Disclosures: All content and views expressed here are the personal opinions of the author.
Table of contents:
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Governance in Modern Society
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What Do Corporations & DAOs Seek?
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Categorizing Growth
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Collective Participation Principle
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Governance & Growth in Corporations vs. DAOs
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Is the Profit Motive an Efficient Use of Resources?
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Is profit growth compatible with the survival of the internal financial economy for DAO collectives & organizations?
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Is vertical growth a better allocation of resources?
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What is the Ideal Structure?
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Challenging the Status Quo: Society's Evolution Beyond Majority Rule
Governance in Modern Society
We have 2 different societies emerging in modern economies.
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On the one hand, we have a global society of consumers with unprecedented mobility and access to information.
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On the other hand, we have organizations with digital sovereignty (DAOs) approaching to take power from the hands of corporations.
The ever-growing power of the centralized power of information amplifies the radical contrast between the two societies.
The centralized power of information is no more limited to multinational corporations such as Google, Facebook, or Amazon. It is now so pervasive that power & influence is increasingly felt by smaller and smaller players impacting all of our lives.
This power has increased exponentially; many examples exist, but let’s focus on one: the web.
The web as we know it today is in an existential crisis. But it is far from being dead. It is already showing signs of recovery.
This is primarily due to the power shift from corporations to autonomous organizations.
There are two broad categories of organizations gaining this control over information:
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Autonomous organizations, controlled by algorithms and computers, operated by "runners" or, as the software world.
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Collective organizations, controlled by members of society, grown mostly on the gig economy and contractual labor.
A diminished web is a wellspring of insecurity for both corporations and DAOs.
The internet, as the core of our digital world, has literally disappeared. Governments and corporations worldwide continue to tinker with theory in ways that change the web's fundamental structure and purpose, making it difficult for individuals to control.
What can we actually do about it? How can we reclaim our digital property through a mesh of decentralized networks and apps? And what would decentralized life look like?
To understand this better, let's take a step back and look at what corporations and DAOs seek.
So, both seek growth and profit, but they go about it differently.
The profit principle drives organizations --> get more and more people involved and monetize their activity to achieve a higher profit.
Companies are organized around managers and stockholders, while employees exist with the sole obligation of fulfilling their roles.
When DAOs reach a specific size and complexity, they have difficulty regulating themselves. So we are in the middle of a transitional moment as a world trying to squeeze the maximum output with the least amount of intellect, effort, and money.
DAOs are driven by the participation principle (explained in the next section) --> get more and more people involved in achieving a larger social purpose and protecting their values of human connection.
So eventually, DAOs will be incredibly efficient because they represent millions of people engaged in mutual aid and cooperation.
How do we categorize this growth?
Let's examine these two types of growth and explore what they could mean for a company looking to further decentralize its infrastructure.
Organically growing a company and DAO has two main paths: social progress through participation and financial progress through profit.
An observation that I have had for a while is the collective participation principle, which can be stated as:
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Vertically scaling a DAO (creating more divisions and subsidiaries) creates more management layers and is a linear process.
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Horizontally scaling a DAO (creating new networks, teams, and leagues) creates a more decentralized structure and is a circular process.
Adding to this, by horizontally scaling a DAO in a highly networked, competitive, and information-rich economy, sustainable growth is almost entirely rooted in "peer-to-peer" cooperation.
Hence, for DAOs, the biggest obstacle to both vertical and horizontal growth is the problem of institutional inertia. This happens when every group has a vested interest in the same centralized, coordinated structure and is, therefore, reluctant to adopt non-centralized structures and processes. In this case, decentralized organizations are often viewed as less efficient and 'unprofessional.'
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If you haven’t read about Coase’s Theory of the Firm, you should.
Ronald Coase was a visionary economist who stood out for his independent thinking, rigorous approach, and innovative ideas. His work has a lasting impact on our understanding of the world, as his theories are not only applicable but also provide insightful explanations for the reality we see around us. He was indeed the epitome of a great economist.
The theory of the firm, as proposed by Ronald Coase, asserts that there is a certain type of individual in the workforce known as an "employable person." These individuals are characterized by their ability to be productive and valuable employees within a firm. Still, they lack the unique qualities that would make them stand out or be remembered in history. This is because they are designed not to leave a lasting impact but instead to focus their efforts and skills toward contributing to the success of their employer.
Coase's unparalleled rigor is reflected in his most famous contribution to economics, the Coase Theorem. Despite being written without a single equation, this theorem holds fundamental importance that rivals even the most mathematically complex economic theories.
The Coase Theorem highlights the remarkable efficiency of markets in allocating resources, even in the face of challenges such as pollution.
Coase's clear and concise writing style, combined with his rigorous approach, has made this theorem a cornerstone of modern economic thought.
Coase’s Theory has important implications for the discussion on Governance in Modern Society.
