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DAO Governance and The Future of the Firm


Wulf Kaal

In Episode #7 of The Futurists, we explore the future of the company. Professor Wulf Kaal is an expert on managing community-led Decentralized Autonomous Organizations. He explains how DAOs differ from corporations, achieving consensus without a top-down hierarchy or executives. The DAO token economy provides reputation incentives and identity to participants. DAOs are the most exciting business innovation of the decade: according to Kaal, there are 50,000 active DAOs in operation today. Visit www.wulfkaal.com for white papers and more.

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this week on the futurists downs are this idea that the community should self-perpetuate and self-govern that has never worked until we had this technology right so the entire downspace is a big experiment right now with how much can community self-govern without leadership and you in my humble opinion if you have the right governance engine and consensus mechanism available the governance revolves around work to earn the product itself becomes the focal point for community audit so in other words if i do a job i don't need to report to a person who's then reported into the community i i report my job to the community here's my job work product post it on the blockchain or on a centralized state database we can be chain agnostic with this in dallas right now and it doesn't it doesn't have to be a smart contracthere on the futurist one of the things we always like to think about is what's coming next and who are the people that are helping to craft the future and how do they go about doing that but the future has very very deep roots in the past and so whenever we think about the future we're always finding ourselves looking back at how do we arrive at this particular moment in history and where do we come from The future of the firm / companyone of the things that's been on my mind for quite some time is the future of the firm or the future of the company most of us tend to sleepwalk uh through our business lives we go to the go to go to work we show up we don't really think about the organization that we work for where did it come from where did this structure emerge from how do corporations develop over time and what's fascinating to me about corporations is that for a period of more than 400 years humanity has only had one answer to a question and the question is how do we best deploy capital to create an organization for profitable productivity and the answer has been a joint stock corporation since the very earliest corporations like the the english east india company and the Who where the first companiesdutch east india company in 1600 and 1602 of course there's been some developments since then but all the alternatives that have been propositioned in the ensuing 400 years they've either been non-profits or government institutions or they simply haven't worked um i'm thinking now things like mikhail bakunin's collective and collective anarchy um interesting concepts maybe concepts that were a little too early in time but one concept that has been durable for centuries is the corporation and so this week on the futures what i want to talk about is the future of the organization and is it possible now that we're at the brink of something entirely new Are we on the brink on a new way to structure and run organisationsjoining me this week is an expert at the intersection of business law and technology he's a professor he's a prolific writer but for our program perhaps most importantly he's the leader and one of key organizers of one of the most interesting new organizations DevDAO is one of the most interesting organisation to emerge in last couple of yearsto emerge in the past two years dev dao we're going to be talking about dallas today and here to join me is wolf cowell professor kaul welcome to the futurists thanks for having me it's good to have you here this morning um i'm sorry that my my colleague brett king can't be here today he's right now he's on a flight somewhere over the middle of the indian ocean so for obvious reasons he can't join he sends his regards this is a super interesting topic that i know he would enjoy as well because he's very fond of economics and finance those are areas of strength for him so in that spirit let's let's dive into it um talk tell me a little bit about the corporation because i know there's a topic that you've written about you understand very well and you teach about uh is my potted history of the 400 years of corporation more or less accurate yeah yeah of course this is the instrument for capital allocation and capital raising uh around 350 plus years and um yeah so it's started with ronald cos theory of the firm major institutional economist has jumped have jumped on on this as well and uh to disclose this up front that's where i'm coming from right i'm trained as an institutional economist and my phd supervisor was very prolific professor an institutional economist um and his peers include uh douglas norris oliver williams and rudolf richter several of the institutional economist powerhouses and that's where my training came from and that's how i got into this environment of of daos when realizing that dynamic governance of institutions is actually possible with technology Dynamic governance or organisations is now possible with a DAOand this is something that um we couldn't have theorized before because the technology just wasn't there right you couldn't exactly right sorry i don't like to keep going on no no that's quite right forgive me for interrupting you but the uh uh i'm gonna i'm gonna want to hold on that topic of governance the dynamic governance because it's a it's a gigantic topic and it's probably gonna be the central conversation point but before we jump into that let's take one step back for people who are new to the concept let's talk a little bit about what is a dao so decentralized What is a DAO or Decentralized Autonomous Organizationautonomous organization so intelligent minds will beg to differ on on the definition of a dao there are certain commonalities however that i personally believe areidentifying landmark pieces for taosthey will not necessarily be shared by the community so i want to disclose this up front a lot of people right now look at dallas as a fundraising vehicle i A DAO is much more than a fund raising mechanism it about governancehumbly disagree with that definition and to me dallas is all about governance and again i come from this as an institutional economist with this perspective of the firm and how we can create uh dynamical uh rule changes in governance to lend stability to institutions right that's that's what dows are made for the crypto landscape is however filled with thousands tens of thousands of dollars that are set up for fundraising purposes right so when when i give you my definition for for a dow environment this is my perspective on it uh other people have other ideas about it right but but that's the hopeful disclaimer that kind of illustrates one of the key points about this is which is it's not just a formative concept but it's also controversial there are many many perspectives so we need to we accept your disclaimer but please proceed tell us more about that and robert this comes from this whole discussion on what is decentralized right um because when we so so you can't talk about dials and defining dials without defining you understanding of what decentralization actually means right and so What does decentralised meanand i don't want to necessarily get into that entire debate but there are certain commonalities that in decentralized systems so for me decentralization involves bringing information from the edges um and attack resistance right those are absolutely crucial crucial perspective on this and um many of us will have read the the book starfish and the spider and that's the the The Starfish and the Spider: The Unstoppable Power of Leaderless Organizationsvery uh sort of intuitive analogy right the spider which has the the nervous system in the center that that coordinates the um the legs if you cut a leg off it can can survive if you cut two leg legs off it tills to the to one side however if you cut the spider in half you're creating two fully visible two fully um uh workable uh equal systems you create new spiders right and that's that's a key element in decentralized systems right they're not as efficient clearly you know having worked through dials uh we get this all the time why does this take so long right well it takes time to coordinate community engagement but you get attack resistance out of this right and so when we talk about dows it