Welcome to the world of DAOs!

Welcome new subscribers – thanks to those of you who entered your emails and have chosen to receive my ramblings in your inboxes – much appreciated! And for those who didn’t subscribe, it’s never too late to jump on board.

In my intro post I laid out a relatively expansive idea for the types of things that this newsletter is going to touch on. From general Web3 learnings, to specifics of blockchain tech, to NFTs, to DAOs, and finally, to how all these things come together with music and the music industry.

There is a lot to cover and this newsletter can’t be everything to everyone, so I’m going to skip a bit of the very basic up front stuff. The basics of cryptocurrency, blockchains and how they work will certainly be covered in different ways in this newsletter as we explore, but I am not going to begin with general explainers for all these things. These already exist in droves across the internet, in written and video form, and y’all should get out there and learn some of the basics. In fact, here are a few of my favourite learning resources and websites that have been useful to me for grasping the basics:

Hands On Ethereum Day (this is an excellent “learn by doing” resource)

The importance of DAOs

There are, however, a few key concepts that are essential to grasp to understand the potential of Web3 to change how organizations of all types are structured. First and foremost, we need to understand just what the heck Decentralized Autonomous Organizations (DAOs) are, for what they can be used, and why they could make Web3 into a game changer.

For me, the easiest way to understand what a DAO is and does is to first peel off the “tech” layer of the onion and explain it as a basic organization.

A DAO is simply a regular ol’ organization that forms AND uses blockchain technology to structure its activities.  Easy enough, right?

I could start up the “Brodie Conley Super Club (BCSC) DAO” right this second and begin building my community immediately, in the same way that one of my musician friends could form a DAO around their work, or that an existing organization or business such as a record label could form a DAO and start growing a community around it’s artists. DAOs are truly just organizations, with a twist.

That’s great, you might be thinking. But also, why the heck can’t I just form an organization/club/business/etc. off of the blockchain and have it be the same as a DAO? What makes Web3 tech and its interactions with organizations so special?

The basic premise is that Web3 and specifically blockchain technology allows for the creation of digital tokens, which can be used to signal membership in a given organization or community. In the blockchain world, these tokens are often issued in the technical form of ERC-20 tokens.

When starting a new DAO, the founders can create, or in Web3 lingo “mint”, tokens to distribute to new joiners and which signify membership in that organization or community.  Continuing with the fan club analogy, I might create tokens called $CONLEYs, and distribute these tokens to anyone who wants to be a member of my DAO or community. If you own a $CONLEY (hold one in your crypto-wallet), you are automatically a member of the BCSC DAO. Simply, token = membership.

Again, pretty standard stuff. Seems like it would be just as easy and useful for me to photocopy a bunch of physical membership cards, pass ‘em out to people I know who are into what I’m doing, form my fan club and we’d end up at the same spot with a simple organization, right? Wrong.

What makes Web3 tokens so powerful is what can be coded into them! Tokens can be programmed via smart contract technology to clearly define the operating rules for an organization, and to enforce these rules in their execution.  The rules include everything - from how many tokens will be minted and distributed, to how formal governance and decision making will work. Tokens have the rules programmed or coded directly into them clearly and transparently, and because of the secure and decentralized nature of the technology they are basically unchangeable, unless of course a community decides to alter them by vote later.  This means that the organizational structures defined in the token are locked in and that the system is entirely trustless – it does not rely on the good faith of individuals taking part in it. Notably, this allows for significant levels of community scaling with far lower administrative costs and efficiency losses than traditional organizations . There is, of course, a dense technical explanation for how this works, but I will not go into it here.

And there is more. By establishing governance using tokens that live on the blockchain, DAOs are able to make and record decisions “on chain”. What this means is that DAO governance is carried out in full public view and all decisions are accurately recorded, executed, and stored in a decentralized fashion where they cannot be altered or deleted. This makes DAO operations and decision making far more transparent, allowing community members to operate, make decisions and vote on items with full information.  This level of transparency also has the added effect of greatly reducing opportunities for organizational corruption.

This is all getting a little dense, so let’s continue with our example:

What if we decided to formally found the BCSC DAO as a vessel to manage all my released music. You can think of this as forming Brodie Inc., if you like. I would mint and issue $CONLEY tokens as proof of membership in the organization. Being the founder I would initially decide on the governance rules programmed into the tokens. Hoping to take advantage of the flexibility of tokens to create more fair organizational structures, I might decide to program the $CONLEY tokens so that each is worth 1 vote on all governance matters related to BCSC DAO and that majority rules. I could decide to create 20 tokens total and then digitally distribute them to 20 of my closest friends and supporters.

