Part 1 - From organisational execution at the centre to modular teams at the edges!

Introduction:

I heard recently that Vitalik choosing the term ‘Decentralised Autonomous Organisation’ in 2015 (defined here) might have been partly influenced by the 1997 book “The Sovereign Individual”. Whether this is true or not, there’s a comparison to be made here. Both this book and the concept of humans organising by using the blockchain have created distinct camps among software builders. ‘Sceptics’ believe it is complete overhype whilst decentralisation ‘Maxis’ see it as our immediate technological future. There doesn’t seem to be a nuanced middle ground on either topic.

This post aims to establish a ‘Realist’ perspective on founders implementing their operations onchain. We claim ‘Sceptics’ and ‘Maxis’ have more in common than they think. Both advocate for predominantly human onchain execution from the centre of the organisation. They only differ on if those humans are a few signers or a wider DAO community. Our perspective instead suggests that execution by modular teams at the edges will be the future of human coordination around assets.

Who are the two camps - ‘Sceptics’ and ‘Maxis’:

During this bear market, scepticism mostly prevails among web3 leaders. Any onchain operation that extends beyond a simple treasury to hold crypto assets is usually met with reluctance. But who are these web3 ‘Sceptics‘? Many are founders who are relatively new to web3. They have been in close proximity to the web2 venture building process popularised by Silicon Valley. This background has given them an acute understanding of how complex operations - like doing stuff onchain - can hinder agile development and delay product-market-fit.

The second sub-group of sceptics, slightly less extreme in their stance but equally steadfast, consists of disillusioned web3 builders. They witnessed the excesses of web3 communities during the bull market, might have become entangled themselves in lengthy debates and even pushed through multiple rounds of DAO voting via Snapshot. Once they noticed though that all DAO decisions actually got proposed and voted through by a only small group of influential ‘whales’, they joined the ex-web2 founders in the ‘Sceptic’ camp.

The other side of the argument stand the ‘Maxis’. Many of these individuals are the OG believers in decentralisation. They are no longer motivated solely by financial gains, either due to being more interested in more equitable societies or - potentially - having already amassed wealth in previous cycles. This group intersects with a smaller yet significant segment. This sub-group of ‘Maxi’ initially pledged immediate DAO implementation to their investors and community during the bull market frenzy. Now in the bear market, they're realising that transitioning from zero to ‘DAO community’ presents substantial challenges. Saying that, they remain committed to this path, forming the rest of the 'Maxi' camp.

It is important to note that I am of course generalising. All of these segments and sub-segments are overlapping and most are flexible somewhat in their opinions. I hope though this context helps frame yourself as a reader so we can deep dive into each argument.

The Challenge of Onchain Treasuries and Centralised Signers:

As a starting point, it's worth acknowledging that the ‘Sceptics’ group still actively participate onchain everyday. Whether it’s launching a web3 product, upgrading a protocol. releasing a token, establishing a vesting schedule, processing onchain payroll, or earning a yield on idle treasury assets - many sceptical founders are willing to engage in highly specific onchain activities. However, what this group insists on is the founding team or leadership retaining direct execution of onchain activity.

This is necessary for them as conventional banks can't assist in executing any of the aforementioned trustless onchain operations. This is why the tried and tested Safe Multisig has emerged as the most favoured treasury solution so far. In essence, Safe Multisigs - or Safe{Wallets} - empower secure storage of digital assets and signing onchain by relying on a small group of individuals reviewing each other’s transactions pre-execution. This solution allows founders to essentially check each other’s homework without any regulated financial institution involved in securing their treasury.

However, this setup means every single transaction has to go through the founding team, creating a cycle of interdependency among web3 leaders as they constantly chase each others tails. I can’t think of any Series A, web2 company where this would be considered best practice agile operations. As well as this, a basic Safe treasury lacks many of the automations traditional CFOs are accustomed to. Consequently, day-to-day financial and operational leadership within web3 becomes manual and data-entry intensive. Finally, founders bear legal liability for any mistakes made. The nature of the blockchain ensures that any errors or founder missteps are public, permanent and open to scrutiny or audit.

We’ve seen this challenge become evident as companies grow past 6-9 people, or what's often referred to as Amazon’s famous 'Two Pizza Rule'. In short, their operations should be transitioning from centralised control by founders to a structure where expert teams at the organisation's edges play a greater role. However, the limitations of basic Multisig treasuries prevent a smooth transition.

The Other Challenge - Decentralised Governance for Everything:

Shifting to the opposite viewpoint, I do agree with ‘Maxis’ in the immediate impact smart contracts can have on how humans organise around assets. However, the crux of the matter lies in the fact that many within the web3 space advocate for direct democratic voting for every onchain action. This approach isn't efficient.