it all starts with governance is not a bug governance is the key feature right so a lot of the dows that started some five six years ago first generation dials they all came to this with this perspective of oh let's slap on a governance system at the end because we know we have to do this here's our smart contracts they coordinate everything no that's not what this is right the smart contracts are key but they're they're key in the context of governance engagements for the community because if you don't have sustainable governance and incentivization as we see now all these dolls are collapsing right um even the ones that have a lot of assets right there's a small group that holds and controls it but there is no community engagement so you you're not bringing information from the edges of the system integrating a new talent in and you're not focused on attack resistance because you haven't actually figured out the governance uh the the the the necessary decentralization elements in governance yeah so you you just packed into that statement all the topics that i wanted to cover in this show so let's let's go back let's rewind a little bit and unpack each of those very important ideas that you shared with us A key trait if a DAO is resilience the ability to withstand attackbecause what you've been talking about is resilience you know the ability to withstand attacks an organization that's responsive to people on the periphery of people on the edge very different from what a corporation does corporations are highly centralized and candidly not that responsive to the workers or the people that are inside the machine or even customers necessarily they're more responsive to regulators and to and to the board of directors and so uh that's quite a big contrast and then you you've been talking a lot about uh governance and i know we're gonna go into the topic because it's super interesting topic but before we jump into that i think we still need to clarify for people what a doubt is let's break it down word by word so you talked about decentralized that's the first one right decentralized autonomous organization and of course decentralizes a topic you're deeply familiar with because that's the title of your book you're the author you wrote the book on the subject the the uh the reference textbook decentralization by wolf call How a DAO differs from a companyuh so this is an organization that is going to be different from a corporation which we would consider highly centralized hierarchical top down uh you know there's a ceo there's a c-suite that function of that ceo is to make executive decisions and this concept is non-existent in a data there is no c-suite there's no ceo so you have to think of it as community organization and think of a DAO as a community organisationcoordination right there is the community itself coordinates itself there is no leadership in endows we call leaders catalysts right you're catalyzing a community you're starting and kick it off and then you let it go because the process is self-perpetuating right so the people often fall back into it but a key element is leaderlessness if you want yeah that the community is itself is is coordinating its efforts and for that you need the correct consensus algorithm right the consensus making tool sets in the dow that allow people to to to get the endorphin rush to to want to engage because they know it's meaningful and community organisations need a consensus mechanismthey get paid for it right and what you're talking about now this idea the consensus making method that gets us to the second word the autonomous part right so the first part decentralized that means there's an absence of executive leadership and in that absence in that void what fills it is a series of smart contracts and we'll have to talk a little bit about that before we get into governance because the two things are intimately linked so um vitalik buterin who who created ethereum wrote in in 2014 he talked about dallas as the concept and said that you could take any corporation and express its mission statement as a series of if then statements and if you had a powerful enough computer and good smart contracts you could run that entire organization on a series of smart contracts in other words you could create a decentralized autonomous organizationyou would just be trying to emulate the centralized structure with smart contracts which is not what dials are about right they can be and there's a lot of people that are moving in this direction but dows are about community building from the inside out grassroot community building so allowing people who don't DAO are about community buildingknow each other and who are ideally anonymized coordinate their efforts and trust each other that's what this is that's what this is about and that's a lot of what you do right that's a big part of your role about that is we are we are currently five years in uh with a lot of money at stake uh building what i'd have described in the book um but we are about a year or maybe two away from getting to a system where we can actually build downs completely anonymized and even then even if we have the cryptographic methodologies down which we're currently coding you would still struggle anonymizing it entirely right this is an iterative process that takes time and um if you talk to developer teams there's a lot of developers saying it's a it's a um it's a fallacy to think that we can anonymize but we can we can we can hope to anonymize it more for The importance on anonymising a DAO its governance and votingthe average user which actually liberates us from a lot of the if you want the human condition or biases or inherent biases that we can't get rid of and that undercut our ability to engage with each other and quite frankly to do a fresh effective business with each other right so this is also a new way of doing business uh community-based business and we're already seeing this in in many dows that i'm personally involved with right now now you've talked about an anonymity quite a lot i'm wondering why is that so essential why is it necessary to support anonymity the system just works better and removes the a lot of the the problems that you're otherwise dealing with in trying to run decentralized communities right um why because if people know each other power structures uh start to emerge that undercut the decentralized nature of the of the of the community um you know you have power centers you have p you have whales you have people identifying whales and it's not about the merit that people put into the system and how they gain their reputation scores in the system which is what should only matter right it shouldn't matter Meritocracy and participant credibility scores are key to DAO governancewho what you've done before it only matters what you're doing in the community for the community with the community which is inherent in the score that you're getting through the voting engine right if you don't anonymize all these other factors that afflict us race socio-economic status culture the ability to engage in other business uh ventures et cetera et cetera they afflict us they affect how we vote that they affect how we engage with each other so if you can't anonymize you're bringing in all these problems that afflict the cooperation and other structures thatare suboptimally working okay so somebody with a huge let's say a gigantic profile someone with maybe a gigantic social media influence so let's say a very charismatic ceo who runs an auto company for instance um can start to sway people's opinions maybe influence them unduly even if what he's proposing makes no sense at all uh he can he can have a great deal of influence so by anonymizing you remove that element of charismatic appeal um and and uh and now all that's left is an anonymous reputation score um that obviously still has a lot of merit and would very quickly become quote unquote a superstar in the system but organically without the the baggage of the past right i mean it's about the skill set that this person brings to the table and if you're that good you you will organically create a very high merit score reputation score in a system but not with the resume of the past things that you've done that undercut the community engagement through merit right it's it's a meritocracy it's all about what you what do you give to the community what can you do for the community how good are you at doing it how much are you following through what is your work ethic and based on the upvotes and the community audit pertaining to your work product people build reputation scores and that's what counts in the system it doesn't your resume doesn't count now you might say well you built a resume through a