What is a DAO? Unpacking The New Collective Ownership Paradigm

Embark on a journey to the forefront of digital innovation with us, Gareth and I, as we unravel the complexities of Decentralised Autonomous Organizations (DAOs). These revolutionary entities are not just reshaping the landscape of digital communities but redefining the very concept of collective governance and ownership. Through engaging discussion, we dissect the historical context and foundational principles of DAOs, revealing how they serve as the heart of the shift from a centralized Web 2.0 to a democratized Web 3.0. Get ready to grasp the transformative role of DAOs in enabling stakeholders to wield direct influence over communal funds, etching a path towards societal betterment.

This episode isn't just about lofty ideals; it also confronts the real-world challenges of integrating decentralised entities within our current legal frameworks. We scrutinize the spectrum of decentralization that DAOs embody, and through the innovative case of ColivingDAO, we examine how legal structures like the FairShares Commons provide a necessary bridge towards a less centralised identity. As we navigate the evolving world of smart contracts, join us for an in-depth look at the pivotal challenges DAOs face in marrying decentralized decision-making with established legal systems. Gareth and I shed light on a model that is essential for understanding the future of collective organization and autonomy.

Transcript

Daniel: 0:05

Welcome everyone to another episode of ColivingDAO Insights. This is your co-host, daniel, and I'm joined today, as usual, by my co-host, gareth. Hi Gareth, hi Dan. Great to be back again. Great to have you back as well, gareth, and today we'll be talking about something very, very important to the nature of ColivingDAO the last three letters of ColivingDAO, DAO. They obviously stand for Decentralized, autonomous Organization. This is something that is already quite popular as a concept, but also we haven't yet, on this podcast, dealt deeper into what DAO is and why DAO is something so crucial, not just for ColivingDAO itself, but for the progress of human organisations in general as well. So, gareth, let's get started.

Gareth: 1:00

Yeah, let's jump right in, dan. So people often ask us what is this DAO bit at the end of ColivingDAO, and it's a really interesting development that came out of blockchain and crypto currencies in around about 2016. But before we jump into the history there, we will first of all give you a definition of the DAO, which stands for Decentralized Autonomous Organization, and the Wikipedia entry. I'm just going to read it out. It says a DAO is an organisation managed in whole or in part by decentralised computer programme, with voting and finances handled through a blockchain, and, in general terms, daos are member owned communities without centralised leadership, and it has a note there that says the precise legal status of this type of business organisation is unclear.

Gareth: 1:57

We'll dive into what that means about WAITR, but for now it's just the simplest way that I think about DAO is. It's like a way to organise a digital community that's a bit more sophisticated, using web 3 than the web 2 digital communities that we're familiar with on social media. That's a simple way to think about it, dan. We also have another definition, just to give you a different flavour, and this other definition says that a DAO is an emerging form of legal structure that has no central governing body and whose members share a common goal to act in the best interest of the entity. Popularised through cryptocurrency and blockchain technology, daos are used to make decisions in a bottom up management approach. So quite a lot to unpack there in the definition already, dan. Is there anything pop out there that you would like to explore a bit further with the listeners?

Daniel: 3:00

Yeah, thanks, gareth, for the definitions and what's important to understand and, by the way, for people that are not too familiar with Web 3 versus Web 2, we did have an episode exactly on that, so I won't refer everyone to that particular episode. We did it very recently actually, so make sure that you go and check it out. And the reason that it even exists is because of Web 3, in a way. So when we look at what happened in the nutshell, going from Web 2, which is an interactive web but still centralized meaning still there's a central authority, central organizations, entities that effectively own and control information, own and control data going to Web 3, where there's no longer centralized entities that own and control all the data and information, and so on, here's where DAOs become something that can exist in the first place. That also makes sense, because in the past, normally let's just look at a website, for example, something very basic, let's say Facebook.

