Why should organizations run on the blockchain?
Victoria
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Utopia Labs
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October 21st, 2022

As transaction costs go to near zero and coordination costs continue to increase, organizations that originate ten years from now will run on blockchains as their primary way of transferring value.

There are two fundamental reasons why I believe this:

1. Blockchains are the most efficient method of transferring value.

Organizations that operate on the blockchain run faster and cheaper than traditional financial rails. This is because, unlike conventional financial operations, working off the blockchain absolves the need for “trust” to be delegated to a third party.

Need to verify that this transaction went through? Ask Western Union. Need to verify a wire transfer? Ask Bank of America...

The need for trust means that traditional financial rails are:

  • Slower

    • Wire transfers typically take 1-2 business days; however, with blockchains, payments can be under two minutes.

    • With human intermediaries as the delegate for trust between two parties, settlement takes much more time. Using operations within the United States as an example, legal negotiations and settlements often take years.

      • Or, in the case where you're an international founder, filing your 83B is a nightmare, and sending $20 to recognize your equity costs typically $50+, including fees.
  • More expensive

    • With blockchains, smart contracts cut out the intermediaries, removing the need for rent-seeking, extractive monopolies that can charge high fees through data moats. Currently, the average cost of global remittances is 6%.
  • High risk of censorship

    • In a centralized world, transactions are more susceptible to being blocked by intermediaries, often for no good reason. This gatekeeping creates an opaque system and a vague verification process.

2. Blockchains enable a newfound social consensus mechanism.

Every transaction on the blockchain gets documented in the exact sequence of occurrence, creating a public ledger of events. This public ledger enables a social consensus mechanism, allowing humans to coordinate with complete consensus.

This solves three things:

  • 1. Information Asymmetry

    • You can trust that nobody messed up the data (i.e. no incorrect or missing amounts).

      • Everybody has access to the same information, which serves to be a universally composable API.

      • Enables 10x efficiencies in areas such as:

        • Network accounting and budgeting.

        • Coordination between financial institutions (i.e. people can build, partner, and work with other organizations in a permissionless manner without high barriers to entry)

  • 2. Permissionless creation and deployment

    • Blockchains serve to be a more democratized technology that allows for permissionless creation. For example, not everybody in the world can start a Delaware C Corp, but everybody can create and deploy a set of smart contracts.
  • 3. Store of Value → Resiliency/Decentralisation

    • Blockchains serve as resilient infrastructure whose infrastructure cannot be shut down, ultimately leading to confidence in resilient, unbiased systems.

You can look at how this affects organizations from an internal and external perspective. Internally, operational processes will be streamlined with a unified backend database. Externally, blockchains work towards enabling a free market economy that optimizes end-user experiences as it’s impossible to build true data moats.

Some trends from the market that I believe validate my two core beliefs:

  • Society is demanding a credibly neutral, authentic, verifiable database..
    People are starting to trust institutions/companies less, including the nation-state. Today, no widely accepted solution allows anyone worldwide to verify factual accuracy unless there’s a credibly neutral ledger.

  • Capitalism is a correct model for only a small percentage of the global population, with negative externalities to disadvantaged nations (i.e. global warming and climate externalities, low labor wages).

  • The sheer amount, quality, and density of ideas through knowledge dissemination are happening more on the internet than in person. The internet will eventually replace cities (think of subreddits and clusters of the internet as cities), and crypto rails will be the underlying infra to allow groups of people on the internet to organize, create, and build meaningful value.

  • Eventually, technology will reach a point where 1) privacy, 2) transparency, and 3) accessibility will all be demanded by consumers vs. institutions and will be the norm.

    • Examples include ZK, AI, DiDs, Layer 2 solutions, and Layer 3 solutions, etc.

    • Previously, privacy had to be sacrificed for accessibility.

I believe Utopia plays an incredibly important role in equipping digital organizations that use crypto rails as their primary means of coordinating. Our current strategy is to work with and be at the frontier of observing blockchain-based organizations' applications (and limits).

Today, we’ve seen many challenges with these organizations, or what we’ll call “DAOs.” In retrospect, it’s an incredible breakthrough to see organizations transparently share their balance sheets, company salaries, operational processes, governance, and more on day one.

That does not prevent us from facing some harsh truths that these organizations (DAOs) go through. For example:

  • It costs more money to send payments - it’s more expensive to send payments (gas costs) vs. sending a wire transfer (free).

    • Layer 2 solutions should eventually make costs minimal, but this raises the question: is the benefit of these transactions being on-chain more than having them completely free in siloed financial systems?

    • Payments are a primary use case that couldn't be solved, but ZK snarks and scaling solutions are right around the corner → Vitalik Buterin - Ideas for things worth building

  • The balance between private and public payments - in the future, crypto organizations will require a combination of both public and private payments. There’s tons of technology/innovation within this space right now. Should DAOs be able to have private payments?

  • Coordination costs are still incredibly high, resulting in “consensus” based decision-making, which does not yield the best results for traditional companies.

    • For companies, the best decisions are typically made where a group of individuals provides input, while decision-making falls to select individuals.

      • Keep in mind, framing DAO’s <> C-Corps might instantly lead you to the conclusion that DAOs won’t work, but more interestingly enough, DAOs might replace things that require more democratic structures, such as the following:

        • Non-Profits

        • Governments

        • Public Goods

        • Large Projects

  • Legal, which I touch on here - and even more recent news with the CFTC and OOKI penalty.

Conclusion

Areas that I want to explore further, inspired by my conversations with our customers, is the idea that a new form of digital conglomerates, which almost serve to be more similar to countries vs. companies, will be the most successful model of what we consider “DAOs”.

“Companies'' or “Sub DAOs” could be the common governance underneath these digital conglomerates, which have their incentives but still provide base value to the overall protocol or project. Think of Alphabet as the DAO and Google as a company.

Over time, Utopia can and will build conviction in understanding which blockchain-based organizations work and which ones won’t, and I’m very grateful that we’re in the position we are today to observe and support this frontier.

Thank you for reading through my half-baked thoughts! I’d love to continue this discussion on Twitter here or feel free to book a call with me here.

- Kaito, CEO & Cofounder

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