An essay about the purpose of DAOs in a Rule of Code future
Introduction
DAOs (Decentralized Autonomous Organizations) are entities that aspire to coordinate human beings using blockchain technology. Blockchain technologies are publicly viewable ledgers that run independently from any particular user or administrator of the system, and as such they represent a new sort of database that accomplishes a good deal of improvement with respect to the general state of the flow of information between human minds as mediated by the internet today, or what is becoming known as Web2.0. Web2.0 is the suite of technologies including Google and Facebook that developed centralized servers users could generally access for free, if they gave up information about how they used the platforms to the service providers.
This essay will explain the benefits of Web3 technologies including DAOs as they pertain to the general state of human societies. If DAOs make the flow of information more efficient across human networks, it is likely that certain foibles lingering in recent years from Web2.0 technologies will be able to be resolved with code. What this means is that it is becoming possible to coordinate minds and resolve disputes using artificial intelligence at a never-before-seen scale. Blockchains and DAOs make it possible, ensuring that human minds are involved in the decision making process so that we don’t end up in some weird AI dystopia. Superintelligence is here, but it lives on a network not a chip. And it may give you your next job.
That’s right — in the age of artificial intelligence, we don’t have to worry about most of what Nick Bostrom was worried about in his 2004 book Superintelligence because social networks of human minds are actually part of the computer that runs the superintelligence program. We’re good in terms of the risk of arbitrarily choosing to produce so many paper clips that human beings become obsolete or whatever, but we’ve struggled a lot with coordinating in ways that don’t lead to increased hate or general friction between different groups because we let advertisers get in between us and our economy is set up so that they make more money the further from one another they can drive us. Our emotional reaction to one another is being monetized, and it makes the parties monetizing it more money if we get angrier at each other and find less common ground, not more. Let’s back up just a little and think about how this toxic trend got started.
Web2.0 platforms kicked off a technological revolution that soured as it became increasingly ad-funded. Half a decade or so after Facebook was founded it was forced to capitulate to the whims of advertisers as venture capital tapered off, and it was not alone in this. Google and the media companies found themselves dependent upon ad revenue across the technology space as IPOs forced the firms to earn a return on the monies invested in them. See more of my thoughts about advertising and social media in this essay.
For the purposes of the piece you’re reading now, suffice it to say that we have good reason to believe that advertising has caused unpredictable effects in the collective information stream of human consciousness as the general level of reliance upon social media funded by ad revenue has increased over time. Anecdotally, I met my ex fiancee on Facebook in 2006 when the network’s primary purpose was connecting college students to one another. Then in 2010 the Arab Spring kicked off and Facebook was used to coordinate a revolution. Then in 2016, Facebook coordinated with an advertiser called Cambridge Analytica to cause a highly unlikely outcome in the presidential election that year. In 2017, Libra, a Facebook technology to be built upon Cosmos and compete as a global reserve currency was rejected. And in 2022, having rebranded, Meta is laying off over 10,000 employees after dumping absurd amounts of money into metaverse development.
As Web3 replaces Web2, centralized platforms stand to get the short end of the stick. Users faced with a choice between a purely exploitative platform such as Facebook, in which they are expected to contribute content that can be monetized by the platform in return for mere access to that platform, on the one hand, and Web3 technologies that can actually allow the end user to monetize their own activity on the other. Facebook has a truly gigantic userbase, but if the platform does not find a new value capture mechanic that rewards the users it is perhaps likely to encounter significant hardship in the days to come.
Web3 is on the rise as new platforms built upon decentralized networks lower the cost of innovation by bringing more users together and providing them with a direct path to financial remuneration for their online activities. Web3 has provided a base money layer for the internet in conjunction with a powerful anti-lie machine that, when used properly, makes an entirely new level of cooperation between people possible: trustlessness.
This essay will first establish the well-known fragility of the Rule of Law and contrast this framework for the governance of human interaction with a new concept, Rule of Code, made possible by blockchain technology. Given the capacity for high-throughput trustless interactions, people can create a new type of organization known as the Decentralized Autonomous Organization or DAO for short. DAOs are networks of people who use the internet to coordinate their actions around the world in pursuit of their common good. DAOs will exist alongside laws to make life better for people.