Daniel: 4:16

Everyone is probably familiar with Facebook. A lot of different people create the content on Facebook. So we don't have Marcus Zuckerberg just writing billions of pieces of content over time. We have billions of users writing pieces of content or creating multimedia content, and what happens is Facebook effectively owns most of the content or simply arranges the content in a certain way, so Facebook can censor it. Facebook can do a lot of things, pretty much Once we agree to the privacy terms. Facebook is full in charge, and Facebook is allowed to do a lot of different things with the content that we submit. At the same time, facebook is obviously providing a service and looking to ensure that people can continue to post content and sound so that the company is profitable, that the company can expand and therefore people can, at least in theory, utilize a better, better service.

Daniel: 5:23

In Web 3, where everyone is owner, everyone effectively is the owner of the content they create. In Web 3, where everyone has the freedom to use their content in a certain way without just having to give it away completely. So, from a power point of view, from a wealth point of view, as in owning something of value, we no longer have just one monolithic entity that controls everything and makes all the money. Because you know what? Facebook is pretty much keeping all the money, all the money that comes from the monetization of the content. Surely, people can make some money on Facebook, that can certainly happen. But the way it happens is people are not just cashing out, checks out of Facebook. I mean, people can use Facebook to promote a business, run a business and so on. It's very indirect, but the money that comes from Facebook advertising, for example, facebook is charging clients and keeping all the money, even though the value of Facebook is in large part derived by the fact that people are giving their content to Facebook. So this is just an example.

Daniel: 6:40

And again, if you want a more in-depth discussion of the transition between, let's say, from web 2 to web 3, I refer you to the previous episode. But when we look at now web 3, where everyone is the owner of their own content, everyone has a right effectively to the monetization of their own content. Even censorship I mean censorship is a whole topic in itself, but we could argue that it's in fear to have just one entity doing all this censorship and so on. So this transition makes it kind of natural to want to have a different type of organization as well.

Daniel: 7:18

It doesn't make sense to have an old type of organization now that everyone is owner, otherwise how do we actually do that? So all of a sudden, daos emerged, where we have organizations where, rather than having one central body making all the decisions, we now have different users, effectively different members of the DAO, making decisions collectively, so, now, pretty much the same people that use a certain protocol, a certain website, a certain product, the same people that are part of it are often the same people that also have some sort of voting powers, and therefore they can organize that, and still they need to achieve the goals that an organization needs to achieve, such as being financially sustainable, expanding, providing a better and better service, and so on. The way it happens, though, is very, very different, because decisions are making collectively, right, gareth?

Gareth: 8:19

Yeah, absolutely, and that is really the key differentiator for a DAO. It's really this collective group and the lack of a central authority, and the definitions are a bit nebulous, right. So it's a group of people. They're coming together with a common aim. They lack a central authority and the participants act as the governing body or the leaders, effectively, of this entity, right? What's so interesting to me is that it's quite nebulous and the definitions reflect that. But decentralization, of course, is a big part of it, and what we talk about a lot here at Co-Living DAO is a big part of what we're doing in our project. It is enabling power and wealth and decision making to be decentralized and given over to residents and stakeholders in Co-Living DAO. But before we go into the specifics around how the DAO structure is relevant for Co-Living DAO, let's talk a bit more about that kind of nebulous entity of the DAO concept. So it appeared around 2016, when a group of developers came together, inspired by the decentralization of cryptocurrencies, to create a decentralized, autonomous organization. So it appeared around about 2016, which is really quite recent when you think about it, and the first DAOs were really different aims and different types, and now, a few years later, you can kind of group DAOs into eight main types. I'm just going to list off some of these, and they all kind of relate to groups of people that are coming together for a common aim. So the first type of DAO is a protocol DAO. The second type is a grant DAO. The third type is a philanthropy DAO. The fourth is a social DAO. Fifth is a collector DAO. There's also venture DAOs and media DAOs.

Gareth: 10:34

Now, the common thing they have here is that this is a group of individuals that are coming together to some defined aim.

