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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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!
- 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.
- 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.
- 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.
- 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.
- 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.