs) - chips specifically designed to execute Bitcoin node software. Given the decentralized nature of the network participants a shutdown of the Bitcoin blockchain is nearly as unlikely as a global failure of the internet itself, and some will argue that it is less plausible.

In essence, the Bitcoin blockchain created the first Decentralized Autonomous Organization (DAO): an organization that is solely operated by rules encoded as computer programs executed by the blockchain. The latter function is referred to as smart contract and has since been extended by several other blockchains, including — most notably — Ethereum. Unlike Bitcoin, which set out to create digital cash, Ethereum.org initially described ether as a necessary element — a fuel — for operating the distributed application platform Ethereum, albeit the operators have since changed the vernacular of the site over time to reflect its growing use case for decentralized financial developments.

Market Centralization

An common thread of the efficiency of corporations is the centralization of services benefitting from scale and network effects. This concentration notably effects access to the internet and the World Wide Web, with many users being limited to just one or two service providers. The entry points to the web has observably been monopolized by a single for-profit entity: Alphabet Inc., which operates services labelled as 'search' - i.e. Google, video sharing (YouTube), and nearly four hundred other entities. The reported mission of the company was "to organize the world's information and make it universally accessible and useful.” Given the for-profit and publicly traded status of its parent company, Alphabet Inc., this motto must however align with the need to increase shareholder value. While the company’s founders in their initial white paper describing their search engine argued that “the goals of the advertising business model do not always correspond to providing quality search to users,” this was indeed the exact business model Google ultimately launched two years after its incorporation date.

Google's actual mission today can be directly quoted from their quarterly report: “We generate revenues primarily by delivering relevant, cost-effective online advertising.”

While this statement does not identify who would find the delivered online advertising relevantclick-through statistics for Google’s AdWords program consistently suggest that users generally do not find these messages click-worthy. The relevance of online advertising can therefore mostly be seen in Google’s bottom line, which reported a staggering $146.9 billion in advertising revenue in 2020  alone, accounting for more than 85% of the company’s revenues.

As the Google example demonstrates, commercial interests influence and sway development. Consequently, the potential of connected systems and connected knowledge has been underutilized and has halted progress, as many internet users seem to have accepted a marketing-driven presentation layer — essentially commercial — as the status quo. Misalignment of interests between shareholders, operators, users and customers – a legacy of the industrial revolution codified in for-profit corporations – has created an environment of broken promises that could be addressed by smart contract systems like DACs, realigning the interest of users, reducing friction and removing middlemen.

The State Of For-Profit Corporations

While corporations can generally be formed for any lawful business or purpose, it is largely understood that the main purpose of a corporation is the creation of profits for its owners. The concept that a company’s primary objective is to increase the wealth of its shareholders by paying dividends or causing stock prices to rise has been widely criticized. While the discussion is usually limited to the problem of conflicts of interest between a company's management and its stockholders; more recently it also focuses on negative externalities of corporate activity such as pollution of the environment, and polarization of internet users for the improvement of corporate key performance indicators (i.e. 'time-on-site).

Profit From Customers as Products

Consumers in the US today tolerate having their online activity, and spending behavior monitored by third parties for the sake of making purchases on credit. Users of social media sites accept being exposed to increasingly targeted advertising so that they may interact with friends and family online. However, these groups of people don't count as customers of these organizations. From the perspective of these companies, consumers and users are the product that is being sold to any entity willing to bid on the attention of these products.

Similar misalignment of interests can be observed in many for-profit endeavors. The far-removed values of corporations from the people they purport to serve was brought to light through the breach of Equifax’s consumer database and Facebook’s user data overshare to the political consulting firm Cambridge Analytica. The misused or stolen data was not that of the companies’ clients but the data of users and consumers of the platforms. Both companies used questionable data policies and maintained centralized databases that gave individuals little knowledge or control over how their information was handled or stored.

Facebook on average possesses more than 52,000 unique data points on their users, supplementing its own information by buying that of third parties.

Cooperation vs. Corporation

The ability to collaborate is the widely considered the foundation of human's success as a species. Comparative psychological research with children and our closest primate relatives, elucidates the phylogenetic roots as well as the unique psychological mechanisms that support human cooperative behavior.

For mutually beneficial collaboration, individuals need to:

a) develop cognitive mechanisms to coordinate actions with partners, and b) create mechanisms to distribute the acquired resources in a way that incentivizes partners to continue collaborating. 

Capitalism, in form of private ownership and resources allocated by markets, remains a flexible, and reliable system for driving human prosperity and generally enhancing quality of life. As of today, corporations are the primary organizing principle in capitalist societies, providing employment, goods and services to most citizens. Blockchain-based systems have opened the door for a new paradigm: the Decentralized Autonomous Organization. DAOs are challenging legacy economic structures by aligning the interests of operators, shareholders, customers and maybe even the environment.

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Note: I shared some of these concepts in 2008 (more here) and published parts of this article on Forbes in July 2018. Ultimately these will find its way into a book on 'Streaming Money' which we will publish in late 2022.

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