Gareth: 10:44

A good example would be a philanthropy DAO, where a group of people want to get together and create almost like a charity type structure.

Gareth: 10:55

Maybe they have some sort of social mission and they want to pull their funds together and create a pool of funds for that social mission For example, tackling homelessness or another social issue and they want to do it in a different way, using these new digital technologies, the decision-making technologies.

Gareth: 11:14

So what they do is they come together, create a pool of funds and then they use a DAO to make decisions and distribute those funds, and those funds are distributed in order to achieve the mission that the DAO was pulled together in the first place for. So it might be something like let's end homelessness, for example, that might be the mission of a social DAO, and so these people would get together, pull their funds and then make decisions and create things, create initiatives that might contribute to ending homelessness. So that takes that really nebulous definition of a group of people using digital technologies to make decisions into the real world right then, where you're using a real world use case and a real world mission in effect, but you're using Web3 advanced technologies to help you make decisions, to make it happen in the real world too.

Daniel: 12:16

Exactly, and the real differentiator really comes down to the lack of centralized authority. Because if we look at a similar example, you mentioned Philanthropy, dao. So let's say an organization with a philanthropic aim. Let's think about a traditional organization doing that, for example, a Charity or an offer profit. Let's say a Charity. So there'll be people sending money to this Charity and then the leaders of the Charity to decide what to do with it. Surely they have to report back to people that send the money in the first place and say, hey, this is what we promised we would do, this is what we've done, and so on. But what if a lot of the things the leaders decide to do are not really in line with what the funders of the Charity, meaning people that fund the Charity, the donors, are expecting from that? So sometimes leadership might be inadequate. Sometimes leadership might have some sort of different aims, sometimes even personal goals, as opposed to simply just honoring the goals of the other people involved.

Daniel: 13:32

So what happens here is we have this new type of organization, the DAO, where imagine, in terms of philanthropy, imagine those people sending the money and, based on the fact that multiple people have contributed a certain amount of capital, everyone gets a say, and when we talk about getting a say, we're talking about really being involved in the decision making process of how to utilize those funds.

Daniel: 13:59

That's not to say that everyone has to necessarily say something or participate in governance. People may simply delegate other people or not get involved in the first place, just like every voting system, really. But what this means is that once people contribute to a certain cause, a certain organization, all of a sudden they also get a say. That is the whole point of DAOs, at least in theory. We'll see that there's been challenges very, very often, but that is what it means, and that's also why it's important, because right now, if you look at the way society is moving, if you look at the way we've moved away from the centralized organizations on a larger scale, like the Roman Empire and all sort of, let's say, large empires in general, effectively it makes sense to think okay, now people can have a little bit more autonomy and make decisions collectively, as opposed to electing one leader and trusting that one leader is always going to be right.

Gareth: 15:17

Yeah, absolutely. And you've hit on a point I was just about to cover, dan, where you talk about the extent of decentralization. So the D part of the DAO stands for decentralization and we're going on about everyone having decision making. But in reality for the DAOs the extent of decentralization does vary. So it's not always the fact that if you have a thousand people, then a thousand people in the DAO all have completely equal say in every single decision that's made. You can have some designated group leaders in a DAO, for example. If you structure your DAO that way and you may not have everyone vote on every single issue, you might have certain groups voting on some issues and groups voting on other issues and co-living DOWs no exception to that. We have a structure that's a bit more complex than just having every single person involved in every decision. That's not the way it works. So a key thing to remember is that, although D stands for decentralization, in a DOW there are different degrees of decentralization and centralization. A DOW is, for sure, much more on the other end of the spectrum, towards a decentralized end, but it's important to realize that we're not talking about some sort of extreme decentralized flat structure. There can be some points of centralization, some decision making that is taken care of in a different way. So that's the first thing. The other thing is the A part of the DOW autonomy. Again, that sort of implies that every member of a DOW has total autonomy to do whatever they want, and that's not quite true. So the extent of autonomy also varies in DOWs and again that kind of relates to the extent of decentralization. They're going to be very closely related. So if you have some, for example, group leaders that have a bit more say within the DOW structure, then those groups will have different levels of autonomy depending on which decisions are being made at which point in time. So it's important to realize it's not some sort of utopian fantasy. It is just pushing the needle a bit further towards decentralization and a bit further towards autonomy.

