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Why I no longer explain Ethereum as a ‘World Computer’

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Talking points from my presentation — ‘Introduction to DAOs’

I’ve written down some talking points from my talk delivered during the Ethereum Meetup Warsaw on 28.04.2016. For TL;DR you can review the slides:

People Create Abstractions to Cooperate.

You don’t know who made your clothes. You don’t know who made the device you are reading this on. The majority of physical and virtual objects we interact with on a daily basis were not created by one person. Look around and realise that what you are seeing is a result of a coordinated economic effort of large numbers of people.

How can we coordinate large numbers of individuals to work towards the same goal? Humans invent abstractions that allow them to cooperate. Money, joint-stock companies and even the nation states are inventions that people use to coordinate their efforts.

These abstractions that don’t really exist outside of the human mind, allowed people to align their economic goals and orchestrate efforts to produce all things you see around yourself.

Pooling Resources And Risk/Reward Distribution.

Inventions like the joint stock company created mechanisms of economic alignment that allowed multiple individuals to share risks & rewards in productive ventures.

The joint stock company model evolved into global corporations but there’s a growing misalignment of interests between shareholders, employees and customers.

Digital Era Needs New Abstractions

Creating new productive ventures in the digital world is a high risk/high reward activity (startups). Most likely you’ll fail but if you win — you win big.

Most startups today are platforms that rely on decentralised value creation by their users. Work is decentralised (by writing these words on Medium, I’m creating value for Medium’s shareholders) but rewards are centralised — mostly in Silicon Valley because this is where the majority of platforms are initially funded and incorporated.

The industrial model distributed economic surplus via jobs & salaries. The digital age model distributes economic surplus primarily via equity in platforms.

But while everyone with a smartphone can participate in information exchange on platforms, only selected few can participate in platform’s equity.

Bitcoin — The Organisation Built on Software Based Incentives

Let’s forget for a moment about bitcoins as an asset class and focus on Bitcoin the ‘organisation’.

Bitcoin proved it’s possible to embed incentives in software so that the same level of coordination and efficiency is achieved without establishing legal entities, signing agreements, employment contracts etc.

In the industrial model their roles of the employer, employee, shareholder, CEO etc were fixed and expected contributions clearly defined. In the Bitcoin model, these roles are fluid. Users just contribute value to the ‘Bitcoin organisation’ depending on provided incentives and disposable resources they have (know-how, capital, appetite for risk etc).

Functionally, people just ‘do’ stuff for the Bitcoin network as they would for their employer. They provide IT infrastructure, write code, do marketing etc. They perform actions in the physical world because Bitcoin’s incentives make it profitable to do so.

Bitcoin proved that economic coordination at the global scale that was previously extremely costly is now possible with pure software. This is the real breakthrough of Bitcoin. The fact that the first ‘product’ of the ‘Bitcoin organisation’ is a money-like asset class is important but secondary here.

There will be many more Decentralised Autonomous Organisations (DAOs) that deliver other products to the world using the same paradigm that Bitcoin pioneered.

Ethereum is to DAOs What Blogger Was to Online Publishing

Bitcoin required specialised knowledge to experiment with other incentive models and its security model limited the range of experimentation to currency-like products.

Ethereum takes the idea of Bitcoin to the next level. It abstracts out the underlying platform so that you can focus on building other incentive structures. In other words, you can create coordination mechanisms for other groups of people, who can share risks & rewards in new ways than in the typical cryptocurrency scheme.

Blogger allowed writers to focus on what’s most important, the content and forget about HTML, web servers and IT infrastructures.

Ethereum does the same for DAOs. DAOs are not organisations as we normally imagine them (own stuff in the physical world, have employees etc). DAOs are pure economic coordination mechanisms. By distributing risks and rewards, DAOs can make people that never met each other contribute resources to the shared purpose.

We can say that DAOs achieve the same results as traditional organisations (creating value by combining skillsets and assets of participants ) but using somewhat different means.

Key questions when thinking about DAOs:

  • what roles does your model bring together?
  • what assets do they exchange? (talent, know-how, capital etc)
  • what is the product of this exchange?
  • who absorbs the risk of failure?
  • who gets rewards when successful?
  • what success means in your model?

Ethereum as a ‘World Computer’ is a bad metaphor.

