The following is simply a journal of my thoughts and opinions accumulated over time exploring the space. They were not researched, beyond personal research done over time. Please feel free to engage, comment, and especially disagree!

Web3 projects are experimenting with organizational structure and design in an unprecedented manner through DAOs, Decentralized Autonomous Organizations, and central to the development of these new forms of organizing is the concept of governance.

First and foremost, governance is not a web3 topic, but rather an interdisciplinary topic that has garnered attention within the web3 space. The study of governance tries to answer how we collectively make (typically formal) decisions for an organization. Collective decision-making is critical to everything we do as humans both at large scales (nations), and smaller scales (households). When the scale is small, the challenge of collective decision-making becomes easy, since everybody knows each other and trusts each other. When the scale is large, relying on this “trust” becomes impossible; thus, we must develop formal methods of governance. At the end of the day, most humans are going to do what’s right for them and their close ones over what’s right for a large collection of people (even if they happen to belong to that collection). Furthermore, even if people DO want to make decisions in the interest of the larger group, people’s opinions are going to differ on what is “right.” On a small scale, these differences are reconciliable. For example, if a household wants to decide where to eat for dinner, they discuss it together and come to a reasonable choice for everybody considering everybody’s preferences. Because they know each other and care about each other, they are not going to make decisions that completely disregard somebody else’s strong preferences. For example, if a child in the household is allergic to seafood, then the household won’t decide to go to a seafood restaurant. Once these groups of people become larger, however, this social knowledge becomes impossible, and so in order to make good decisions that take into account everybody’s preferences, we have to create governance mechanisms. We have to create agreements on who gets to decide what, when, and how. The two models of governance that immediately come to mind are: shareholder governance for corporations and representative democracy for nations.

No single corporation is governed the same, but a common structure goes something like as follows. A corporation issues shares to shareholders (mostly those who have invested in the company, and perhaps some to the original founders and whatnot). The large shareholders get some allotment of board seats, and the board has ultimate governing power over the corporation. Rather than be involved in the day to day, the board hires a Chief Executive Officer. In this structure, the executive power gets vested in the top of the hierarchy (the CEO) with ultimate oversight and power being given to the investors (the shareholders). This governance structure has been well optimized for the purpose of selling things for profit. But other goals that many would consider worthwhile, such as sustainability (lasting a long time as an organization), improving the lives of those within the organization (employees), improving the lives of communities outside of the organization (customers and non-employee communities), are poorly aligned with the typical governance structures of corporations, especially long term. This is important because many business founders primarily create their business with the intention of making their communities better, in some way. Of course, some people create businesses only for the money, but not all, perhaps not even most. Currently, entrepreneurs wanting to make the world a better place have the best chance at doing so by making a useful product and creating a business that makes money and just so happens to help people. Ideally, we’d like the same entrepreneur to create an organization around this product that optimizes for helping people and also just so happens to make money.

Nations, like corporations, are a large body of people that require some governance mechanism to make collective decisions; however, nations typically choose to adopt some democratic governance model. Voting power is granted to citizens, or the representatives of those citizens, as opposed to those with the most money. Purchasing votes, in fact, is looked down upon and highly illegal. Most would say that this democratic model of governance is ideal for nations, and most would never argue to govern nations like we govern corporations because the ultimate goal of governments is not to make money, but to better the lives of its citizens. Thus, if we are trying to make organizations whose primary goal is to benefit their affected communities, would it not be wise to incorporate the principles of democracy in its governance? Cooperatives (organizations owned and governed by their members) have explored this question since the 19th century, but they lack on experimentation. Cooperatives give each member a single vote in decisions even though more innovative (and potentially fair) modes of democratic voting exists (for example, quadratic voting). In addition, there are challenges in forming cooperatives. From what I’ve been exploring so far, I believe a primary challenge involves gaining sufficient capital to actually start a cooperative. Another challenge is culture and perception. People aren’t exactly jumping at the chance to start their own cooperative.

Here’s where web3 and Decentralized Autonomous Organizations (DAO) come in. Web3 technology allows us to transfer value across the internet if certain conditions are met. This ability is executed through programs called “smart contracts.” These programs allow us to create flexible organizations that live (and fully operate) on the internet. Traditionally, to form an organization, one needs to higher lawyers to create legal agreements between all of the stakeholders within this organization (investors, founders, workers, etc.). One must pay the government of the residing organization’s nation in order to register these legal agreements. And, finally, if anyone strays from these agreements, one must pay to convince a court of law that this breach of the agreement actually occurred, and the court of law must then give some punishment. Using smart contracts, the agreement is in code, registering this agreement is a one-time network fee, and the enforcement of this agreement is automatic: once the proper conditions are met, the value is transferred automatically (it is more complicated, but those complications are outside the scope of this blog). These smart contract-enabled organizations are often called Decentralized Autonomous Organizations (DAO). Decentralized because decision making power is well-distributed among the community (what “well-distributed” means is up to debate, and the “community” differs from DAO to DAO). Autonomous because, once proper conditions are met, the “agreement” is carried out automatically through smart contracts. In practice, many organizations which are called DAOs are neither decentralized nor autonomous; however, many people in the web3 space, including myself, are pursuing the realization of those organizational properties through blockchain technology. Particularly interesting to me is the exploration of experiments in democracy, as well as digital reputational systems, in this new DAO frontier.

I’m certainly optimistic about the future of DAOs and web3 governance, but it is reasonable to be skeptical. Perhaps it turns out that DAOs are better suited as DOs, Decentralized Organizations without the blockchain (think loose networks like the scientific community, or democratic workplaces like cooperatives). Perhaps even DOs (whether they are autonomous on the blockchain or not) will continue to be ill-suited forms of organizing outside of the political sphere. I think it is also important to note, half the battle is learning how to build the correct culture around the governing mechanism. For example, democracy poorly works when the voting population is uneducated. Fixing problems like these are just as important, if not more, than fixing mechanism problems. Regardless, the concentration of energy and talent within the DAO space, along with the attitude and ability to experiment, will without doubt push the boundaries of how humans organize and govern.

Here are some open questions worth investigating:

How are DOs uniquely advantaged (if at all) compared to other organizations? What types of goals are they good at accomplishing?

How are DAOs uniquely advantaged compared to DOs? Vice versa?

How do different governance mechanisms lead to different outcomes?

Which organizational strategies (governance mechanisms, cultural, social, etc.) help maintain democracy long-term and resist power centralization?

What are the technical limitations of DAOs? How might they be overcome?

Follow me on twitter for more of my thoughts in scattered format: @0xdididoitright