Gareth: 17:51

And a big part of autonomy is the degree to which we use smart contracts. So we spoke about this last week when we spoke about the differences between Web 2 and Web 3, dan and autonomy. A big part of that is kind of, you know, the automatic aspect of a DOW. A lot of decisions can be executed automatically using smart contracts in a DOW on the blockchain, and what that means is that when decisions are made, they can then be executed automatically, and some decisions can be executed by the smart contracts that are on the chain without anyone making any decisions. But the key thing is for a DOW is it's not a complete machine entity. There are human beings involved and there are human beings making decisions in the structure of a DOW. There are human beings in the DOW, it's just that they're using smart contracts for some things, and that's where the autonomy piece comes in.

Daniel: 18:59

Yeah, because before smart contracts, how do you even create something like this in the first place? The reason the centralized organizations work that way is because, even if some people are consulted before making a decision, there's still some people that effectively have access to the physical tools or practical tools that allow for certain actions to be taken. So, for example, not everyone can change the code of Facebook just to keep the same example we had before. Only some developers have access to Facebook's code and again, that happens in a centralized way where Facebook itself is a company it's now meta, it used to be Facebook. They have the servers, I mean, they have the passwords to effectively utilize those lines of code and so on.

Daniel: 20:01

With smart contracts, we start a different way of doing things, where things can just be executed or enforced on the blockchain, which is this decentralized ledger we spoke about last time as well, and this means that there's actually no need for essential authorities, sometimes even for execution, especially in the case of protocol. There will be cases where, of course, just like Arith said, it's not 100% we are towards the decentralized end of the spectrum. We are still very much tied to some infrastructure that is not decentralized, so there will have to be some action points that cannot fully happen automatically in a distributed way, but still we very much in that situation where smart contracts can execute and some things can happen automatically without anyone having to pull the trigger other than the collective itself, which means that already one of the typical points of failure has been partially removed, meaning what if one person wants to do something? That is the direct opposite of what everyone else wanted.

Daniel: 21:24

Traditionally could have still happened, but with blockchain as smart contracts, there isn't a single person pulling the trigger on executing something. There's effectively a mechanism, a decentralized mechanism, that does that, and that's how technology really has supported the creation of DAOS. So, gareth, we can see how this type of organization is not utopian. Just like we said, it's one step further, which is all we need at this stage, and of course, we're looking to get further and further, and that's partly what we're doing here at Co-LivingDAO as well. Why are we not yet at the full end of the spectrum? And then, gradually, we can see what the challenges have been and where we can go from there.

Gareth: 22:13

Yeah, absolutely so. One of the biggest challenges with DAO is going back to that nebulous entity, this organization. Is it an organization or is it just a group of people coming together? It's like a social, almost like a social media group coming together and pulling some funds right. It's a community of people that have a common aim.

Gareth: 22:41

So one of the problems with DAOS are in the legal entity side of things. It's not clear, if you form a DAO and then create a pool of funds on the blockchain, that this is a company, therefore a DAO. If it wants to become a legal entity and have a legal incorporation as a company, it has to really form a limited liability company. This is a traditional way to do it. If you do that and then have a DAO, you have a problem because the founders and the shareholders in a limited liability company really call the shots. They have the legal decision-making authority to make those decisions. You have centralized decision-making within the legal company and you have decentralized decision-making within the DAO, the community that you've created.

Gareth: 23:39

That's the most obvious problem with a DAO right away, one of the biggest challenges.