lifetime of experiences of course those lifetime experiences count but anybody can come on right so there's the people now who are uh talking about the school of life right there's all their programs and centralized systems where we're using the school of life to get people on track um because they don't necessarily succeed in the centralized hierarchical structures that that we created as as a society yeah and um in dallas you don't even need to create these programs because the entire entire engagement is about the merit and what you can bring to the community right okay so let's let's actually look back at the corporation and and apply a little critical lens to the corporation you know clearly corporations have been durable in history because they seem to be the most effective Corporations have been durable way of deploying capitalway to deploy capital for profitable enterprise at least historically that's been the case and of course deploying capital is risky right let's let's think back to those early days of the corporation where every time a ship shipped left the harbor there was a risk that that ship might not come back and the investors who stake the capital for that ship well they'd lose it all and so people could be ruined in that process so the corporation was a way to mitigate risk of course those investors demanded certain protections certain controls to ensure that the corporation carried out the mission that they asked it to do and that's you know ancient history at this point but even today we can say that that's largely how corporations are governed that there is the board of directors that represents investors the investors are concerned about risk and so the board of directors responsibility is to keep an eye on the management of the company and ensure that they're carrying out the mission now who's left out of the equation here of course our workers um the people inside the organization who might have excellent ideas um every person listening to this has had the experience of working at a company where they feel like the employees know more than the management team does and this also creates something else which is the agent problem uh tell me a little bit about the agent problem because this is kind of like an age-old criticism of corporations and finally a dow presents an alternative to the agent problem yeah so that's really where i i got started with this about about a decade ago the principal agent problem right we've never been able to overcome this um the principal is delegating authority to the agency agent has boots on the ground knows more inevitably the agent will not be able to transmit all his or her information to the to the principle which leads to information asymmetries bonded rationality opportunistic behaviors all the terrible things that affleck affect and afflict capitalism in the way we're engaging with us with each other and so we're building the corporation all these control mechanisms top down to mitigate principal agent problems and bring down agency cost yeah soDAO solve the principle agent dilemaarguably in a dow there is no principal agent engagement because it's a flat hierarchical non-hierarchical structure it's a flat hierarchy right in fact there's no investor class right there's no board of directors yeah there is no board of directors there is no again there's there's catalysts that are the founders of the community that kick it off and they have a high reputation score right which they they need to have right so we and sorry i don't want to get into the weeds we've been through this we'll get into the weeds in a moment but so this is really this is really worth unpacking yeah so what you're saying wolf is um when we say principal and agent what we mean here is the principle in this case is the investor uh maybe maybe represented by the board of directors that's the principle and then the agent is the executives that they hire the management into the company um you know so for those of you duty rules in law to to make sure that the interests of the agency the board and the officers are aligned with the the owners and and you know this is this whole problem in corporate law uh separation of ownership and control hundreds of thousands articles written about it terabytes of data it has never worked never could work everybody knows about this yeah and the examples would be things like a disengaged uh investor a passive investor yeah or or a board of directors that's uninformed and doesn't know what it's doing or board of directors that breaks its fiduciary obligation of course you always have the issue of crazy ceos who run off and do things that really are not authorized necessarily or they kind of um you know in a way they call it all kind of respect from translation problem right this is that's right that's higher problem that we have okay so for those yes so dials are like the alternative to this right downs are this idea that the community should self-perpetuate and self-govern that has never worked until we had this technology right so the entire downspace is a big experiment right now with how much can community self-govern the DAO space is a big experiment into how much communities scan self governwithout leadership and you in my humble opinion if you have the right governance engine and consensus mechanism available the governance revolves around work to earn the product itself becomes the focal point for community audit so in other words if i do a job i don't need to report to a person who's then reported into the community i i report my job to the community here's my job work product post it on the blockchain or on a centralized state database we can be chained agnostic with this endows right now and it doesn't it doesn't have to be a smart contract but we can get into those details later right right here's my work product um so wolf you're telling us that the dao represents this alternative to these age-old problems in the corporation i'm fascinated to hear how that might work the topic of course is governance in daos where we're listening to the futurists and my guest today is wolf call we're going to take a break and in just a few minutes we'll be back and we'll tell you all about how a dial actually operates and what it's like to govern one of them hang on you're listening to the futurists and we'll be right back after this break welcome to breaking banks the number one global fintech radio show and podcast i'm brett king and i'm jason henricks every week since 2013 we explored the personalities startups innovators and industry players driving disruption in financial services from incumbents to unicorns and from cutting edge technology to the people using it to help create a more innovative inclusive and healthy financial future i'm jp nichols and this is breaking banksyou're listening to the futurists i'm rob patrick and my guest today is wolf calm professor carl is an expert in doubts decentralized autonomous organizations and before the break we were talking a little bit about some of the problems that have plagued corporations for centuries uh what we call the agent principle problem there are many manifestations of that and dowels represent an alternative possibly a solution to many of those problems and the main thing there is that the dao doesn't have a top-down hierarchy there is no ceo there's no c-suite and there's no board of directors instead it's a community-led community driven organization that strives for consensus there are two concepts here that are really central to understanding a dao the first one is how do you achieve consensus and the second one is what is the function of the smart contract now wolf a lot of people think a dao is basically a robot corporation that's run by smart contracts what do you think about that okay so that's where everything started it's very important that we understand the transaction cost minimization potential that smart contracts have very important but we cannot get carried away by smart contracts alone right so when we talk about optimizing Optimising top down structures with smart contractstop-down hierarchical structures with smart contracts and removing transaction costs that's the origin of of smart contracts right so if a then b it's a very simplified format um in which these contracts work however the more we build smart contract superstructures that potentially can govern real estate transactions uh very complex uh high liability engagements Smart contracts are not a panacea and have shortcomings and risksevery time we do something like this and we build smart contracts bigger and bigger even the smaller smart the smaller smart contracts have bugs and logic breaks that afflict them right so this idea engineers come in and say yeah we're