While technically accurate it creates wrong mental associations for most people. (outside of the narrow group of insiders) It makes people think about ‘computation’ as an application of Ethereum.

But computation on Ethereum is slow and expensive. For computation, there are better, cheaper and faster alternatives that don’t require blockchains and all that.

Ethereum’s value proposition is not in computation.

Ethereum can create various forms of economic alignment, shared purpose and coordination between thousands of anonymous people, at a fraction of a cost compared to alternatives (legal frameworks). There’s no alternative for that currently.

Let me give you an example.

You can read this post and if you agree with me, we can have a shared perspective on the world. But we don’t have shared economic goals.

Most likely, we live in different countries, get paid in different currencies, work for different employers. No shared economic goals here.

But if we purchase the same DAO token (BTC, ETH or other) , suddenly we both have a vested interest in success of that DAO. We don’t have to know each other, speak the same language but still we are economically aligned proportionally to our stake in a DAO. We start reading the same websites, join the same reddit communities, tell our friends the same stories about how great the DAO is.

From Social Networks (Web 2.0) to Incentive Networks (Web 3.0).

Cryptographic tokens represent various risk/reward profiles and their holders create various incentive networks.

Web 1.0 — Static Document Networks — web of static pages connected via hyperlinks.

Web 2.0 — Social Networks — web of people connected via social links (likes, follows). 

Web 3.0 — Incentive Networks– web of people connected via economic links (tokens). 

Each subsequent paradigm affects the behaviour of the previous one. Web 2.0 influenced the way Web 1.0 looks like — social networks affected the way websites are designed.

Web 3.0 is already affecting Web 2.0 — just look at what happens on reddit during crypto bubbles, crashes, blocksize debates etc. The amount of noise will only intensify when DAO proposal debates begin. To fix that we need to be able to see incentives behind behaviours.

‘One Proposal Per DAO’ Governance Model

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This is a continuation of the article “Forking as a Governance Mechnism for DAOs

What if the DAO could self-govern itself using only the external mechanisms or ‘forks’?

What if there’s no voting, no formal proposals, and each DAO is created with a single, specific goal in mind? Once that goal is achieved, the DAO forks itself into a new one, incorporating all the learnings from the previous iteration.

Here’s the DAO framework that incorporates all these assumptions.

The framework is split into three phases:

  • creation — this is where DAO objectives are proposed, DAO gets created and invested in
  • execution– the core team works on delivering the Return-On-Investment for the DAO
  • evolution– if the execution is proving successful the DAO evolves via subsequent forks.

CREATION PHASE

  1. A Founding Proposal gets submitted to Reddit, Slack, website or elsewhere. What really matters is that it happens ‘off-chain’. The Founding Proposal outlines what the Founders aim to achieve, expected timeframes for product/service delivery and most importantly — the expected Return-On-Investment projections for the potential DAO Investors. However, the DAO doesn’t ‘know’ anything about the proposal. The proposal is part of the social contract between Founders and Investors, but it’s not the on-chain contract.
  2. The DAO creation address gets published and the dates of the DAO creation phase are announced. The share of DAO Tokens that will be assigned to Founders is clearly announced to Investors. Before you scream — ‘premine!’ or ‘that’s not fair’ please stay with me. The Founder’s share is critical to this model.
  3. During the DAO creation phase, investors can purchase DAO Tokens. For example: if the sale is conducted using Ether, DAO Investor’s Ether is locked in the DAO Fund and the corresponding amount of DAO Token is released to the Investor.
  4. Once the DAO creation phase is over, the issuance of new DAO Tokens islocked forever. There won’t be any new DAO Tokens created outside of the DAO creation phase. All collected funds sit in the DAO Fund. There is only one way to access these funds — to return the DAO Token to the DAO and redeem the proportional share of the funds. The DAO Token gets ‘burned’ and the total amount of tokens is reduced. Later on, the only way to rejoin the DAO is to rebuy the DAO Token from existing members.