Gareth: 23:45

This has been partially addressed in some places, for example, in the state of Wyoming in the USA it is possible to legally incorporate a DAO as a company, but again there are questions around. Does that create a centralized point of failure if the articles the legal articles in the company, legal documents point to the power and decision-making being held in the hands of the founders who created that company? That's the first big challenge, dan, with DAOs. What are they exactly? How do they exist in the real world? Are they legally protected? If they are incorporated as a limited liability company of the traditional type, then that's a huge failure because all of a sudden you're swinging the needle on that spectrum all the way over to centralized for the really big decisions. The DAO and the community can make lots of small decisions and then the owner of the company can say actually I disagree with all of that and just act in their own interests and either ignore the decision or make their own decisions. That is one of the major practical challenges of the DAOs.

Daniel: 25:08

Correct. In fact, just like I was hinting at before, you know what, when we live in a world that is not fully decentralized yet, maybe in terms of infrastructure, servers are not decentralized at this stage. Access to critical trigger points not fully decentralized at this stage. Code not really fully decentralized. I mean, certainly a specific smart contract can be decentralized, but what happens if someone is writing code on a GitHub, for example, like a repository code is somewhere in a certain place and whoever controls access to that place, where the code is, might not be decentralized. Electricity is not decentralized and we use a lot of infrastructure that is still controlled in a centralized way. So, even if a decentralized organization makes a decision and even if we use smart contracts that guarantee a certain level of execution without needing or without allowing anyone in particular to have the ability to execute something different, still there are a lot of points where centralization is not just there yet in terms of infrastructure. What this means is that it is utopian right now, with the current state of access and technology, to have a structure that is nothing in itself, so without a legal entity, without a legal identity as well. Simply go by what people want and what the code allows them to do and be fully decentralized. So this is something to really keep in mind.

Daniel: 27:04

So one of the things that we spoke many times about here at Cleveland DOW is the fact that we're not just taking the DOW and using it in a very let's say, quote, unquote, common, very common way, which is just use the code. The code is law, the code is enough to be autonomous. Because we realize that it's actually not enough to be autonomous. What we realized is that once there is a certain type of legal structure, legal incorporation, the DOW all of a sudden can have an identity and the DOW all of a sudden becomes an entity that can take one more step. Again, we're not talking about 100% decentralized just yet, but adding a legal wrapper can really make the DOW a lot more decentralized than an existing DOW structure is right now. Right, gareth?

Gareth: 28:03

Yes, that's right, dan.

Gareth: 28:05

And so we at Co-Living DOW we use a legal incorporation structure that's quite unique.

Gareth: 28:10

It's called the Fair Shares Commons and it builds on a century and a half of cooperative law and it builds on that and adds to it, and essentially what it allows is a decentralized legal incorporation that matches to the DOW, it mirrors it in effect, and so all the exact same decision making power and structure that's decentralized in the DOW is mapped exactly as a multi-stakeholder legal incorporation in the Fair Shares Commons. And so that's pretty amazing. And so we've removed that centralized point of failure in the DAO, in traditional legal structures that would incorporate a DAO, and we have taken that away by mirroring the decentralized structure in the legal incorporation, which is pretty cool and quite a unique part of the solution that we've built here at Coal Living DAO. And we dive deeper into that in a previous podcast episode on the Fair Shares Commons, two of them in fact, one with Graham Boyd and one with Professor Rory Ridley-Duff. So those are worth a listen. If you wanna dive deeper into the Fair Shares Commons, maybe we should go into some fun facts about DAOs, would you think, dan?

Daniel: 29:34

Yeah, just to lighten things up a little bit. I understand it's been a little bit technical and it's something important for a lot of people that never heard of DAOs before. I hope you now have a better understanding of what a DAO is and why there's still a lot of work to do on the DAO side, but why we add in something really critical that could potentially be a major game changer. But let's make it fun a little bit. Gareth, what do you got?