The DAO is different from the corporation because it does not necessarily have a profit motive and is not owned by shareholders who hire employees that have a fiduciary responsibility to increase the value of the shares of the company. A DAO is a community based around an interest that the members all have in common. In general, DAOs use blockchain technology to coordinate financial and non-financial interactions between members. DAOs can be more difficult to capitalize than traditional corporations because they tend to be more mission-oriented and less driven to seek profit, but DAOs can coordinate large numbers of people from widely divergent geographic locations around specific goals discovered by radical alignment with the DAO’s mission. This property of the DAO enables technological development at a rapid pace and creates financial opportunities that do not involve securities but rather hinge upon the issuance and trading of digital commodities including NFTs (non-fungible tokens) as well as cryptocurrencies and information.
It is the blockchain coordination that makes DAOs special. The Facebook technology that enabled the Arab Spring and then the 2016 upset of Hillary Clinton did not enable users to directly send money to one another and also provided little to no objectively agreeable framework available to all users. As a result, camps were formed. They created the red camp and the blue camp, and the big con Cambridge Analytica was able to pull was to consolidate the red camp in the control of Donald Trump, and then there was this whole scandal involving geolocal targeting of undecided voters with overwhelming success in persuading them to join the red camp after that. Cambridge Analytica accomplished their geolocal targeting goals by creating a wide variety of ads and showing those ads to specific people in specific places at specific times by paying Facebook to put their content out. It didn’t help that this was around the time that the methods Facebook used to get people to pay attention to ads began to involve a lot of really manipulative stuff that they achieved by essentially playing their users off one another to make them all sadder. It had been ongoing for some time, but in 2016 with Cambridge Analytica an inflection point was reached; perhaps the Meta struggling today is having a hard time because it hasn’t found another really effective business model now that it has tried ostensibly to move on from its unsavory past.
At the end of the day, you have a social network that uses an algorithm nobody outside of the company that runs it is allowed to know much about to… sell ads. And so over time what happened was that the people buying the ads got more and more power over what the algorithm did, until eventually everyone went off to la la land and something big went wrong because it was impossible for anyone else to provide any oversight or to meaningfully engage with Facebook about what they were doing with that formula.
DAOs are essentially the answer to this problem — the DAO owns the IP that the network uses to function, i.e., the algorithm if we’re hypothetically thinking of a DAO that runs something like a Facebook type of application. What that means is that we are no longer in the dark about what the application is doing to us if we have it running in plain view on a public blockchain managed by its users, a fluid group of people that changes over time as they swap NFTs and/or trade cryptocurrency with each other. Because the DAO owns the IP and not a centralized corporation, the whole community of users has to be consulted and vote for changes to it. This makes it very easy to run an open source software community, and with the addition of the base money layer we think of as cryptocurrencies it becomes possible to create a new type of incentive for people to come and participate in the projects DAOs can run.
But that isn’t the end of the story. DAOs can scale, and so you can end up with a situation where there are a variety of different teams building different software solutions to solve the same problem at the same time, collaborating as they go — contrast this to the Web2 technology company environment in which everyone is highly secretive about IP and the firms raise hundreds of millions of dollars primarily to build and defend IP moats.
In the end, the DAO provides a higher level of throughput for information to reach its members than a corporation does. We know this for a number of reasons, but the most important thing to know that has changed between DAOs and corporations is that in DAOs the structure is largely horizontal and voting can involve thousands of people — see Juno Proposal 16, or Cosmos Proposal 82 for extremely high-turnout examples. In addition to the large number of voices that can be supported by DAO governance on public blockchains, stake-in requirements to enable on-chain proposals to come to a vote can pose a financial penalty if ⅓ of voters choose the No With Veto option, as on Cosmos Proposal 82, in which the depositors lost their funds. This rule is not necessary for all DAOs or for all votes, and yet it signifies the variety of coordination tools available to DAO organizers. In conjunction with blockchain technologies that are always online and available to be consulted and/or queried for information, DAOs allow members to get more information about what the other members think than the traditional political discursive technologies did.
The Rule of Law is Fragile
The Rule of Law, in conjunction with democratic governance of the people by the people for the people, has been considered the leading framework for human social coordination for centuries. We base many interactions from national governance to corporate governance upon this system of rules and corresponding penalties.