EXECUTION PHASE

  1. The Founders who now hold the DAO Token have two ways of financing the Proposal: 1/ sell the token on the open market 2/ return it to the DAO and redeem their share of Ether from the DAO Fund. Founders have no other way of accessing the DAO Fund than selling or ‘burning’ their Founder’s share of DAO Tokens.
  2. Let’s assume that Founders deliver on their promise and their Proposal turns into a working product or service. Revenues are generated and collected in the DAO Fund. The value of DAO Tokens goes up accordingly as the DAO Tokens are backed by more cash in the DAO Fund. In addition, the revenue model is now proven so the market puts a premium on the DAO Tokens. Early investors can sell with profit or hold.
  3. If the Founders don’t deliver, Investors withdraw their funds by burning their tokens. Their investment is reduced by the Founder’s share which by this time is most likely gone. But their share of money sits safely in the DAO Fund and is only diluted by the Founder’s share.
  4. DAO Investors continuously ‘vote’ on the original proposal by either holding their DAO Token or cashing out (via ‘burning’ or selling).Their ‘vote’ is reflected on the blockchain and in the DAO Token market price. Effectively, this becomes a form of a prediction market on whether the Founders deliver the promised ROI.

EVOLUTION PHASE

  1. How does the DAO evolve, raise more money, bring in new investors and expand into new markets? It’s simple — by spawning a new DAO!
  2. The original DAO will have a clear economic goal and a pool of stakeholders who invested in the original idea. Due to the nature of open source systems, the value created by the original DAO will be publicly accessible.
  3. At some point, a new proposal will be introduced by the new or existing Founding team. The new proposal will use learnings of the original DAO but introduce new Founders, technologies, marketing techniques etc. And we go back to the Creation Phase again.
  4. Stakeholders of the original DAO can ‘vote’ on the new DAO by acquiring a stake in it. Some will burn or sell their original DAO Tokens to acquire the new DAO Tokens. Market mechanisms and people’s drive to maximize profit will quickly put the price on the new DAO.
  5. In the ‘real world’, the new DAO doesn’t have to be competitive to the original DAO. It can be created by the original Founders or stakeholders to expand into a market niche or introduce some experimental tech. The main advantage of this approach is that they don’t need to seek consensus. Interested investors will then hold both DAO Tokens providing funding to the new venture. Others will stay with the original project.
  6. From this perspective, individual DAOs become just accounting mechanisms used to distribute risks/rewards of different projects linked by common goals and stakeholders. Using the accounting terminology, they become cost & profit centers of the ‘meta-DAO’. Each has a specific purpose, a founding team, and a group of investors. Their profits and losses can be audited by anyone on the blockchain. Market mechanisms decide what gets funded and buying/selling replace voting.

To avoid complexity, I’ve intentionally left out some interesting modifications that can be applied to this model. We can explore them in more detail in the coming articles.

Benefits of this approach

  • 51% attacks are impossible — there’s no voting on spending decisions (investment in the DAO becomes the spending decision)
  • emergent, on -chain accounting system — each project becomes its own, on-chain Profit & Loss center.
  • permissionless innovation — no need to seek consensus within the large group of investors. If your extension of the original DAO is investable, then just introduce the fork and people will jump. If it’s not investable, they won’t — the market decides.
  • multiple founding teams possible — multiple people can take leading roles in various ‘branches’ of the DAO.
  • more granular market pricing of DAO components — instead of holding 1 DAO token, investors hold a portfolio of ‘subDAO’ tokens that represent their bet on financial success of various branches of the DAO.
  • potentially interesting viral loops —any revenue stream of the DAO is immediately reflected in the token price (the DAO token is backed by more funds) which draws attention to the DAO. Well-performing DAO tokens could become the most expensive ones because investors rather sell than burn and buyers will always pay at least the price equivalent to token backing (which is continuously increasing if the DAO performs).

Nothing new under the sun

The presented model mimics how the blockchains have been evolving so far. Multiple, often competing groups are working on multiple blockchain implementations replicating what worked for their predecessors and testing experimental features. Investors finance these projects by buying & holding their tokens.

From the investors point of view, every upcoming crowdsale presents a new dilemma — should I hold the ‘original’ token or diversify into the ‘child’? From the developers point of view, every success of the ‘original’ creates an incentive to launch their own iteration.

The majority of these projects will result in failure, loss of investment and disappointed ‘bagholders’ holding worthless tokens. But isn’t it similar to how the startup ecosystem works? The beauty of open source is that all the learnings from the failed projects stay in the public domain and help innovators who come in later.

