The Dao of DAOs

What comes after NFTs? Let's go deeper down the Web3 rabbit hole

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Hi friends 👋 , 

The fun part about working for myself is that I don’t have a job description, but if I did, one bullet might go something like this: “Hang out on the internet and translate the most interesting things you find.” 

A few months ago, I started seeing tweets about NFTs. I had no idea what they were then, but the people working on the edges did, so I read and talked and thunk and wrote. I wrote to learn as much as anything. Now, NFTs are everywhere. Beeple’s Everydays sold at Christie’s for $69 million. Your grandmother probably owns some NFTs. It’s moving fast out there.

Now, all of those people who were tweeting and Clubhousing about NFTs are on to the next: DAOs.

Each new depth I plumb in the world of Web3, the more out of my depth I feel. When I told Jess Sloss, who runs Seed Club, that I was exploring DAOs, he wrote: “🐇  meet 🕳”. DAOs, or Decentralized Autonomous Organizations, are the next step down the rabbit hole.

Things start to get wild at this depth; I’m exploring out loud. I won’t have all the answers, but hopefully, we’ll learn something together. 

Let’s get to it.

The Dao of DAOs

(You can click on ☝️ to go straight to the full post online)

The Ether (ETH) that hackers stole from The DAO on June 17, 2016 would be worth $6.6 billion today if it weren’t for the fork. 

Launched on April 30, 2016, The DAO was an early Decentralized Autonomous Organization (DAO) and venture capital fund. 11,000 people invested 11.5 million ETH, 14% of the total supply at the time, worth roughly $150 million, which they planned to collectively invest in crypto projects. 

Unlike a traditional fund, in which institutions and high net worth individuals (Limited Partners or LPs) invest money into a fund that other people (General Partners or GPs) invest into companies, investors in The DAO would be able to vote on proposals based on pre-set rules, established in smart contracts. Each person’s vote was weighted by the number of tokens they held, which was based on how much they had invested. If a proposed project received enough votes, the smart contract automatically triggered the investment of The DAO’s funds into the project’s ETH wallet.  

Two weeks into The DAO’s crowdfunding campaign, TechCrunch wrote, “The DAO is a paradigm shift in the very idea of economic organization. It offers complete transparency, total shareholder control, unprecedented flexibility and autonomous governance.”

Then, less than two months in, on June 17th, hackers hit The DAO and took out 3.6 million ETH. At the time, that amounted to around $50 million. Today, with ETH trading at $1,851, the stolen ETH would be worth $6.6 billion, placing it among the most expensive hacks of all time. 

The hackers aren’t billionaires today, though. The funds were put on a 28-day hold based on the terms of the smart contract, which gave The DAO and the broader Ethereum community nearly a month to figure out what to do. After a contentious debate, the Ethereum core team, led by Vitalik Buterin, released a hard fork of the Ethereum blockchain. It was essentially a new version in which everything was the same, except in the forked version, the heist never happened

The Ethereum core team couldn’t force people to move over; people voted with their feet, answering this question: does the benefit of erasing the hack outweigh the cost of human interference on trust in Ethereum? To most, it did. While some people continued to use the Ethereum blockchain on which the heist had occurred, renamed Ethereum Classic, the Ethereum we all know and love is the forked version. If you look at the Ethereum blockchain today, you won’t find any trace of the heist. No harm, no foul. 

From NFTs to DAOs

Off-chain, there was some harm though: namely the death of DAOs’ early momentum. While you’re probably at least familiar with the terms Bitcoin, Ethereum, DeFi, and NFT, chances are, you don’t know what the hell a DAO is. In fact, the last 400 words probably read like gibberish. 

But DAOs are re-emerging, five years later, with a diverse set of use cases, a growing software toolkit, and new governance and incentive models. A bunch of smart people I follow have been talking about DAOs recently, as the “what’s next” after NFTs.

When Jill talks, I listen. So I decided to go down the rabbit hole, and it’s way deeper than I expected. 

NFTs are relatively approachable. They’re easy to capture in catchy headlines. “Expensive JPEGs?! LOL.” Because at their most basic, they’re simple: they make digital media ownable and collectible, and people sometimes pay a lot of money for them. 

DAOs sit a level above NFTs -- DAOs can own NFTs and create NFTs, plus do a whole lot of other non-NFT things -- and have more transformative potential than NFTs. An NFT is a piece of digital media; a DAO could be a whole media company.

Because they’re more complex, they’re not nearly as easy to capture in a headline, soundbite, or price tag. But that’s what we’re here for. 

This is the beginning of an exploration, a walk through my own process of figuring out what DAOs are, how they work, how they interact with the rest of Web3, what advantages they have, and where all of this might lead. We’ll start simple, and then we’ll build up: 

  • Enter the DAO

  • Ethereum and DAOs

  • Uniswap versus Coinbase

  • Forking SushiSwap

  • Progressive Decentralization

  • Why DAOs?

  • The 7 Powers of DAO

  • DAOs Today and Tomorrow

All roads lead to DAOs. A lot of the more exploratory pieces I’ve written -- Secure the BaaG, Power to the Person, We’re Never Going Back, The Value Chain of the Open Metaverse, and Conjuring Scenius -- pointed towards DAOs without me knowing it. Those pieces all asked a version of the question: how are we going to work, invest, create, and play together in an increasingly digital and global world? 

