Studying DAC/DAO and Collaboration Governance
Once upon a time, the emerging of the blockchain seemed to initiate a parallel new era, a utopia of the Value Internet. However, now the tide has receded, Bitcoin and Ethereum, as the flagships of the blockchain, are still struggling to get out of the dark tunnel, and the difficulty of landing various blockchain applications still has not been resolved.
Is it because of the immature infrastructure of the blockchain? Or was it led in the wrong direction?
We believe that the maturity of a technology is a gradually cumulative process, which is not the root cause of the current status of blockchain development. The key to the problem is that blockchain projects are revolving around the finance too much at the cost of neglecting the governance and management of the most basic layer of the cross-domain collaboration.
It was in 2008 global meltdown when Satoshi Nakamoto first created Bitcoin. He hoped to create a transparent, decentralized payment system, free from the control of any centralized institutions. This original intention is good, but the cryptocurrency that Satoshi Nakamoto wanted, which is entirely decentralized, transparent, and widely circulated among the people, now has become a simple speculative financial instrument for the giant whales in the Wall Street.
The volatile change of the Bitcoin price after the year 2017 has made it crystal clear that Bitcoin has been manipulated. Bitcoin has become the West World that the evil Guests rampage back and forth to hunt innocent Hosts, which is definitely not Satoshi Nakamoto intended.
Warren Buffett has been saying that cryptocurrencies do not generate any value associated with this asset, which is just a type of gambling, not an investment. In fact, the old and wise man is right. Like many other copycat coin projects, Bitcoin has become a beautiful wish but used for speculation. Except for those die-hard fans of Bitcoin, how many people still have the same faith or consensus that Bitcoin will become a digital currency or digital gold in the future?
Well, nothing is impossible in the year 2020. Maybe we could anticipate the emerging of a new "Bitcoin".
At the same time, the so-called new direction of the blockchain, DeFi (Decentralized Finance), is also facing the bottleneck of development.
First, DeFi projects will undergo severe geopolitical restrictions as the financial industry has to follow the territorial principles. Financial regulators in different territories have developed rigorous management frameworks to avoid possible risks, which is highly centralized governed. And this is inconsistent with the original intention of DeFi.
Second, it is impossible for DeFi projects to grow up independently, as there are too many giants in the financial industry. Two possible endings for the DeFi projects when they touch the pizza initially belonged to those giants, either being destroyed or being merged.
Third, DeFi has shown some signs of overheating. Lightning Loan allows borrowers to borrow money without collaterals, which is a financial derivative that lacks value support. For the immature DeFi, it is hazardous and easy to stir up new bubbles. DeFi also has become a haven for hackers. Several months ago, a hacker used a combination of DeFi protocols to arbitrage $360,000 in 13 seconds. On March 12, with the plummet of ETH price, a flawed design in the execution of liquidation procedures of MakerDAO was detected by several "Keepers". They used the rules to win the auction with a bid of 0 DAI without any competitors, which has caused a US$4 million debt for the MakerDAO. So MakerDAO had to auction MKR governance tokens and issue additional DAI to raise funds to repay the debt. On April 19, another hacker attacked Lendf.me and drained over 99 percent of the assets, which is valued US$25M.
Given the facts, it is tough for the blockchain to control its fate in the financial field.
In fact, cross-domain collaboration is much more fundamental than financial applications in the field of blockchain. If finance is the application layer of the value, cross-domain collaborations will be the backbone layer to create value.
What is cross-domain collaboration? Why is it more important than finance?
After the outbreak of the Ebola virus in 2015, Bill Gates gave a speech at the TED. He said in his speech that if anything kills over 10 million people in the next few decades, it's most likely to be a highly infectious virus rather
than a war. Not missiles, but microbes.
In the speech, Gates reminded countries that they should pay attention to investing in an epidemic prevention system, because when the epidemic broke out, “We didn't have a group of epidemiologists ready to go, ... We didn't have a medical team ready to go. We didn't have a way of preparing people, …we were far slower than we should have been getting the thousands of workers into these countries. And a large epidemic would require us to have hundreds of thousands of workers. There was no one there to look at treatment approaches. No one to look at the diagnostics. No one to figure out what tools should be used.”
Unfortunately, Gates is right. Now almost everyone on this planet has taken and is still bearing the consequences of unpreparedness to conquer the COVID-19. As he said, human beings are totally defeated in front of the virus.
When we analyze this scenario in detail, you will find that what he said is actually a typical cross-domain collaboration. One organization simply cannot cope with the virus, and it requires epidemiologists, medical teams, manufacturers, volunteers, etc., who originally belonged to different organizations and from different places of the world to collaborate
across their original boundaries, and this is cross-domain collaboration.