Voila! I’ve just formed a DAO, a new organization with a radically flat organizational structure. Each of my 20 friends now owns an equal part of BCSC and simply by holding these tokens which contain clear, executable governance rules as code, has an equivalent vote and say in the governance of BCSC as the other 19 owners. If a token holder puts forward a governance proposition to print an 8-track tape version of my album, they can round up majority support, propose a vote, get 11 votes and make it happen!

Now say my music starts getting really popular and I sell a ton of albums and merchandise. The revenue from these sales would all go to the BCSC DAO treasury and each token holder would have an equivalent say in how to spend that money. And as my theoretical career continues to grow, the overall value of simply owning a token also grows. It is akin to owning a share in a company. So, by creating organizations with more distributed or fair ownership structures to begin with, it is also incentivizing all token holders AKA owners to work hard to create and grow value for those organizations. If you (the fan) and I (the artist) both own the DAO, then it behooves both of us to work hard to make the music very successful, as we both benefit. In this way, we can also see the value of DAO’s to create organizational structures that allow for shared benefits and shared labour. A rising tide lifts all boats, and shared ownership via DAOs can help make this real.

I hope by now that it’s relatively easy to see how the unique, programmable nature of blockchain tokens allows for the creation of radically different organizational structures. I chose a simple, flat structure for my example, but the technology allows for tokens to be programmed with and execute basically any organizational structure that you can think of, and even ones that we have not yet thought of.

This alone is game changing, and will change the future of all organizations – from large corporations and businesses, to the smallest community-based social and cultural groups.  However, all this flexibility does not come without some potential downsides.

Any structure, you say?

If you’ve ever watched Spiderman you know that “with great power comes great responsibility” and the same goes for the formation of DAOs.

In the example above, I created a DAO with a flat structure: 1 token = 1 vote.  But, I could have created any structure I wanted. I could have programmed the initial distribution of tokens to favour myself for example, giving me more tokens than anyone else right off the bat and thus more ownership control. I could even have created tokens with no ownership or voting value at all. They could simply allow holders to access special perks, like concert presale access, or special event access, etc., for being part of the BC Super Club. Benefits of token holding can be distributional and economic, but can also be social and cultural.

The point being that Web3 technology allows for a huge diversity of organizational structures and some will be better than others, depending on the values on which we create and judge them, and the context in which they are employed. Web3 technology alone is not an automatic panacea for fairness and equity.

And to make the picture even more confusing, it is not at all clear at this point what optimal organizational structures might look like for any given type of organization. For instance, there is a strong critique that has been made around the nature of token based governance as “too economic” or even trending in libertarian directions, with tokens potentially being valued as purely economic in nature, and holders then making governance decisions based only on economic self-interest. This has the potential to lead to poor reasoning, decision making, and outcomes.

Likewise, even those organizational systems that may seem fair on their face might have challenges that we haven’t anticipated. The flat (1=1) governance structure that I used in our example appears very fair on its face and when applied to very small organizations, but it’s unclear whether this type of structure will actually produce fairness, equity and strong governance in the long term for organizations operating at a larger scale. While 1=1 might be fair in terms of distribution, with larger organizations it could lead to distorted organizational incentives and poor decision making for the overall health of the organization. It turns out that radically flat doesn’t necessarily mean radically fair or optimal. It could, but it might not. Context is everything.

This is all to say that the technology around Web3 is very new, let alone the thinking around the organizational structures that it might produce. Careful thought and constant learning is needed as DAOs grow to ensure that they actually achieve the progressive ends that they are touted as delivering. Which brings us to our next question…

Why get into Web3 now?

The simple answer is because the basic structural elements of Web3 are being built right now, and it is important to have smart, engaged, progressive-minded people involved to contribute, develop, test, use and refine the basic infrastructure being built around Web3 (and DAOs), and to put the infrastructure into practice across many different organizational use cases. As I mentioned in my first post, Web3 technology contains all the elements for creating more equitable organizations and a fairer world, however, Web3 technology is only a structure (albeit a powerful, incentive heavy structure) upon which human interaction occurs, and ultimately the way humans choose to program tokens and build Web3-based organizations in the short term will provide a model for how they are used and develop into the future. 