automating everything right until it's just every day with targeted engineers that's great yeah we get transaction costs are minimized which is a big ticket item uh theory of the firm right so that that but that's only the starting point when you automate with smart contracting including big structures you're bringing bringing in other attack vectors they come from bugs unanticipated functions um and so forth and also very importantly most importantly what do we do in anonymous decentralized and autonomous systems if we let smart contracts without a human backstop govern our relationships in my humble opinion it brings out the worst in humans because you are not accountable the contract takes care of your conduct it is only this one off and in this smart contract engagement you are not penalized you just walk away you can act your worst and walk away because it's all automated we trust the code right that's really good you can you can sorry go ahead no that's a really good point you're reminding me this is uh this is actually this goes back to the original dao the dao it's confusing because the name of the organization was the dao uh which was a kind of um community investment organization just you know we can think of it as like an in uh investment yeah yeah yeah as an investment fund that was governed by the investors themselves without without a management team um it was an interesting concept it was uh created in 2016 but there were some flaws there were known vulnerabilities in the smart contracts yeah and one of the users exploited those but it was actually controversial right because some people said well he stole money stole a third of the money about um roughly 50 million dollars of capital was stolen if essentially taken away but other people said no actually the smart contract permitted that that was a flaw in the smart contract and he did not do anything that was not permitted this became highly controversial and actually kind of besmirched to the reputation of daoists for a couple of years it took a few years to kind of work past that tell me a little bit more about yeah so this is just the the typical um hey you know i'm automating payments and i i don't know what the code really does ultimately and somebody identifies a hacker identifies the flaw and then siphons off funds puts them into a wallet that nobody else controls including himself because the code only allowed that and so the assets were just sitting there and then as a result of that we um we had a hot fork in ethereum right that creates that ethereum classic okay so that but that is just uh hacking what i'm talking about is the long-term implications of these smart contracts and building more complex uh smart contracts without a human backstop right so there is hacking smart contracts bugs and unanticipated consequences that hackers can exploit they will they are always present the more complex structures you build the more of these opportunities you create for the hacker communities okay but what i am talk so that's that's a natural uh site product if you want but what i'm talking about is the the impact of automation on human behavior right if i automatehumans and this is arrows and possibilities theorem right in one application humans will always try to find ways to gain the system right that's and so when the more you put smart contracts up the more gaming opportunities there are so what you absolutely need is you need dynamical governance the system has to change constantly in order to avoid the gaming what is dynamic governance and why is it importantopportunities right so tell us about dynamic governance because you've been going there so so there's there's dynamic governance there's a lot of okay there's a lot of topics yeah but let's before we talk about dynamic governance it's this idea that if the contract allows you to do x and you know you're not going to get penalized it's just one contract you can act your worst because the contract allows it and by the way we've seen this play out in dallas they have witnessed it firsthand where people say what do you mean the system allows it if the system allows it i can act like that well no you can't just because the smart contract see this is this problem with the information of symmetry humans are boundly rational we cannot program these smart contracts to anticipate all eventualities that's right because we can't do that people will come in and exploit it so what we need is we need a human backstop for smart contracts and and robert that is dao's that is the that is one of the foundational elements for dallas where the community holds people accountable for their actions is that what the reputation token does is that the function of the reputation that is exactly right so if i do something that's egregious even though the rules might permit it but the community is going to say no dude that was completely wrong and we're going to deprecate your reputation that's exactly right and and the interesting thing is that people are still in this oh especially engineering communities where all this started in this oh the smart contract allowed it so well we're bad luck we can't do anything about this no no no this is community values this is how you think people should act if you think this is nefarious the community should be able to uh to slash your reputation because because we would expect the person to know that that conduct was wrong yeah okay so this is really interesting what you're saying well this is new to me so the reputation token is not just a reflection of my technical acumen or my professionalism it's also my ethics uh my ethics and and how much i adhere to the community uh bylaws or the community you know the community ethic this is a really interesting notion so that is a really powerful indicator of who i am um in a way it's it tells you more about my identity than my name in an anonymous system my reputation score is a better communicator of identity absolutely and as a matter of fact we mandate that people stake a reputation towards any action they are asking of Reputation is critical to DAO governancethe community right so if you if you say i have a wonderful proposal for the community well show us how serious you are by staking your your blood and sweat of what you earned with these tokens show us how how much you're sticking because that shows us how serious you are we have to explain this we have to explain this part because i'm afraid nobody's going to understand it it's it's when we when wolf is talking about reputation when he's actually talking about our tokens basically coins cryptocurrency that's been issued but it's not like typical cryptocurrencies it's not bitcoin that we're talking about here these are tokens that are governance tokens they're used within the system to govern the dow this is this is what we have as a substitute for or an alternative to top-down management each person in the community accumulates reputation tokens based on their contribution to the community that might be leadership that might be contributions in terms of software or building something maybe something else like marketing or attracting customers and of course there's also the policing function that is to do with quality control and the work that's been done so there's a lot of work to be done inside of a dow basically all the functions you might expect in a corporation then what people are paid instead of being paid cash for that they earn reputation tokens but what we just heard wolf say it's really important every time there's a big decision the rest of the community wants to know how committed are you to this decision and you stake your reputation essentially you're staking your salary your what you've been paid you're putting that on the line and you're exactly willing to sell this it's more than a salary uh sorry go ahead i'll explain it's okay go you go for it so so yeah you stake your reputation tokens and we have to understand these tokens are controlling how much you're actually getting paid right so if robot has 100 reputation tokens and i have 10 and the community engages in a payout decision robert gets 10 paid 10 times more than i am because i'm just not as good as robert right that can be a function of having spent more time with her down having done better work having done more policing actions etc etc right but it's all about reputation right the the and it's fascinating to watch once people understand this how behavior changes in dallas it's really fascinating i can't wait when we have all the data and can run regressions on this and see what the what the functions are and how how reputation really helps change human behavior in the system when people see that they might lose their stake they might