The Generalist - DAOs: Absorbing the Internet

Hey friends,

For the past six weeks, I've been collaborating with 17 (!) leading crypto thinkers, investors, and builders in the world of DAOs.

That includes the minds behind The LAO, FWB, Seed Club, Syndicate, Mirror, and other leading projects.

It's The Generalist's largest multiplayer piece yet with a great deal of brainpower behind it.

You'll notice this is a more tactical piece than some others. When I set out to learn more about DAOs this past summer, I found it difficult to answer even simple questions thoroughly.

What is a DAO, really?

Who can work for one?

What do they do?

Do DAOs make money?

How do they manage it when they do?

What tools do they use?

And what are the risks of this new structure?

This work answers those questions, and hopefully goes far beyond them, too. Above all, the goal is to share a sane, comprehensive rationale of why DAO's are exciting, how they function, and the state of play.

Let's do some learning, together.


Actionable insights

If you only have a couple of minutes to spare, here’s what investors, operators, and founders can learn about DAOs.

  • DAOs are a new way of organizing people. Traditionally, a company structure has been the most effective free-market approach to accruing talent in pursuit of a goal. That labor is usually persuaded and controlled through wages. DAOs seek similar ends — the creation of value — but rely on a decentralized framework in which workers, users, and other stakeholders have true ownership of the entity.
  • Various types of DAOs have emerged to serve different use-cases. As interest in the space has increased, DAOs have begun to diversify and experiment with the boundaries of what’s possible. There are DAOs for investing, DAOs for building new products, DAOs for socializing, and many iterations both between and beyond.
  • Meaningful assets are being managed by these entities. Those skeptical of the crypto space in general and DAOs in particular, may want to reconsider their stance. These are organizations with real sway, and real capital. Tens of billions are being managed across top DAOs, with some, like Compound, boasting a treasury of almost $1 billion itself.
  • We’re still early when it comes to DAO infrastructure. DAOs have many of the same needs as corporations, but must often deal with greater complexities given their scale, fluidity, and technical stack. That necessitated the emergence of tooling for formation, communication, collaboration, payments, and more. DAOs have a handful of providers to select across these categories, but by and large, choice is limited. We should expect many new entrants to the space in years to come.
  • DAOs have clear vulnerabilities that have yet to be fully addressed. The first DAO was famously hacked, with a bad-actor attempting to siphon off millions in Ethereum. While DAOs are safer today, they carry risks. Contributors often join pseudonymously, meaning reputation capital is not entirely on the line. Furthermore, without sufficient protections, some DAOs are still vulnerable to exploitation.

***

Team

Aaron Wright (founder of Tribute Labs), Alex Zhang (mayor of FWB), Chase Chapman (co-founder of Decentology), Cooper Turley (∞ DAOs), Derek Taylor (founder of DDDVVV), Jarrod Dicker (partner at TCG Crypto), Jess Sloss (founder of Seed Club), Jihad Esmail (community at Syndicate), Jose Macedo (co-founder of Delphi Digital), Jorge Izquierdo (co-founder of Aragon), Kevin Kelly (co-founder of Delphi Digital), Nadia Alvarez (growth at MakerDAO), Patrick Rivera (Mirror), Pri Desai (operations at Tribute Labs), Raihan Anwar (community at FWB), Tina He (co-founder of STATION), Will Papper (co-founder of Syndicate), and Mario Gabriele (founder of The Generalist).

→ You can follow everyone via this Twitter List.

***

We did not always work for companies.

As late as 1820, just 20% of the American population worked for an organization that paid wages. The rest farmed, fished, ran their own businesses, or split their time between these activities.

Over the following 130 years, that changed rapidly. Industrialization offered the chance for greater wealth while demanding increased labor. That drove the consolidation of workers beneath large organizations with centralized command systems. These shifts meant that by 1950, as much as 90% of the populace depended on companies for wages.

The company, then, is a modern phenomenon, at least in the way we usually think of it. What seems so embedded and intractable today — the default for most new ventures ​​— is really just humanity’s latest attempt to solve the problem of coordination.

A better alternative may have emerged. Though far from perfect, decentralized autonomous organizations (DAOs) seek to remedy some of the company’s flaws while enabling human collaboration at scale. This internet and crypto-native structure looks to decentralize governance and ownership, giving contributors the chance to determine a project’s direction and profit from its success.

While still in its fledgling stages, the explosion of interest in this organizational framework indicates that DAOs are an idea to be taken seriously. Over the last few months, in particular, new DAOs have risen to prominence, attracting meaningful capital and high-caliber, devoted talent. Historically, those that have paid attention to such dislocations in the crypto realm have looked prescient years later — even when the hype seemed overblown. Both builders and investors would be wise to give the space due consideration.