Cross-domain collaboration is not an odd situation, a lot of business scenarios require distributed parties from different background to collaborate across the traditional boundaries of companies, independent teams and professional individuals, such as some large and complex projects in multidisciplinary consulting, M&A, trans-border supply chain management, or some innovative frontline interdisciplinary study, or crowdsourcing, crowdfunding, social community economy, volunteers, makers, etc.
So, cross-domain collaboration is one of the most basic ways to create value, which covers a much broader spectrum and deeper degree than those of the finance. Cross-domain collaboration does not have territorial supervision or compliance issues, and it greatly complies with the spirit of the blockchain.
However, cross-domain collaboration requires a systematic governance and management framework.
Let’s take volunteers as an example. To fight COVID-19, volunteers are collaborating to provide help to medical frontline workers or to provide services to the local community. However, this kind of collaboration is mostly driven by their conscience, sense of responsibility, and enthusiasm, which is very loose and difficult to persist. It is hard to establish the collaboration due to the lack of trust, if not managed well, the collaboration with good intention might turn out bad results. As there are no mature governance and management frameworks to follow, currently, most cross-domain collaborations can only be carried out within a short period or a small range.
So how to establish the collaboration relationship among multiple trustless and distributed parties, and how to manage the collaboration process, will be the critical issues to solve, and that's why we will propose a new protocol.
Before we introduce the methodology, a fundamental concept, which is the DAC (Distributed Autonomous Company), needs to be explained and clarified.
DAC is an autonomous business organization built on blockchain technology and token economics model. DAC has no pre-defined boundary as it is open, trans-boundary, and flexible. All the participants are autonomously organized together to collaborate on some business projects, create value, and get incentives. (Yes, work has changed to a privilege that you could decide for yourself on which project you are willing to spend time).
With the deepening of the collaboration, a consensus community will be formed. And this community lives in the cyber world, so all the business activities and data generated could be recognized, verified, and confirmed.
An excellent token economics model could continuously drive the community members to contribute and attract even more members to join the community. As a result, the “boundary” of a DAC will be enlarged, and a self-evolution platform will be established.
The concept of DAC originates from DAO (Decentralized Autonomous Organization). DAO lives on the internet and leverages Smart Contract to execute the terms of the traditional offline contract on the blockchain, which entitles distributed protocols and algorithms to automatically run, audit, and implement the contract terms. After the implementation, tokens will be issued as incentives.
As every distributed collaboration parties can join without permission, DAO breaks the boundaries of traditional organizations. The rights of every contribution can be validated via the underneath blockchain technology, and Token Economics is used to incentivize the contributors. So, DAO makes it possible for distributed collaboration parties to govern the cross-domain collaborations.
However, DAO underestimates the complexity of a cross-domain collaboration. Also, it has issues of easy-of-use, Oracle, disputes resolving, etc.
DAC is an improvement of DAO, as we confine the scope of DAO within the Business Organization that is pursuing economic benefits. It would be easy to regulate the detailed governance and management mechanism after the confinement.
And what’s the relationship between a DAC and a traditional company?
Simplified put, DAC is the counterpart of a Company in the traditional business scenario.
DAC is focusing on the scenarios of cross-domain collaborations, while the traditional centralized company focuses on the collaboration within its walled garden. So, DAC and company are the supplement to each other, the company could be a com munity member of a DAC, and DAC could also provide services or products to companies. We anticipate that DAC will co-exist with the company and jointly build up the essential value creation entities in the future.
Founded in 1602, Dutch East India Company was the world's first formally listed public company. After over 400 years of development, the company has already built-up a well-established management paradigm, such as the hierarchy management structure, project management, KPI management, etc. It's highly efficient for people to form a company and collaborate within the company.
However, as we have known, enormous cross-domain collaborations exist in the value creation process of the society. The emerging of the internet has solved the issues of information gathering and distribution via various collaboration tools or platforms, which has promoted collaboration efficiency among these distributed parties. While as to the core problems of governance and management of these distributed collaborations, the internet platform didn't offer any solutions.
The traditional governance principle is not suitable for collaborations among multidisciplinary parties, as in this scenario, the boundary of a company has been broken, and these distributed parties are not the shareholders, nor in the employment relationship.
It is barely possible for distributed parties to connect their isolated information systems, even in the internet era. The in-transparency of information will cause the inefficient of traditional project management or KPI management, which is prone to create the "black box" in the process control and the failure in turning out high-quality deliverables.
So, although the paradigm of the traditional company is very classic, it couldn’t solve the issues faced by cross-border collaboration.
As DAC is formed and promoted by cross-domain collaborations, the focus
has shifted to the governance and management of a DAC. I will introduce how to leverage the Optimistic Rollup to build up the whole structure in the next article. Please stay tuned!
Contributed by Kevin Liu from Metis Lab and Steven Guo.