correct they're gonna they're gonna start to behave differently yes give me give me an example like what give me a real example of that if you can so um okay how has someone lost tokens and changed their behavior uh so let's so sorry this is going a little bit deeper um so what we do in this dow with this dow engine is we the dow engine is a consensus building mechanism and in order to build consensus what we do is we are doing we're engaging in two rounds of voting one vote is how do you feel about this generically right um so people look at look at a proposal and then read about it and then vote their conscience nobody penalizes you nobody there's no tyranny of the majority where you're constantly worried about well am i am i winning this vote am i on the majority side and who are the whales who are voting right anybody can vote their their conscience just vote what you think and see this is super important because we're bringing information from the agency and we're bringing unique talents to the to the table right how much do you stake of your hard-earned reputation and it doesn't count right it doesn't count first time at the end of the vote we tell you the vote and everybody sees how the community felt about this proposal yeah now we are we are we've created a an impression of community sentiment on a given proposal everybody now sees how everybody else felt about this and now the actual vote starts now it's you can you can let's say you let's say you robert we're in the minority right you stake quite a bit of your reputation but you see at the end of the world oh i was in the minority despite my high stake the rest of the the people in this town feel differently now what do you do do you stick to your guns and say i don't care if i lose this or are you saying well maybe i don't care that much about it and i can see their point of view and it's the majority and i see how much they stick and i respect these people right because they have a certain reputation score they earned this and the main thing is you know you're going to lose your tokens right that's very powerful if you you can double down and go all in right or you say okay but this is the game's theoretical evaluation with every single bill you see all the community fields you can compare what you think yeah and how you feel about it um but you are and we see this in the data 99 of all the cases people sign on the majority okay so you do like a sentiment analysis first that's the first vote it's it's a soft vote it's non-binding but we're going to just see where people stand at an issue and it might end up being something like 48 feel one way 52 feel another way is there any opportunity for undecided or do you have to vote one way or the other is it always binary if you don't vote you cannot participate in the payout and do you lose reputation over time if you if you refrain from voting through inflation only through inflation okay and you have to bet all of your tokens uh each time do you have to stake all or is it just one motion no no never of course not you you signal how much you care by staking and the the the the stake amount signals how much you care okay oh okay so this is like the weighted voting systems that we hear about in radical markets uh in that book radical it's quadratic voting you know where you can buy additional votes if you're willing to spend uh concentrate your voting power yeah oh fascinating so this is a real world deployment of those concepts um great and so there's a real risk if you're adamant if you're if you're going to stand on principle you end up losing it really will cost you some reputation you're you're really you're really making a huge gamble doesn't just cost your reputation it costs you all the future cash flows that are paid out pro rata to your reputation score okay but then does that leads to a tyranny of the majority is that is that a situation then where like the mass majority will always win and maybe there's a brilliant minority that's going to be outvoted every time yeah but they they had they had their vote right you see what the minority says you see the reasoning the forum shows what their opinion is on a given issue so there's a forum debate uh ideally on a blockchain but doesn't have to be and at the end of the debate the community now stakes in the informal vote right we call that loosely coupled voting where we're just taking a sentiment now everybody sees the brilliant minority and you there's another governance variable that goes into which is the length of debate between the first vote and the second world the the community can review the evidence that the silent the brilliant minority might might put forward and the brilliant minority actually has a shot at changing voting outcomes because they can educate their people and quite frankly if it's a key governance issue you may actually see the minority saying okay well if this doesn't work we're going to go somewhere else we're going to make sure that we're taking our brilliant minority people and provide services in another engagement right does that happen do do dows split apart do people sometimes feel so strongly that they say are going to take my tokens and leave and go start a new start in new towel it hasn't happened to me yet but what has happened is that dao's seed other dows because they need highly specialized community services this is happening all the time and by the way robert this is something that's important we may want to talk a lot about a little bit also in the context of contrasting corporations we're talking about horizontal versus vertical scaling right so vertical scaling the facebooks the corporations they're all about centralized power structures to make more money for the power structures and for the uh controlling shareholders and the the decision makers in in this power structure right now we're talking about the ten cubes the the the eight case uh and the the the and other uh metrics under federal securities laws that are pushing agents boards and and officers to make more money quicker right so in the hierarchical structure where's the next unicorn etc whereas in the dow environment we're talking about horizontal scaling we're talking about communities seating other communities to get services provided to the first community right and we've seen this uh the deaf star alone has now had four four service provider communities at different stages of development yeah last time i spoke to there were two so it's growing yeah yeah it's growing rapidly we're gonna have to set another up another three very soon wow so um so that baked in that part of the concept is that the dow will seed new daos DAO will seen new DOA to meet needs the DAO community cannot meetin our experience it's inevitable because you just it's all about more specialized communities right does entropy set in at a certain point though does something get so fragmented that it starts to fall apart uh so and this is this is again how you how you're looking at the space right we're used to saying let's put everything in the power structure and report up whereas in the dow environment it's the other way around you horizontally scale you're creating more communities that are then cooperating with each other and everything is fully transparent now you might say yeah okay so if a given community entropy as you're saying it doesn't attract the jobs yes of course that community should fail right but it failed because it didn't have the right talent to provide the right jobs and the community gets seated if the first community recognizes the expertise that the new community is providing and based on that expertise they have a revenue source that they are then sharing in this community right and based on these these horizontal scaling structures that i'm talking about i personally believe this will ultimately end up in a new form of of business where communities are engaging with each other in business not centralized power hubs um with all the principal asian problems that we illustrated well it's a really interesting point right because uh early in the beginning i talked a little bit about how corporations are set up to guarantee or to ensure the maximum roi return on investment for capital and the issue there is how do we protect capital you have to do something with capital you can't just put it in a box under your bed you've got to put it to work but how do we do that and yet minimize the risk that the capital is going to be lost and here we're talking about what's interesting we haven't really talked about capital at all we've talked about effort right effort so everybody has the ability to contribute work even if we don't have a lot of capital we all can contribute work and ideas and uh direction and so