Beyond the potential for financial gains, DAOs may herald a societal shift with lasting implications. We are, after all, influenced by the organizations in which we operate. In his work, “A Society of Organizations”, sociologist Charles Perrow argued that organizations explain much of the way our world works. He introduced this theory, as follows:

[U]nless you are an organizational theorist...your specialty will be treated as a dependent variable; organizations will be the independent variable that shapes political and economic behavior, the stratification system, religion, social psychological processes and history in general.

How will DAOs, as a new independent variable, influence each of these dependencies? What will this structure do to religion, history, and politics?

In a telling line, Perrow says, “My proposition is that organizations are the key to understanding our society because organizations have absorbed much of society.”

If that maxim holds true, what parts of life will DAOs absorb? If companies invaded the relationships and connections made in the physical realm, DAOs may, over time, assimilate our digital beings. They may, in short, absorb the internet, becoming the constituent pieces of our new, web3 society.

We’ll explore that idea in today’s piece, while unpacking the current state of DAOs. In particular, we look to answer the following questions (and say the word “DAO” so, so much):

  • Definitions. Explaining what a DAO is and how we might think of them.
  • History. The origins of a new organizational structure.
  • Categories. The diverse types of DAOs that exist.
  • Culture. The values and philosophies that underpin the space.
  • Landscape. Key players and the tools they use.
  • Starting a DAO. Exploring the benefits of going decentralized, and the tactics needed. Legal issues. Promising developments in Wyoming, and open questions.
  • Against DAOs. The vulnerabilities of the structure and its unproven potential.
  • Frontier. Exploring what the future might hold.

By the end of this piece, we hope you’ll have a strong grasp on what’s happening, and why it matters. Though it may seem unlikely today, in a few decades time, it’s not impossible that a large percentage of the population works not for a centralized entity, but a decentralized entity, enabled through crypto.

History and lore

Want to invent your own financial derivative? With Ethereum, you can. Want to make your own currency? Set it up as an Ethereum contract. Want to set up a full-scale Daemon or Skynet? You may need to have a few thousand interlocking contracts, and be sure to feed them generously, to do that, but nothing is stopping you.

Those words appeared in Vitalik Buterin’s 2013 Ethereum Whitepaper — the source for one of the first ever descriptions of a DAO. Not only does Buterin’s explanation above illustrate his blockchain’s modularity and power, it hints at its intellectual influences.

Indeed, years before there was Ethereum, let alone DAOs, there was the “Daemon.” In 2006, science fiction writer Daniel Suarez published a book by that name that can be seen as a kind of ur-text for DAOs.

In Daemon, Suarez paints a picture of a mass scale computer program that orchestrates an underground cooperative society. While the Daemon is involved with a number of insalubrious acts (think self-driving-motorcycle assassins!) that we wouldn’t want any web3 organization to take inspiration from, its fundamental operations are very similar to those a DAO under takes today: paying out bounties, sharing information across a community, and managing a narrative currency.

Despite its functional analogousness, Daemon did not coin the name “DAO.” Buterin had written about “decentralized autonomous organizations” prior to the publication of Ethereum’s whitepaper, but he included a tidy definition in the seminal work:

[DAOs are] a virtual entity that has a certain set of members or shareholders which, perhaps with a 67% majority, have the right to spend the entity's funds and modify its code.

Like the Daemon, Ethereum DAOs rely on self-modifying code. Unlike Suarez’s creation, however, Buterin envisioned DAOs as fundamentally transparent with clear governance processes and paths for establishing consensus.

This notion is further illustrated by the whitepaper’s delineation between two types of DAOs: “Decentralized Autonomous Corporations” (DAC1) and “Decentralized Autonomous Communities” (DAC2). (These acronyms are our attempt to easily distinguish between them and are not canon.)

Buterin envisions the former as profit-seeking entities with tradable shares and a dividend offering, while the latter serve more as a democratic entity in which community members vote on certain issues, such as adding or removing members. Effectively, DAC1s operate with a model in which “1 share = 1 vote,” whereas DAC2s govern such that “1 member = 1 vote.” Needless to say, readers of Daemon will remember the book’s near-omniscient program did not have such a clear structure.

Now, while Buterin’s quote at the beginning of this section can be viewed as an invitation, it was also — at least, in part — a provocation.

Want to set up a full-scale Daemon or Skynet? ... Nothing is stopping you…

It took nearly three years for someone to take on that challenge. In April 2016, The DAO was born.