Nonetheless, the Rule of Law is a fragile system dependent on authority that involves a great deal of trust, most of which is undeserved. Especially in the current epoch, in which incentives seem more perverse than ever before, the trust placed by governed people into their elected leaders seems to have melted away. Regulators are frequently “lobbied” by industry leaders who oppose the values of the general public, but hold significant economic power, making it difficult for legitimate coordination to be arranged. All too frequently, elected officials find themselves at odds with the interest of the body of people who elected them as they attempt to coordinate their policy goals with the support of an eclectic group of well-heeled businesspeople they would prefer not to be at odds with.
While it is easy to have sympathy for legislators in a seemingly hopeless situation, caught between the rock of the way things are and the hard place they told their constituents they were going to get to, it is important to be clear — the fact of the matter is that representative democracy is a pale shadow of the will of the people.
And this state of affairs is rather typical in ordinary legal proceedings today. Think of the speed limit — enforced by a police officer under the peculiar circumstances that an individual who speeds all the time has now been caught doing so, the rule about how fast we should drive is more of a guideline for most of us most of the time. And say we drive somewhere, speeding, and don’t get caught. In some sense, what we did was just as permissible under the eye of the law as it would have been for us to drive the speed limit.
Now, our speeding doubtless created risk for our fellow drivers and ourselves, and so the act is not in any means except with respect to the application of the law identical to not speeding — but the argument being made here is that the rule of law is frequently unenforceable and therefore at least sometimes a very poor representation of the will of the people who decided that there should be a law in the first place.
Beginning with the Iraq War under the administration of George W. Bush, American politics has increasingly suffered from an inability to legislate meaningfully and within appropriate timeframe regarding American military conflict and American Citizens’ privacy. With the USA Patriot Act and its subsequent renewals, the banks fed information about their clients directly to the US Government in the hopes of catching a small number of bad actors who have mostly ceased to be a threat if they ever really were much of one in the first place. Then, under the Obama Administration, the quasi-legality of drone strikes arose and was largely not dealt with, and finally under Donald Trump corruption became so rampant that the President was actually given leeway to distribute federal relief funds with almost no congressional oversight and records show that he largely paid his friends.
Without delving into the Biden Administration too much because we are only halfway through it, it is safe to say that the American state is having a difficult time deciding what to do with the former president, who kept classified documents, violated the emoluments clause, normalized the phrase “fake news” and in general overwhelmed any legal establishment that could have possibly threatened him enough to get him to behave.
The reason that the state is having a hard time is that it is being pulled in multiple directions by a wide variety of partners who all fight for uncertain goals by arguing to a small group of elected officials that they are the most important thing in the world right now. Some of the people say that Trump is a criminal who needs to go to jail, others say that about Biden (albeit with far less evidence!). And at the end of the day, the centralized state has to choose one pole or the other, and it is very bad at doing that. One party can only make one decision at a time, and the monolithic nature of the US Government has prevented it from doing a good job of keeping abreast of technological developments in a number of sectors.
The centralized authority represented by the Rule of Law is being eroded by coordination technologies including artificial intelligence and psychological manipulation because the parties that create and enforce laws do so inefficiently. This enables other parties to outmaneuver them, thus undermining the general idea that people should obey the law by failing to accomplish adequate enforcement.
My first ever published academic essay was about the failure of the Rule of Law system that was put in place to regulate oil production and minimize its externalities. This system, created with the consent of the petroleum industry, had failed to adequately quantify the material difference between emissions in an internal combustion engine vehicle and an electric vehicle. The situation is as it is because the economy is set up to incentivize the petroleum people to try to hide some of the consequences of their actions. The petroleum industry’s understanding of the regulations it is subject to has outpaced that of the regulators attempting to regulate their industry, and the result is that the Rule of Law ends up far behind the current state of affairs at any given time. If only it were easier to manage all of these measurements and drag all of this accountability out into public view!
The Rule of Law is an important part of human culture and will undoubtedly remain thus for the foreseeable future. However, with the addition of blockchain technology to increase the throughput of human social networks and create a reliable on-chain record of the past that network participants can agree upon, it becomes possible to do some things much more efficiently than the old system that was based primarily on the Rule of Law and its hidden axiom: “if you get away without being prosecuted, what you did was legal.” This is the assumption that underpins most of the negative externalities inherent in modern capitalism, and when there is an immutable record of all transactions on-chain it is likely that bad actors will have a much more difficult time eluding prosecution for their misdeeds indefinitely.