Here’s where I get to deploy my first use of the concept of path dependence, which at its most basic states that “the further along a path something moves, the higher the costs are for exiting that path.”. With respect to Web3 and DAOs, path dependence means that the experiments in programming tokens, and creating and forming communities that are happening now will have an impact on how DAOs are used in the future. If initial users of the tech choose to use it to form organizations that are not optimized for fairness and equity to begin with, then it is likely these same inefficient and inequitable structures might be repeated by future DAOs, and so on.

This is important because theories of governance and power around DAOs and what they are capable of are only just being developed, and are forming based on actual live use cases, rather than prospective academic theorizing and testing (though formal academic theorizing and research is taking place, as well, and building off an already strong literature on governance, organizational behavior, etc.). The current moment is a crucible for DAOs and for the future of organizations. The types of organizations being formed and experimented with now will have a major impact on the fully developed Web3 organizational environment that emerges over time.

Web3 is the future. Whether we like it or not, it’s coming and we will all be operating on it within a matter of years. And so the time to get our hands dirty and build a fairer system is now. We can either get involved and clearly push for progressive goals, or leave it to others and live with whatever we get, be it a progressive, democratic, libertarian, authoritarian or other system. Personally, I’ll take the former option.

Web3 and music

So, now that we know a bit about what a DAO is and how they work, we can briefly start to think about the huge impact they might have on the music industry. A few quick thought experiment examples, for fun, to end this rather lengthy newsletter.  Of course, we’ll be diving in more fully on all of these in future posts. And feel free to hit comment below or hit me with a short note with your best ideas for how you might design a DAO to make the music world better!

1.     A brand new artist could form a DAO and decide that the DAO will own and control all of their master and publishing rights from the get go. To help grow their brand new career from scratch, they could offer tokens to fans or community members who do tasks that support them. This could mean anything from helping with management administration and grant writing, to forming and moderating online communities for the artist, to simply tweeting a whole lot about the artist. Completing a task might be rewarded by an amount of tokens relative to the difficulty of the task, granting token holders some level of ownership in the artists career based on the number of tokens they collect.  This is a completely novel form of artist organization made possible by Web3 technology. Artists can grow their careers with the help of their fans and community, and everyone is incentivized to work hard, because they all may share in the output value.  

2.     Granting Organizations could choose to operate as DAOs, with tokens distributed to members of the artist network being served by a given organization, and these artist members then having a direct governance say in how the organization operates and its rules and procedures for awarding grants. This would create a strong feedback system, with artists and community members directing how and why projects are funded. One note here, I realize there are managing “public funds” issues with this example, and we’ll try think through those in later posts.

3.     Performing Rights Organizations could be turned into DAOs, with artist members being given direct governance say over everything, from royalty rates, to how royalties are administrated and paid out. And something I didn’t touch on yet is the power of smart contracts to eliminate massive amounts of administration work, through programming monetary distributions clearly into code. This allows for directing money and royalty payments to the correct place and person without the constant need for human direction and labour.

4.     Streaming Services could be operated as DAOs, with tokens distributed for uploading content to the platform and thereby providing value to the platform.  Artists with tokens could then share in ownership of the platform and decide on the fairest way to divide streaming revenues.

5.     Record labels could form a DAO around their rosters. Structures could vary here, but could include shared benefits and governance, and even shared ownership for those who contribute to the DAO. Web3 label experiments are already taking place, and I am even a part of one early experiment. I recently joined GenreDAO, a web3 label experiment by Leaving Records. I was able to claim $GENRE tokens, the official token of the community, to join. So far, membership simply means I can access a secret group chat on Discord, but it also gives me a say in the DAOs operations through a governance vote. GenreDAO is already moving to build a treasury through partnering with artists to sell music NFTs, with the DAO receiving a 15% share of the initial sale revenue on artist NFTs, to be “directed towards the GenreDAO Treasury, a reserve to fund creative project incubation for artists, events, artist mutual aid, and more.”. So, as a token holder, I will have a small say over how that treasury is ultimately used to incubate more music.  In return, GenreDAO members help add value and promote the artist release, driving up its overall value and sale price, and the value of the artist generally. It remains to be seen how it all works out, but so far it seems to be building a functioning, more egalitarian system for releasing music.

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