The profit motive in corporations is often seen as the driving force behind their resource allocation decisions. However, as Coase's work suggests that it is not the profit motive per se, but the existence of transaction costs that leads firms to coordinate production and allocate resources within the firm.
In the context of decentralized autonomous organizations (DAOs), transaction costs may be lower compared to traditional corporations, which could lead to a more efficient allocation of resources.
The "participation principle" in DAOs, where growth is driven by increasing participation and cooperation, could also contribute to more efficient use of resources, as long as the institutional inertia that can limit the growth of DAOs is overcome.
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This leads us to the following questions about Governance & Growth in Organizations vs. DAOs:
Is the Profit Motive an Efficient Use of Resources?
What constitutes "efficient use"? It depends on which side of the equation you look at.
For example, big businesses may be efficient in their resource use. At the same time, individuals or people who band together in DAOs may be efficient in their resource consumption.
In terms of resource allocation across collective, corporate hierarchies may be more efficient. For example, if large companies create monopolies, they may use resources more efficiently than small DAOs. However, this efficiency comes at the expense of individuals or people banding together.
According to Coarse’s theory, an employable person is more valuable to their employer when working within the firm rather than trying to sell their skills and abilities in the open market. This is because the firm provides a structure and support system that allows these employees to maximize their potential and be productive. In return, the firm benefits from the efforts and contributions of these employees.
When an individual tries to contribute to the collective as a whole, they make a resource usage of their time and energy, which is purely negative. Individually, nobody is efficient at producing more than Zero; but collectively, most people contribute more than Zero.
Also, when an organization reaches a certain size and complexity, its processes become less and less flexible. This is because large companies typically have thousands of employees who all have their internal ways of doing things, which become comprehensive when the size gets too big.
One point of transparency that emerges from this is that "individualism" and "collectivism" are, in reality, the same — they are just different forms of cooperation and organization.
Is profit growth compatible with the survival of the internal financial economy for DAO collectives & organizations?
In classical economics, "growth without a limit" is a desirable outcome. However, in systems driven primarily by free market dynamics, this often translates to speculation that drives up the value of assets and prices.
In the case of the hyper-accelerated world that is expected to emerge with the advent of Web3, profit growth may no longer mean increased profits.
Instead, it means an upward spiral of crypto asset prices that eventually leads to an inflationary spiral of asset pricing and asset value.
Suppose the community's goals do not include values of wealth accumulation. In that case, another solution may be to use external financial tools to support the internal financial economy for DAOs & organizations.
Is vertical growth a better allocation of resources?
DAOs live in an ecosystem that continually evolves. When the collective size is small, it may evolve in a vertical direction as it grows bigger. However, an evolutionary trajectory may be more suitable for achieving a certain extent. This means that the collective may evolve from independent individuals to a group with many interdependent parts.
How big is big? DAOs that are big enough to be bound by culture and specialization can become too big to fail. However, the size of such an organization should be large enough that it's no longer feasible to maintain both centralized and decentralized governance structures. In other words, the size of an organization should be large enough that it's either centralized or decentralized, but not both. Otherwise, management becomes a limiting factor for the organization's growth, just like an individual.
So, what would be the ideal structure?
The underlying structure of reality matters much more than the participants, something policymakers, executives & collectives need help understanding.
Under the right market structure, a collection of idiots produces a well-functioning market.
-- Nassim Nicholas Taleb
The structure of an organization shouldn't be architectured in a way that fosters inefficiency. The majority of economic production that has ever been produced came from farms and small businesses.
By definition, a community is governed through consensus. Each member of the community has the right to speak and vote. The only requirement is that all members must participate in the decision-making process at the same time.
In the structure of DAOs, individuals should be enabled to collaborate toward a common goal. Ideally, this is a goal shared by everyone in the organization or at least by the majority. Therefore, a set of shared values should enforce the agreement between individuals.
Hence, for DAOs, the leaders of the collective should be those who can provide guidance and leadership to the organization, not necessarily manage and make decisions for the group as a whole.
Challenging the Status Quo: Society's Evolution Beyond Majority Rule
Society doesn't change through simple agreements or decision-making methods like voting, committees, or academic conferences. It only takes a small group of individuals with a substantial stake in the outcome to significantly impact the direction of society. This is because there is always some form of unequal balance or distribution of power or resources.
It's important to note that this change doesn't happen through a democratic process or a majority vote. It doesn't happen through lengthy meetings or debates over tea and sandwiches. It's not necessarily the result of a polling process where the general public weighs in.
Instead, the change comes from a few individuals who have a personal stake in the outcome and are willing to put their soul into making a difference. They can leverage the asymmetry in the situation to drive change and move society forward in a new direction.
In conclusion, the evolution of society is not driven by a large group of people coming to a consensus or making decisions through formal processes. Instead, it only takes a small group of invested and motivated individuals to create change to impact society significantly.
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