Even a glimpse at the timeline of ‘DAOs' validates this argument. First, the hack of ‘The DAO’ in 2016 underscored the vulnerability of centralised automation. The attack required human intervention, leading to a code fork of Ethereum in order to redistribute funds. Unfortunately, rather than learning that certain critical smart contract automations require human checks and balances, most DAOs adopted the lesson that community-wide voting for every treasury decision was sensible. This was the first mistake.

Secondly, Compound’s launch of governor bravo (here) gave every DAO a standardised template for how to set up community 1 token to 1 vote governance on Ethereum. The problem is that this approach, failed to differentiate social capital (voting power) from financial capital (wealth). Many communities were overwhelmed by influential whales who artificially purchased and boosted token prices, influencing governance, before selling off and causing a market crash. While innovative solutions like quadratic voting and conviction voting have emerged, the fundamental challenge will remain until onchain ‘identity’ and ‘reputation’ solutions can guarantee ‘1 human to 1 vote’.

Third, decentralisation can impede a team's agility. MakerDAO's vision of a self-governed e-dollar (2015) was indeed groundbreaking. However, what often goes unmentioned is that decentralisation was only fully implemented in 2021. Recognising the importance of teams in achieving product-market fit, MakerDAO initially adopted agile execution, contributing to its rapid market cap growth to approximately $500 million. Similar successful stories of truly decentralised teams from inception are scarce.

Finally, transparent decision-making at the centre can jeopardise competitiveness. The ‘Constitution DAO’ partly lost its bid for the U.S. constitution due to the public nature of its funding decisions, allowing competitors to anticipate outcomes. Until private voting and treasuries become available (i.e. ZK technology) this remains a competitive risk.

These four risks are surmountable for established player with scaled products. However, for new ventures striving to grow rapidly, gather feedback, monetise, and outperform rivals, immediate decentralisation of governance can be catastrophic.

The “Realist” view and ‘Onchain Modular Organisations’:

I see the same problem with both of the camps above. Both the 'Sceptic' and 'Maxi' camps seem to fall into the trap of advocating for direct decision-making at the centre of organisations.

Starting with the ‘Maxis‘, even the term ‘Decentralisation’ seems to have somewhat lost its meaning. It should be defined as ‘the activities of an organisation being distributed or delegated away from a central group’. Many ‘Maxis’ believe more in community decisions execution all decisions for the entity. This ironically sounds very centralised to me verses if they played a role of reviewer and final arbitrator. Especially when we consider the aforementioned issue of most of the voting power of this group sitting with the wealthy anyway.

The ‘Sceptic’ camp are even simpler. These leaders are unwilling to relinquish control of onchain execution as they search for rapid innovation and growth. However, governing at the centre has rarely been the most effective form of leadership (as evidenced in the governance of most 21st-century nation-states). Why should that change now that we are onchain when it’s easier than ever to set permissions to still keep them in control over more agile sub-teams.

The most effective founders I’ve seen in this bear market—and those I aspire to—are resilient individuals with a ‘growth mindset’ (read about this here) who are great delegators. They haven’t let the mistakes of web3 breed pessimism and are constantly focused on finding new ways to operate. Saying that, they only prioritise onchain operations that significantly optimise delegation to their teams and make execution to the edges of the organisation secure. Smart contracts have a unique ability to code these sort of ‘optimistic’ permissions whether they have set up a DAO or a more traditional web3 project.

In essence, we’ve expanded upon the original quote (linked here) to account for what we believe is our own ‘Realist‘ take:

“ Onchain Modular Organisations should first automate what they can…

…then permission most human activity to teams at the edges …

…with only what can’t be delegated being reviewed and governed by the centre”

This concept isn’t groundbreaking. Returning to Vitalik's original DAO thesis (linked here), we find evidence supporting the idea for modular teams at the edges.

However, the current bear market is an opportune moment for web3 founders to implement modular operations, automate their constrained resources, set granular permissions on sub-teams and (optionally) progressively decentralise their organisation.

Next Steps - ‘Onchain Modular Organisations’ and best in class examples:

In our second instalment of this series (linked here shortly), we’ll begin by defining ‘Onchain Modular Organisations’ as ‘groups of individuals utilising smart contracts to encode automations, permissions and decision-making to the edge of the organisation in any manner best suited’. Notice how this is very relevant for any organisation, whether a DAO community or founders using a basic Multisig.

We'll then delve into the players and smart contracts that facilitate this modularisation. Lastly we’ll offer a glimpse into our team’s solution Fractal, which streamlines the process of extending any existing Safe Treasury Multisig into a modular Sub-Safe (or SubDAO) structure.

If anticipation for the next segment overwhelms you, or you want to contribute to this research, don't hesitate to schedule a call here or reach out via email.