forth we can all participate in a community in some level or another what are the rules for capital in a DAOand so this is there a role for capital in the dao and and how does that work you said earlier that dao is not is not a vehicle for fundraising but there are plenty of capital intensive industries you know i'm thinking of manufacturing or the energy industry or even artificial intelligence these are industries that require tremendous amounts of capital because you have to build out infrastructure to make them work can those be handled with the dow is there a way for a dow to handle large amounts of capital okay so it depends what handling here entailsthe there's two models that that i've been working with that i think work one is this idea that there is a benevolent dictator who provides capital and it's it's the less that's less favorable the work to earn model vs capital model for DAOmodel in my humble opinion and then the there is the the work to earn model where a community i'll get back to the first in a second um where the commit so work to earn model is the pure model um where the community attracts market-based fees for their expertise right the market pays the community the community audits it's its work product from from its workers yeah and pays out according to this distribution mechanism yeah that runs through reputation and you can see that mechanism working for software development because there's nothing exactly right that's exactly right that's where that's why we have the code review dao already which provides exactly these types of services to the deaf star in this case and by extension it might work for creative industries as well like a design firm or you know even i know people are experimenting with music dows now that's exactly what's going on so we have uh quite a few clients out of europe and and uh silicon valley media companies that are now starting to evaluate how this can actually work to let the creative communities coordinate themselves and then generate uh fees market-based fees for the creative communities okay so then there is this other model which goes back to our earlier point about um the capital right so the the benevolent dictator he is saying i want x from this community here's a pot of money i will make this this this money available for distribution if the community gives me why yeah so that that is possible and it's a workable uh way of for the community to do to distribute these assets but it creates less optimal flows right that this so how do you i don't know if you know the story about the the apaches right the apaches were tribes that didn't have leaders but decentralized communities um they were they were ungovernable they were they couldn't be taken over if somebody killed a prominent member the tribe would just keep moving and you know fault the tens and keep moving somewhere else and we would become actually more powerful because they were less less centered around a community community leader right and then the chiefs didn't command anyone to do anything they had no power to enforce and eat it they only persuaded exactly they didn't have a concept right and they didn't have a concept for uh property right there was no such thing people just used things and helped each other um and so spanish invaders that took over the incas they they encountered the the apaches and moving north from from inca territory and they could never overcome the the apaches apaches would just keep moving and morphing as a society that that couldn't be pinned down so how what did they do well they introduced the concept of property to them by giving them cows and saying hey here take the cow milk the cow eat the cow and all of a sudden it became around this asset right whereas before you just did a service the community helped the community benefit from it and everybody lived together through this yeah and you were you were more way more attack resistant and you distributed your assets much better now you have the cow all of a sudden you need to protect the cow farm around the cow uh hoard other property start rent seeking do all these things to protect the cow because you had cows now right they didn't have this before i'm oversimplifying this a little bit okay so um it's the same with this dao where now you have this asset andit becomes about community engagement around how's the asset distributed right and it works it's it's a workable way of of dealing with this and we see major corporations now jumping on this the better down model that that i see is the work to earn down model where we we're reinventing how people make a living with each other for the community through the community that's the pure model that's what the voting engine the the engagement is all about now the capital driven here's the sponsored asset model works as well and the reason why i'm supporting is is because it's it's seeds or we're talking horizontal scaling and new communities right these these capital intensive dials they are seeding other communities that are over time attracting market-based fees which is in my humble opinion a way to to help dallas proliferate and that's why i support the capital heavy dials as well okay so yeah in a way what we're doing here is we're deconstructing ronald kaus the coast uh theory of the firm and that theory for the people who aren't familiar with it basically says that the reason corporations or companies exist is that if you had a bunch of individual people let's imagine some medieval environment where there are guilds of people who are making various things it's quite expensive to go around town and assemble every single thing that you need uh to run a business you end up having to do transactions with all these different merchants and vendors and artisans and so forth and so at some point um you you can scale better more efficiently by hiring those people and now you eliminate the internal transaction those external transaction costs and now you have the cost of paying employees but they do what they're told they deliver their work uh and you don't have to negotiate for each and every item each and every input into your business your business that's the theory of the firm it's about minimizing transaction costs that's that's why corporations exist and that's why they scale to great size but now what would you like to perpetuate this with the smart contracts right so smart contracts is really in this logic that you just illustrated it perpetuates the firm through the smart contract by by by increasing transaction cost minimization right that's that's only the first step within the firm structure now okay so that's the problem this smart contract solves is reducing transaction costs inside the corporation or the firm but you're describing something very different i mean this is like a radically different notion which is a highly distributed decentralized community of communities really it's uh it's a loose linking of communities that cooperate with each other now clearly there's inefficiency because now that we have to negotiate transactions right so how much of that can be automated i'm sure there's a lot of work being done there to to make that to minimize that that friction so the way that we see this play out right now is that one community says we need this work done we don't know how to do it we just don't have the expertise can you guys do it and guess what these guys they're they're saying yes we can do we have the expertise and we like what you do we see how you're working how can we how can we organize right so it always becomes about how can we organ organize as a new community to serve the first community we've seen this happening multiple times as i said we are now at some seven hours totalwhat we really need is an inexpensivefor DAO to grow in number we need market barrier lowering cloning aggregators for DAOsmarket barrier lowering uh cloning engine aggregator for dials right and that's robert you may see that their products such as superdow colony aragon there's a whole bunch of these that are that are starting to offer this the problem with how they're offering in my humble opinion is that they're focusing on the capital heavy fundraising ideas around dallas where they're saying hey use our dart platform to issue nfts and tokens we'll help you will set you up and oh by the way there's a community yeah so whereas i'm saying no it's you need to lower barriers to entry for the communities and catalysts by giving them an inexpensive way of seating new communities with the same voting engine same uh same governance setup to serve the first community part of the efficiency is that you're using the same tools for voting and governance correct and actually there's also another kind of efficiency