This will continue to happen in the universe of Ethereum DAOs — but at an accelerated pace.

So the twist here is that rather avoiding the inevitable, let’s design systems that expect to be forked.

I’d love to hear your feedback regarding potential attack vectors on this DAO model.

Ideas presented in this article were developed in collaboration with Kuba Kucharski. We spent many hours discussing Ethereum, DAOs and ways to scale attention marketplaces described in the Userfeeds article. We’ve realised that the model we design for Userfeeds can be applied more generally to other types of DAOs. Most of the ideas presented here are as much his as mine.

How The Blockchain Turns Content Micropayments Into Microinvestments.

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Why Speculation Can Be a Foundation of Decentralised Media Business Models.

In my previous post, I introduced a metaphor of the blockchain as the ‘persistent social graph’ (or the persistent link-graph). The main argument was that the chain of transactions on the blockchain creates a persistent, immutable graph of connections between addresses. Once we assign an identity to the address on the blockchain, the transaction graph becomes a public social graph of financial transactions.

For the pure currency applications, this is actually a very undesirable feature. The chain of transactions has to be obfuscated, meaning that you actually don’t want anyone to be able to understand who is transacting with whom. Therefore, in the case of Bitcoin, you should use a new address for every transaction, to maintain your transaction privacy.

But this quality of the public ledger is a feature when you want to design a social graph where money is used as one of discovery signals.

In this category of applications, you actually want to get discovered and having an identity tied to a public address is the first step.

Owning your social graph is MUCH more valuable than owning your content. In fact, in the networked attention economy, you cannot separate content from its link structure. And by the link structure, I mean all the inbound and outbound likes, hyperlinks, stars, hearts, tweets, friends, followers, fans etc.

These links affect your discoverability and ranking in the context of a particular social platform.

But what advantages the blockchain social graphs (and apps built on top of them) could offer when compared to the traditional centralised social networks?

Turning Cryptocurrency Speculation into Content Speculation

Speculation is one of the leading use cases of cryptocurrencies. When I’m writing these words there are 674(!) various cryptocurrencies being listed on coinmarketcap.com. Most of them have no other use than speculation and won’t survive till the next month.

Speculation has a lot of negative connotations but the reality of life is that people are natural born speculators.

 What blogs did for journalism & publishing, the blockchain does for speculation and trading. By allowing everyone to create and trade digital assets, it has created a new breed speculators trading with cryptocurrencies. Activities that were reserved for professionals and heavily regulated before are becoming available to everyone (at with all positive and negative consequences).

Services like Augur.net will open up possibilities for speculation even further. With its prediction market, it will allow everyone to bet on the outcome of future events.

But this is just the tip of an iceberg. What I’m excited about is the possibility of creating new user experiences based on speculation but in the context of content discovery.

The critical feature of the blockchain, that’s going to unlock a multitude of new, speculation based applications is called ‘timestamping’. Time stamping allows you to prove that a particular statement was made at a specific moment in time (measured by the block number).

So why is it relevant to our blockchain-based social graphs?

Because it introduces a whole lot of possibilities for content speculation — who was the first to link or like a particular ‘person’ or a ‘piece’ of content. 

Combine it with the monetary value that can be attached to ‘likes’ or ‘links’ and suddenly you have two extra dimensions (time and value) embedded directly in your social graph. 

Let’s make it more tangible with an example.

Look at the one of the most successful YouTube videos ever — the Gangnam Style. It has accrued billions of views over the years and became one of the greatest hits in the history of YouTube. But what I’d like to know is who was the person that was the 1st , 10th or a 100th to share or like this video. Before it actually went viral.

Today, it’s impossible to determine that without digging deep into YouTube’s or FB’s databases. And even if it was possible you couldn’t tell whether their administrator didn’t quietly change the records. You don’t have the ‘objective’ timeline.

The blockchain gives us the objective reference for time-based events and applying it to linking in all kinds of social graphs has a massive potential.

Imagine the alternative reality where ‘Gangnam Style’ went viral on the blockchain-based social network. Where all the links are time-stamped and carry a monetary value. As the ‘Gangnam Style’ video is getting more popular, this popularity is automatically transferred to the nodes in the social graph that were first to connect (‘like/link’) to it.