Rule of Code: Trustless Interactions in a Post-Law World
The Rule of Code is well-adapted to post-law conditions. It involves inviolable coordination principles agreed upon by a community and baked-in to applications built upon the community’s blockchain, enabling an astonishing array of possibilities for collaborative development. When contrasted with the Rule of Law method of coordinating activity among people, Rule of Code methods are surprisingly simple. Largely enabled by smart contracts, Rule of Code systems simply are set up to do some things and not others.
A smart contract-based application, such as a decentralized cryptocurrency exchange (DEX) or NFT marketplace, can be managed by a community of people and used permissionlessly by anyone. Ultimately, this means that these technologies can be made available as public utilities for people to use as long as they are maintained.
Post-law interactions are interactions that have a built-in guarantee of a specific result; i.e., they are deterministic. A smart contract can hold funds and enable users to behave in a particular way to earn them, or to swap for them, or to do some other action — but in each case, as long as the contract remains functional, the action the user takes leads to a completely predictable outcome with respect to the smart contract.
As long as the contract is doing something legal, we can refer to the way it transparently administrates its own function as a post-legal framework for interactions. Users who interact with the contract may only do so in ways that the contract supports, which is to say that it is not possible for them to break the rule of the application and hence we can imagine more complex smart contracts that can administrate increasingly advanced functions without a direct need to evaluate legality under the case of normal operation.
A DEX application will enable users to swap some tokens for other tokens according to rules that have been baked into the application at the smart contract level. These applications are publicly viewable open source software that runs on public networks, which circumvents the lack of transparency that has most recently led to the collapse of the FTX cryptocurrency exchange. Voyager and Celsius were similar organizations, accepting user funds and then using those funds to pay operating expenses, leaving them insolvent when a large proportion of users sought to exit the platform all at once. On a DEX, each user keeps custody of their own funds — eliminating the risk of malfeasance by actors who operate without transparency.
In this way, smart contracts replace trusted intermediaries who manage certain affairs for us, enabling users to save money by working around these intermediaries. Less risk and greater transparency are assets public blockchain communities leverage to provide services to their users, making some actions available and not others. This is the simplest way of expressing the Rule of Code; which contrasts with the Rule of Law insofar as laws require enforcement and code simply permits some actions and not others.
Comparatively speaking, Rule of Code has a few components, just as Rule of Law involves a legislative body, an enforcement arm, and a population that accepts the actions of the legislative body as legitimate. The components of a Rule of Code system are a public blockchain that serves as a frame of reference that is freely accessible, a community of developers who maintain the software for the blockchain and build other applications atop it, and a base money layer that enables users to send payments to one another over the network.
What a Rule of Code blockchain fundamentally does is make actions available on a network for anyone who meets the conditions, usually a small cryptocurrency payment. Hence, Ethereum charges a small fee to purchase an NFT, and it doesn’t matter to Ethereum who the buyer or seller of the assets happens to be. Recently, OFAC has sanctioned a smart contract application called Tornado Cash in the United States, resulting in Ethereum nodes participating in a blacklist of addresses and ETH assets on the basis of their participation in the Tornado Cash application.
Ethereum is a censorship resistant public blockchain, but even so it faces pressure to comply with regulations because it is run by people, some of whom are obligated to behave legally in their homes. It is here we begin to see the interplay between Rule of Code systems like Ethereum and Rule of Law systems including the US Federal Government, in this case OFAC.
To date, there is great leeriness directed at Rule of Code systems by Rule of Law regulators, but in general the coordination tools made available by public blockchain technology are quite benign. The public nature of most of the activities that take place results in reasonably good behavior by most network participants most of the time. However, it is easy to find examples of imperfect code that has enabled bridge wallet hacks totalling in the billions of dollars, and in some cases the broken code has generated caseload for regulators who are then tasked with bringing criminals to justice under the law.
It is likely that Rule of Code will continue to front run the Rule of Law system by simply not enabling users to steal from one another or commit other crimes on-chain, but in hacks and other cases where code fails, legal repercussions will continue to be employed to penalize the worst actors.
As time progresses, Web3 will become more sophisticated with respect to both attacks and defenses, and as Rule of Code systems become more widely used and popular we can expect them to more thoroughly flesh out their relationship to the legal structures of the different nations in which the code is maintained and accessed and interacted with.
