DAOs
Most uniquely interesting dialog centered around governance innovation at present centers around DAOs.
DAOs are digital, decentralized, autonomous organizations. Essentially, a DAO uses blockchain technology and programming to ensure a governance system adheres to a certain set of parameters—instead of laws and human-administered rules. DAOs have their uses, but they are dramatically more hamstrung than their proponents would have you believe.
First, it is critical to understand that a DAO is not a new type of governance structure. DAOs merely represent a new medium upon which a governance structure can be written. If a governance structure is a picture of a bird, a DAO is drawing that picture on a piece of leather (blockchain infrastructure) instead of a piece of paper (legal infrastructure). Because DAOs present a new type of operating system on which a governance structure can run, in some rare cases they enable “programming” not possible in governments that run on legal rather than blockchain infrastructure. Most of the DAOs that operate today are the governance equivalent of programming DOOM to run a refrigerator’s computer. Sure, it’s neat that you did that, but it would probably run better on a normal computer.
The core problem of DAOs is that this new operating system must almost always operate on top of the old one (think of it like the limitations involved in running a Windows emulator on an iPhone).
For example, suppose one were to create a DAO which subsequently faced a dispute over who owned some of its assets. Theoretically, the DAO’s internal structure would sort out the dispute, but if one of the parties was not happy with how it turned out, they could just go to the local court system (the old government operating system), override the DAO’s decision, and seize its assets.
This is the problem with a lot of blockchain-based technology designed to replace government functions. For example, NFTs would be strictly better than the existing system for tracking land ownership, but even the perfect NFT system for property ownership records would still be subject to the old legal system of any nation in which it is released. It is irrelevant whether an NFT says you own the land if someone else has an older claim to the same land and you have not revitalized the entire land ownership system in the country to operate on NFTs.
We will not see the full potential of blockchain technology applied to government systems until we can start running this new operating system as something more than an emulator on top of another one—or to use an analogy: When we can start running Windows as the primary operating system of a computer instead of having it emulated on an iPhone.
That is not to say DAOs have no utility. There are a few instances—even today—in which they are strictly better than present alternatives.
- In environments where the underlying legal “operating system” is faulty (e.g. When doing business in a failed state).
- When you believe the governance system—e.g. the nation state—in which the DAO must operate will not last as long as the DAO itself. (It is for this reason our own family office operates using a DAO.)
- When you are creating a security of which one of the partial owners must remain anonymous. A DAO could theoretically allow someone to buy partial ownership with an anonymous token like Monero and keep that ownership itself anonymous. The problem here is that while only a DAO can do this, it is also illegal in most developed countries.
Other than in those three specific uses, a DAO will consistently be worse than a traditional government because it has to operate on top of one, which requires you to make sure the organization functions as desired both per DAO protocol and per the governing nation’s legal system, whereas in a normal governance system you are just working with the nation’s legal system. Sure, we’ve encountered DAOs that claim to have evaded government control and meddling, but when one looks into how much of its members’ time and effort went toward creating structures designed to cleverly evade government intervention, these DAOs don’t seem to have much of an inherent purpose or impact aside from “avoid the government.”
Once nations successfully scrap some governance systems and replace them with DAOs, we may be able to see their true potential.