Gareth: 30:03

Yeah, I've got a few things here, so we've got some stats and facts. To begin with, and I mentioned that the first DAO appeared in 2016 and people might be listening thinking well, I've not really heard much about DAOs since 2016. If you're not familiar with the space and in blockchain and cryptocurrencies obviously crypto and Bitcoin and NFTs are things that you would have heard in the media a lot, and DAOs maybe have not been had such a high profile. So you might be thinking how much money is actually going into this space? What's going on? How many DAOs are there?

Gareth: 30:43

Well, it turns out that the total treasury of all DAOs right now is over $30 billion, so small by global market standards, but certainly not tiny. This is a huge amount of money, right? This is coming close to the percentage of some countries' GDPs. So, $30 billion in the total treasury of all DAOs. There are several thousand DAOs in number and 33 DAOs have over $100 million in their treasury. So 33 DAOs have over $100 million in each of their own treasuries, just to give you an idea of the numbers there. So that's quite interesting.

Gareth: 31:29

And another fun fact there is a DAO called Moondal, which aims to create a lunar colony on the moon and they have actually successfully sent a guy into space, a civilian into space, by pulling together funds and financing a seat on Jeff Bezos Blue Origin spacecraft. So, yeah, they actually put a guy into space. So that's quite a cool example of a DAO coming together, a bunch of people with a common aim, and they've actually put somebody into space as part of their space mission to create a lunar colony. Oh yeah, that's quite funny considering in crypto.

Daniel: 32:11

A lot of people are really looking forward to things going to the moon, and at least one person did manage to go to the moon Thanks to crypto projects, specifically DAO. So, yes, this gives us an idea of what's possible with DAOs, because if we can get someone on the moon with a DAO, we can certainly achieve a lot of other things as well. And, again, it's a very nascent organizational structure utilizing nascent technologies. So this is really just the beginning. So it's extremely exciting in a one-to-one way and, on the other hand, there's a lot of potential pitfalls and some frictions that needs to be addressed.

Daniel: 32:56

What we'll do, by the way, for the ones of you that are usually with us here every week, we will be going more in depth on why DAOs have failed in the past, what major problems are with DAOs and what we're doing here at Colovian DAO that really changes the game Completely.

Daniel: 33:16

In addresses all these challenges that DAOs have had in the past, and we'll cover all that in the next episode, because we felt that that needs a little bit more attention and more care, because it's really something that is changing the status quo, is changing the ways DAOs exist and, who knows, it might even be the way DAOs will incorporate in the future, because we are not going to be able to do that. We have effectively identified some key changes that can be made to the DAOs structures and implementation that can really change the ways DAOs in general evolve. So we'll be covering all that in the next episode, but here today, so far, I hope you had a little bit of fun with this information. Yeah, that's a huge amount of money that is going into DAOs, so we really see that it's something that is here to stay, something that is no small feat, as they say. So, gareth, any final thoughts for today?

Gareth: 34:26

Yeah, I think my main impression of DAOs and my main feeling and ambition for DAOs going forward is that they're kind of like the underdog football team in the blockchain world. There's so many headlines about meme coins and Bitcoin and Ethereum and NFTs and really DAOs offer this amazing, really powerful solution, a real-world use case for blockchain technology. So I'm really bullish on DAOs and I think they have a big future ahead of them, although they're kind of the underdog in this world at the moment. So keep an eye out. And, yeah, I'm looking forward to diving deeper into the limitations of DAOs and how Co-Living DAO will address those limitations and the structure that we've created using our own secret sauce.

Daniel: 35:23

Absolutely, and we will be doing that next week. So, for everyone who's listening, make sure you subscribe to the podcast, because we are back every week with more content and, in particular, next week, we will take this conversation to a whole, next level to show you exactly what we're doing here at Co-Living DAO. So right now, it's been great to have all of you here. Again, I'll be back with you. I'll be back with Gareth as well next week. So stay tuned and until then,