there's a learning curve right so they're also eliminating the learning curve the beauty is all these all these service provider dials they're now helping the new community do all these things so it's policy and they reinforce admin stuff you know payment rails accounting all these things have to get done right yeah and we need the problem is the cost are still too high right so we need to find a way to find a down aggregation system that allows us to bring the costs down and seed all these communities and that sounds like an opportunity to build that aggregation system that's exactly what i'm working on yeah okay cool tell me about some industries where this would be useful like like what are the businesses that dao's can handle well certainly software development makes perfect sense right because engineers can write code from anywhere you don't need to have an office engineers can be managed from anywhere you can you know you can you can check their work they check it in each night you can have code review and so forth so that so and that's effectively what you're doing at dev dot right yes i mean if you see all these commuting uhtechnological nomads right where people are and this was proliferating through the um the the the cobot years right 2020 following where people decided okay i cannot go to the office anyways i need to work on on the beach somewhere right i need to be loan in a house somewhere okay so now all of these people that are still thinking about oh i need to make a living i need to work for this corporation but i kind of want to do my own thing they are perfectly positioned for work to earn type engagements in daos right and that's one of the reasons why dials are proliferating so quickly because people are saying i don't know i don't want to go to the office i don't want to work in a corporate structure necessarily so there's this new this new work to earn structure which is driven by the style engine right um where where people are are now starting to to engage on that level um so okay so sorry what was the original question i'm interested to find out what businesses might make sense yeah like what if someone's listening to this they say gee i want to start a design agency or someone else might say i want to do medical devices you know there's so many different industries i'm wondering which ones would be appropriate for a downfall right so there is as you as you identified earlier there is the um the creative industry there's the freelance industry there's a technical industry uh developers i mean everything started with the developer communities right because they were prone to and gaming gaming is very important as well yeah um so the dematerialized businesses the businesses are defined by software a little bit yeah everything that is uh low assets light asset businesses right okay they're they're primary targets for this for this community engagement and work to earn model however having said that there are a lot of leads that i see in the 501c3 environment where people are identifying the wish to create legacies through communities for their non-profit entities these are centralized non-profit entities that are very actively looking towards community creation in a dow environment to create legacy for these 501 c3s and that's adjacent to an organization you might be a 501 exactly you can even imagine a corporation and then alongside it there's a dow that's a community that's exactly right yeah so we are and i can't name names right now but there's some very very influential 501 c3s that have very very actively working with us in trying to identify the innovation potential of dao's in the community building around their their existing structures in a 501c non-profit environment and this is in in my mind this is going to be one of the products um where we will see we will see a lot more dow proliferation now the tricky part for that of course is that um you have the the old affecting the new right so there's this translation barrier there's uh education that has to happen but we i'm seeing a lot of progress and i'm i'm pretty confident i have to imagine the toughest one is the psychology around relinquishing control yes because all hierarchical organizations whether it's a non-profit charitable 501c3 or a regular corporation or even a partnership an llc all of these things involve some element of control by a relatively small number of people who enjoy that power and exercise it right right now you're saying to them relinquish that power to a community and trust us they're going to make better decisions that's a gigantic psychological leap yeah so the way this can be this problem can be mitigated is by simply saying run parallel tracks keep your power but you you owe it to yourself and the future of your venture to have a parallel track through a community which you are part of right you're helping see this community and the beauty is you see very quickly how much people can actually become catalysts in the new community right so the old business the people want to control they're not necessarily becoming good catalysts for community building right and so these parallel tracks allows you to identify who can actually do the job in the new community and gets the merit and who can't and those people stay in the old structure right and then at some point you you you shift uh you shift the the asset base that's long down the road right because it's all about trust right how can i how can i trust this community i can't control the community community governs itself right so it becomes about how much do we need the community for what elements do we need the community and there's some back and forth a lot of what we do initially is just doing licensing agreements right so the existing frequency says okay we're going to give them our name we're going to provide some assets in we'll see what they can do and then the communities engages right and some people are being carried overs other people are staying so there's dif they're different ways of handling these these transition um issues but we see a lot of fiber on c3s now um one of the things we talked about earlier was efficiency and and i'm thinking if you have the community voting on everything that could get to be quite a tax on their efficiency right that might occupy a lot of time but you mentioned briefly that there's one way to control that which is to shorten the interval the number of uh sentiment votes you know for a very big decision there might be a series of votes where we get to see consensus formatting but for smaller decisions maybe that interval is very short maybe it's just one round of voting tell me how that works as a matter of fact in the end machines will be voting okay you can actually teach machines certain basic parameter voting routines where the machines will execute automatically right so that is of course not the community uh audit function right so when we talk about efficiency um how efficient is it in an existing cooperation for a small group of maybe 10 people to sign up on a work product which they have themselves created and don't see all the flaws right now we're talking about having to hire experts and reviewing it and you know duplicating uh data et cetera et cetera right so here in the dow environment every decision every work product goes through a community audit community looks at this and community community upvotes the work product the amount of governance decisions themselves also depend on the community right so there will be some communities i'm working in several where there's a lot of ongoing governance decisions where they do every minutia it's governed by community engagement there are other communities that say okay we're only dealing with governance decisions that as a community that affects our our core governance parameters right where the where the engine is set up hey here the governor's parameters if you change it you need to upload this as a community right and in those communities there's maybe one or two governance votes a year right everything else is just work product community audit and that community audit is i mean it's a community work product so the community of experts is interested and wants to engage around the work product because it helps them optimize their own skill sets and quite frankly helps them optimize their reputation score in within the community right so there is engagement there's game theoretical endorphin releases all these things because people want to know about what others are doing because because it helps them optimize their own skill sets and with that increase their bottom line well and so when reputation score is involved it's the community is evaluating let's say my work if i were part of a dao the