How does this popularity get ‘transferred’ though? Because in this alternative reality, it makes sense to create a discovery system that ranks people who were first to recognise the future popularity of content. And it makes even more sense to connect to these people/nodes earlier that later.

How Would You Invest Your ‘Likes’?

Timestamping of links in the social graph creates a new dimension of ‘time-scarcity’ and in this dimension, it matters when you ‘liked’ or ‘linked’ something.

At any given block, you can only link to a limited number of other nodes so your timestamped linking pattern becomes your immutable and public footprint on the ledger. It is your link equity to use the terminology from the Google SEO world.

Various ranking algorithms can be used to analyse this graphs of individual footprints but the objective timestamp and attached value will be always there.

Wouldn’t you be interested who was the first person to link to the Bitcoin whitepaper? And how much monetary value they invested in it?

With Timestamping, Micropayments Become Microinvestments.

If we recognise the importance of timestamping and persistent linking on the blockchain then micropayments cease to be just the simple transfers of value. They become microinvestments in building one’s social graph and the mental models of users change completely in this scenario.

In the traditional micropayment or tipping model, my motivation to initiate a micropayment is altruistic. I enjoyed what you’ve created so I’ll send you some small amounts of Bitcoin or some other currency. If you put up a paywall and request me to pay, I’ll probably go elsewhere because I have the abundance of other options. In both cases, the mental model I have is the ‘payment’ model. Value is deducted from my account and added to yours.

But if we recognise the timestamp and the persistent link that is created in the blockchain social graph with a transaction, the micropayment automatically becomes a ‘microinvestment’. I’m not paying you anymore.

I’m publicly voting/investing/creating a connection between our nodes. My motivation is selfish now — I’m ‘investing’ in my social graph and I want to invest in the most valuable connections AND do it as early as possible. Because with each passing block, the value of my potential ‘timestamp’ decreases by one. I’m no longer in the ‘customer’ mode, I’m in the ‘speculator’ mode. 

Is this content/person worth linking to NOW? How does this link reflect on me? How does this affect my future chances of getting visibility and being linked to? How much should I invest? etc.

In both scenarios, the actual transaction will look exactly the same on the blockchain (not counting the metadata). But its meaning to a user will be totally different.

In the first case, a user is paying someone small amounts of money in exchange for access to content, a classic ‘buy/sell’ transaction.

In the second case, the user is investing in their own social graph and speculates how valuable this link might be in the future. Consequently, they might ‘invest’ much more than they would ‘pay’ in the first scenario.

Attention and Discoverability Is Where It’s At

You might have noticed there’s no ‘content monetization’ embedded in that model. Attention is the value that the nodes compete for. Transactions between nodes are the primary way of competing for attention and building a persistent reputation on the network.

If I want to get noticed by the ‘Kim Kardashian’ node I have to either send a high value transaction today or send a lower value transaction back in the day when the ‘Kim Kardashian’ node didn’t have so many incoming connections.

It doesn’t matter whether the Kim Kardashian node produces high quality content or is a creator of any sort. What does matter is that nodes the ‘Kim Kardashian’ node links to, become valuable due to the link equity that Kim Kardashian has.

It’s like the Web where all the links are on the public ledger but anyone can apply their own Google PageRank on top of it. The only difference is you don’t have to crawl the entire web to understand the link structure. It’s right there- on the blockchain.

But What About The Scalability?

Obviously, the blockchain tech today is not ready for mainstream deployments of the on-chain micropayment schemes. However, we can already experiment with with on-chain economies at the ‘Harvard scale’ equivalents of the future social networks.

Right now, we don’t even know what economic models for content monetization will gain traction. Bitcoin tipping or microtransaction paywalls are the first step but they still follow the classic ‘buy/sell’ paradigm and don’t take full advantage of the blockchain’s potential.

Product and UX will be key

To create successful ‘open social graph’ models we’ll need new UX metaphors.

  • Web 1.0 came with pages & links metaphors — ‘the web of static documents’
  • the social Web 2.0 came with feeds & likes metaphors and was shaped around ‘people and profiles’.
  • what metaphors will be appropriate for the blockchain-based Web 3.0 where time and value become the first class citizens?

The key to creating successful ‘open social graph’ models will be discovering new UX metaphors that make sense in this new contexts.

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