If Power to the Person was about how much a single individual can accomplish alone, DAOs are about how much we can do together.

But wait. What’s a DAO?  

Enter the DAO 

Note: If you’re unfamiliar with Web3, or need a refresher, read The Value Chain of the Open Metaverse.

Let’s start with a definition. In her post, A Beginner’s Guide to DAOs, Scalar Capital’s Linda Xie gives a good one:

A decentralized autonomous organization (DAO) is a group organized around a mission that coordinates through a shared set of rules enforced on a blockchain.

A DAO is “decentralized” in that it runs on a blockchain and gives decision-making power to stakeholders instead of executives or board members, and “autonomous” in that it uses smart contracts, which are essentially applications or programs that run on a publicly accessible blockchain and trigger an action if certain conditions are met, without the need for human intervention. 

More simply, DAOs are a new way to finance projects, govern communities, and share value. Instead of a top-down hierarchical structure, they use Web3 technology and rapidly evolving governance and incentive systems to distribute decision-making authority and financial rewards. Typically, they do that by issuing tokens based on participation, contribution, and investment. Token holders then have the ability to submit proposals, vote, and share in the upside. 

If blockchains, NFTs, smart contracts, DeFi protocols, and DApps are tools, DAOs are the groups that use them to create new things. If they’re the what, DAOs are the how. They’re the Web3 version of a company or community. And as people experiment with new building blocks and structures, DAOs will have emergent properties that we can’t predict today. 

Supporters believe DAOs have the potential to reshape the way we work, make group decisions, allocate resources, distribute wealth, and solve some of the world’s biggest problems. DAOs are why Ethereum was created in the first place. 

Ethereum and DAOs 

In the beginning, there were DAOs. Vitalik Buterin, the co-founder of Ethereum, mentioned Decentralized Autonomous Organizations in the introductory paragraph of the Ethereum White Paper in 2013. 

Vitalik linked to a piece he’d previously written for Bitcoin Magazine (which he founded in 2011) titled Bootstrapping a Decentralized Autonomous Corporation: Part I, in which he asks and attempts to answer the question: 

Can we approach the problem from the other direction: even if we still need human beings to perform certain specialized tasks, can we remove the management from the equation instead?

In the post, Vitalik refers to Bitshares’ founder Daniel Larimer's idea that Bitcoin is actually a sort of a proto-DAO, a new kind of decentralized equivalent to a traditional company: 

  • Shares ≈ Bitcoin 

  • Shareholders ≈ Bitcoin owners 

  • Employees ≈ Miners and validators 

  • Payroll ≈  Bitcoin rewards for adding blocks to the chain 

  • Marketing  ≈ All of those people with laser eyes pumping Bitcoin

But Bitcoin is limited. It’s kind of dumb. It doesn’t really know much, can’t really change itself, and doesn’t really do anything; “it simply exists, and leaves it up to the world to recognize it.” It really is like gold in that it sits there as people do stuff to it and assign value to it. 

More charitably, to analogize with an equally complex analogy (this is the nice thing about having smart readers!), if Bitcoin is like Artificial Narrow Intelligence (ANI), DAOs are like Artificial General Intelligence (AGI). Bitcoin does the thing that it was programmed to do really well, but DAOs can theoretically do anything really well. 

Vitalik said as much when he introduced Ethereum: 

What Ethereum intends to provide is a blockchain with a built-in fully fledged Turing-complete programming language that can be used to create "contracts" that can be used to encode arbitrary state transition functions, allowing users to create any of the systems described above, as well as many others that we have not yet imagined, simply by writing up the logic in a few lines of code.

Bitcoin is digital money. Ethereum is a platform on top of which builders can create anything, from apps to entire organizations. 

Ethereum, Bitcoin, and other blockchains are Layer 1 in the Web3 tech stack. For Bitcoin, all of the magic happens at Layer 1, but with Ethereum, most of the magic happens in Layer 2, the protocol and smart contracts layer. 

The second layer is where builders create Lego blocks of protocols and smart contracts that can be arranged in countless combinations and formations to do anything from mint art to trade crypto, directly, without the need for a third-party. 

Zora is an NFT protocol that lets any creator mint, own, and sell their work. The Uniswap protocol is a decentralized exchange that lets “developers, liquidity providers and traders participate in a financial marketplace that is open and accessible to all.” Mirror’s decentralized publishing platform “revolutionizes the way we express, share and monetize our thoughts.” 

Zora, Mirror, and Uniswap are all protocols, but not all protocols are necessarily DAOs, and vice versa. To understand the difference, let’s start by comparing a centralized platform and a decentralized protocol, and then we’ll move on to the evolution of a decentralized protocol into a DAO. 

This rabbit hole goes deep. For case studies, UNI vs. SUSHI, Progressive Decentralization, 7 Powers Analysis of DAOs, and a glimpse at the future…

Jump Down the Rabbit Hole

Thanks to Patrick, Jess, and Ryan for being my Web3 sherpas, and to Dan for editing!

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