These post-law tools enable cooperation between users from any nation to cooperate without fear of legal issues — i.e., international royalties are typically all but unenforceable for most small-time creators, and yet a smart contract that trustlessly distributes royalties can seamlessly integrate atop this rickety international legal framework to provide reliable royalty payments to users across borders, all achieved independently of the cumbersome and diverse legal systems we are accustomed to.
Rule of Code systems should therefore be thought of as a collaborative framework to enhance human connectedness despite local differences between various legal jurisdictions. Cooperatively built Rule of Code AI systems will provide improved access to advanced computation to end users around the world.
Destination: Scalable, Reliable, Verifiable DAO Architecture & Public Good AI
DAOs exist to coordinate human beings on a global scale in pursuit of common goods. The primary common good to be achieved is an acceleration of the flow of information & associated increased capacity for claim verification, to all parties in all locations. The simple operation of basic decentralized applications such as DEXs and even NFTs have highlighted the way to a publicly accessible organization strategy capable of replacing most of the centralized architecture that we use today.
Over the long run, it is important to think about all of the different applications that Ethereum and Cosmos and their associated chains will automate. Already, we see email that stores files in IPFS and runs off an ENS domain being provided by Skiff and other third-party services who have learned to take advantage of the on-chain data that Ethereum users share already and build in extra functionality around a product that can make them some money.
The way in which open source software development facilitates economic growth is central to the Web3 vision of a creative commons available for everyone. As long as that basic software that connects everything together stays online, the applications people build on top of the blockchain can be anything they need to be. Profitable, resilient, functional — the developers in the Web3 space have a lot of creativity and will no doubt continue to come up with new offerings as the space grows over time.
In a Rule of Law environment, AI presents many concerns. Will it be evil? Will it be highly functional, but motivated by an arbitrary goal to take destructive actions against its creators? These and other practical questions are largely ruled out by the advent of the Rule of Code. And while the rules that govern smart contracts are not nearly so abstract as Asimov’s ideas about what they would be, they do allow human beings to build extraordinarily reliable applications that require less trust between users because they “just work.”
Cosmos SDK appchains in particular stand to make a powerful contribution to the smart contract-based foundation that DAOs build upon. In another essay I have expounded in some depth about the power of the verifiably on-chain DAO. Ethical theory is likely to be significantly influenced by Rule of Code applications and, as governance and participation grow, the interplay between legal rule frameworks and code-based ethics is sure to prove fascinating.
As the development of Web3 continues to provide more power and scale to builders and communities based on blockchains, the concept of a public good that is permissionlessly accessible by anyone is going to become increasingly important. The general concept of artificial intelligence is simply a smart application that knows what its user wants and gives it — this could be a search filter or a chatbot with equal ease.
Building AI in siloed corporations is a great way to end up with lots of competition between teams to build the best technology, and as AI and blockchain technologies have developed over the past decade and a half or thereabouts, the amount of resources going into AI “training” has increased dramatically. The corporate AI-for-profit model will be meeting increasing competition from public good AIs that are built upon public blockchains and enable anyone who wants to use them to do so.
Access to AI will hence be democratized insofar as anyone who meets the network’s requirements will be able to access cutting edge AI models, such as the one I used to generate the cover image for this essay. However, for the communities building these technologies it will be important to maintain the public good positioning and to keep fees low enough for new users to access these networks to limit the incentive to “fork” the software and replicate it on a new blockchain that now can compete with the old one.
In this way, pursuit of a public good by a community of builders can for perhaps the first time in human history achieve the robustness and resilience the modern technology company with less pressure to profit at any cost and more focus upon what people actually want and need. The accelerating pace of development and the frequent flame outs of projects that were not good enough can be quite disorienting, but Web3 is already changing the world. The power of DAOs to organize coordination of individuals around the public good they choose is the cornerstone of effective cybernetic coordination. As the Rule of Law is gradually supplemented and made more effective by Rule of Code structures, we can expect to see increasingly complex applications managed by DAOs using public blockchains to distribute the work as well as its rewards.
Essay originally published at Readme Books, as part of the Cosmos Better Future competition, where it took home a First Prize. https://humanitythree.com/2022/11/16/cosmos-better-future-prize/