The project began with the best of intentions, hoping to become the de-facto venture fund for the Ethereum community, managed in decentralized fashion. Community members collaboratively invested in The DAO, and voted on potential investments.

That proved an enticing proposition to many. The DAO quickly accumulated 12.7 million ETH, the equivalent of $150 million at the time, from more than 11,000 LPs. A warchest of that size would have been meaningful, even among traditional venture firms. For context, the same year that The DAO was founded, storied fund Union Square Ventures announced the closing of a $166 million new fund, not much beyond the Ethereum-native vehicle.

For those that know what came next, it’s hard not to spend a moment imagining just how miraculously successful this entity might have been. Had The DAO done nothing more than hang on to its ETH, delivering zero alpha, it would have assets under management equivalent to $52 billion today. Had The DAO picked even a few winners — and it would have certainly had the broadest sourcing structure in the world — the sums could be significantly higher. The result would be a Tiger Global-scale player in the world of decentralized finance.

Of course, it didn’t play out that way.

In June of that same year, The DAO was hacked. Fully 3.6 million ETH was extracted from the entity and moved to a holding account. To give owners of that ETH the chance to recover their funds, Ethereum underwent a hard fork. No money was lost, but the hack led to a schism within the Ethereum community and illustrated the perils of a DAO structure that had yet to be fully baked out.

What followed was a DAO winter that preceded and endured through the broader crypto cooldown. Still, even during this slower period, dedicated builders were building in the space. Aragon, co-founded by contributor Jorge Izquierdo, began working on tooling for DAOs in 2016. MakerDAO, which had been founded in 2015, continued to grow in prominence, attracting new talent to work in the space.

These early-movers have proven vital over the past 12 months. Part of the reason renewed enthusiasm about DAOs has translated into a tangible renaissance is because newcomers are able to rely on the infrastructure and architecture created by organizations like Aragon and Maker.

Before we talk about the state of play, we’ll think a bit harder about the definition of a “DAO.”

What is a DAO?

Hopefully the section above has given us a sense for the subject at hand. But still, it is worth spending a moment thinking through this most direct of questions: what is a DAO?


IN A MEME

For the pictorially inclined, here's the whole piece — all 13,500 words of it — in a single meme.


PUZZLER

All guesses welcome and clues given to anyone that would like one. Just respond to this email for a hint.

This week's riddle is rather sinister...which feels suitable given its the spookiest day of the year.

A man attending his brother's funeral, sees a woman in another pew. He falls madly in love at first sight.

For a few weeks, he tries to find her but she is nowhere to be found. Subsequently, the man kills his sister. Why?

Some of my favorite answers of all-time arrived in response to our previous puzzler.

Edward M was first to pose a viable solution, followed by a stampede of other brainiacs including Joe K, Charlie P, Massimiliano B, Anna L, Robert H, Thomas K, Steven V, Michael G, Josh K, Ravi P, Austin V, Peter F, Hardik T, Angela F, Vivek J, David S, Grant G, Timothée D, Colin H, Amir L, Amir S, Bruno F, Austin L, Hari A, Kaitlyn R, Lawrence S, Bernard V, Lawrence L, Robert H, Jithamithra T, Jim W, Sudarshan P, Adam S, Mikaela R, Andrew R, Joe H, Nihal D, Jean L, Husky, Yazin, Dan M, Balaji V, Lucas N, Stephen C, Jonathan Z, Neal K, Eric J, Daniel T, Nate M, and Kunal G.

Here is your challenge: you must throw a ball with all your might and have it return to you. You are not allowed to bounce the ball off of anything.​
What do you do?

The answer?

Well, that depends on who you ask. The stated solution was to throw the ball directly upwards into the air, allowing it to fall back into your hands. But a range of other crafty workarounds came in. Here were some of my favorites:

  • Go bowling. Throw your bowling ball as hard as possible down the alley, and then allow the machine to return it to you.
  • Use a tether or elastic of some kind. It might limit your range, but it could bring the ball back to you.
  • Go to a wind tunnel. Again, you might not be able to throw it very far, but you could still use your full strength. The wind tunnel could blow it back.
  • Bring your dog. A game of fetch solves this nicely.
  • Throw it upstream. As long as you don't mind potentially getting wet, you could always toss the ball into a river that is coursing towards you.
  • Visit space. If you throw the ball while you're in space, you can wait for it to orbit back to you.

You guys are too clever. Well played, all of you.

Wishing you all a lovely Sunday (and a happy Halloween),

Mario

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