community is going to make an evaluation of my of my work first they're going to make an evaluation of me as i apply to join the community right so i have to say hey here i am here's my credentials and so forth and the community it's always about work product right it's not about necessarily who you are currently that's still afflicting us because we need to know who you are there's kyca requirements all these things right yeah but ultimately it's about the work product we don't care who you are we care about what can you do right and and can we use the skill set and can you audit other people with the same skill set that's what this is about and then does the is the um decision to allocate reputation tokens to a person who contributes does that automated is it regular like how is it or how is it not just an arbitrary decision um and how is it possible to prevent people with charisma who are persuasive from getting maybe uh too much compensation okay so and i can walk you through the the the token minting algorithm if you want uh it's maybe a little bit too much for this podcast yeah audience but you summarize it tell me the result of it so yeah exactly so the baseline is this if you work for a market-based fee your work can be quantified the quantification of the value the market-based value of your work results in a reputation minting engagement so the the market-based fee that comes to the community is used to mint reputation and that reputation goes goes partially to the worker the person who did the job and who's getting onboarded with this job into the community and the other part of that minting engagement based on the market-based fee goes to the community for auditing the workers the newly incoming workers performance yeah and that's that's how that's how it goes on every single engagement you bring money to the community we audit you you get reputation as because you have reputation you participate in the community payout pro rata to your reputation score yeah and how do people accumulate more reputation than others is does it i mean sometimes you're going to have a rock star who's who's valued by the community right the more you work the more your work gets upvoted and the more value you generate for the community the more reputation you get quickly now not everybody can do every job not everybody will get selected to do a job right so they're different ways of organizing the selection criteria for doing certain jobs but what it does do is the young people who are gunning for it and who are making time available they are they have a very good shot at doing the doing the work building expertise getting upvoted and getting becoming superstars in the community relatively quickly right now and so it's all about the merit and the merit identifiers and quite frankly the older farts such as myself in the communities we benefit from that young blood and we benefit from seeing what they do and helping supervise it and we should be paid a lot less for our audit work because we want to make sure that the young guns come in and do the do the job and and perpetuate and grow the community oh it's a really smart structure too because you're going to incentivize the best people to do the best work right it very you can imagine that relatively quickly and i mean months not years someone could start to be could emerge from a community with a great reputation and that reputation is better than a cv or a resume it's better than any kind of linkedin profile it's better than a network of you know reference letters uh because it says speaks for itself just actually does the job this person does it so well that the all these other people in this community say this person is great it's you and you can't get that score without doing the job there is no face time there is no hey you know let me talk to the boss and get a good eval it's just not there right so it's about what do you do and how does everybody like you in your work right not like you like your work sorry so it's a super interesting question because we're now at the brink of a whole other topic which is about identity and identity and decentralized systems which i dearly would love to go into if we don't have time maybe let's do it quickly absolutely i'm very excited about this so i've written about this quite a bit so robert you now know how these dials work how reputation scores work now let's say there's 10 dials you know the knitting now the karate down making this up right the the coding down the um this highly specialized rust development dow etc cetera right and you have a score in every single one of those downs okay because you work you engage you earn a living and you're part of these communities that's that those scores the totality of these scores become your identity in the universe of dao's and in my opinion they become your metaverse identity it depends on how the metaphors companies are engaging with us but they become their self-sovereign identity it's because it's the underlying merit the specific community upvoted merit in all of these communities that you're part of which shows who you are your you know in the philosophy now because you you're a deep thinker and people upvote you then there's a karate and it all these things you do and where you're coming from where you have developed through a lifetime and through the doubts where you've developed merit that becomes you in these communities and to other communities who don't know you right right it's a very strong signal it's a strong signal to people who don't know and actually this brings us back to your point about anonymity you don't need to know me or my background of my history or where i went to college or what i studied or my degree or whatever any of that you know that that's how we evaluate people today it's all about your history and your past exactly you're saying identity is something it can be constructed as a series of contributions to communities not one but many and then across all those communities there's going to be a cumulative you know kind of profile that tells you about my interests my acumen uh where i'm useful or where i can make a positive contribution that's going to telegraph a great deal more to newcomers to people i've never met before about me because it's verified by community it's verified by a group of people who've been right there alongside working alongside with me well we could go on but i've i'm afraid we've got to bring it to an end so can you give me a little bit of a prediction for the future like how do you see this unfolding where do you think dials are going to go this year next year how many will there be in the future okay so total dowels um i'm talking about all dowels including the fundraising dowels i think we have around 50 000 right now maybe more by the end of the year i think we're gonna double that to a hundred thousand or more um but long term the the dows that that have decentralized governance they will over time in my opinion proliferate into what i would call a reputation economy where where communities build identity and allow people to earn a living in work to earn environments through these communities with each other and i think that's all the digital nomads they're prone and primed for this right this is coming i can already see it it'll take some time because you have to build the tool sets and the community and the dashboards and the ux's and all these things have to be optimized but i i see that's that i think that's where it's going and i would call it the the reputation economy because you're making a living in work time environments through your reputation scores in these dentals that's how i look at it great on that note let me bring it to an end thank you very much my guest today has been professor wolf call he's the author of the book decentralization he's an expert in the subject and we've been talking about dow governance and i've enjoyed that conversation immensely you're listening to the futurists um and in our next episode my friend and business partner brett king will join me again he's traveling today so he couldn't be here for this particular meeting but he'll be with us next week wolf thank you so very much for being on the show thanks for having me well that's it for the futurists this week if you like the show we sure hope you did please subscribe and share it with people in your community and don't forget to leave us a five star review that really helps other people find the show and you can ping us anytime on instagram and twitter at futurist podcast for the folks that you'd like to see on the show or the questions that you'd like us to ask thanks for joining and as always we'll see you in the future

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