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Explaining DAOs to a non-technical person in 10 points

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I’m seeing a lot of questions about DAOs on Reddit and elsewhere. So I’ve decided to offer my explanation — hopefully, it will help someone to better understand this complex topic.

  • DAOs (Decentralised Autonomous Organisations) are mechanisms by which we can align economic incentives (distribute risks/rewards) over the Internet using software. Using DAOs, humans can coordinate themselves to work towards a common goal at the global scale without relying on trust or third parties. This mechanism has been enabled by the invention of the blockchain, pioneered by Bitcoin.
  • The ‘alignment of incentives via risk/rewards distribution’ is a fundamental purpose of a DAO. Some participants in the DAO will seek to take more risk today for the expected higher reward in the future, other participants will seek to minimise risk today by sacrificing future rewards. If incentives are compatible, then each participant will contribute to the DAOs purpose, just by working to maximise their own interest.
  • This is nothing new. We’ve been doing this for centuries using inventions such as joint-stock companies, insurance schemes or even nation states. Groups of people sharing a common goal pool resources together, agree on risk/reward distribution and enjoy the benefits (or not) of the shared activity in the future. This way humans can cooperate on a large scale and align incentives between individuals who never met each other face to face.
  • Nation states, joint-stock companies, corporations, insurance companies are just a few examples of ‘inventions’ that allowed us to achieve large-scale cooperation. Essentially, they are just abstractions that we use to organise ourselves to collaborate. But their function is no different from the function of DAOs but technologies used to implement them are different (paper, print, enforcement by the judicial systems).
  • While we’ve mostly replaced paper & print for transferring information, we still use print & paper for aligning and communicating economic incentives (the entire legal system).
  • Bitcoin proved we can align incentives using just software, without third parties, to achieve a common goal of creating a digital currency with gold-like properties. We might call Bitcoin a proto-DAO. It proved that a certain design pattern is possible and works in the real world.
  • Ethereum takes this concept to the next level. Ethereum provides a platform to coordinate ourselves to achieve economic goals other than just currency creation.
  • Ethereum is to DAOs what Blogger was to publishing. It allows everyone to code economic incentives without having to build the underlying delivery infrastructure from scratch.
  • The Internet allowed you to exchange information with anyone in the world at no cost. DAOs will allow to your exchange economic value with anyone in the world. That means to invest, raise money, speculate, trade, get insurance, lend, borrow, get paid, form joint-ventures in ways that were impossible before. Generally, make a living in a digital world of the future.
  • It’s early, it’s risky, it’s a Wild West. But this is the way, the global networked economy will create value in the future.

On Risks, Rewards and The Evolution Of DAOs

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In order to scale, DAOs will have to continuously reinvent themselves.

The concept of DAOs (Decentralised Autonomous Organisations) has been explored in the blockchain space for some time but the recent rise of Ethereum and upcoming DAO crowdsales generate a lot of new interest in the community.

I’d like to share some thoughts on the nature of DAOs and their importance in the emerging programmable economies enabled by the blockchain.

What does the Wikipedia say about DAOs?

“A decentralized autonomous organization or distributed autonomous organization (DAO) can be thought of as a self-governing organization under the control of an incorruptible set of business rules. These rules are typically implemented as publicly auditable open-source software distributed across the computers of their stakeholders. A human becomes a stakeholder by buying digital tokens, similar to shares in a company, or by being paid in those tokens to provide services for the company. These tokens may entitle its owner to a share of the profits of the DAO, participation in its growth, and/or a say in how it is run.[1] [2]

Personally, I’m not a big fan of this definition. It explains the features and implementation details but doesn’t explain the benefits.

I’d like to offer another definition:

DAOs are the software-based mechanisms for aligning economic incentives over the internet by distributing risks & rewards among people that share a common economic goal but don’t know each other.

So DAOs are not really autonomous and are not organisations. At least not by the common definition of the word ‘organisation’. DAOs can be understood as risk/reward schemes, programmable sets of incentives that can be distributed over the internet that aim to affect change in the world without a formal, legal organisation.

I intentionally didn’t include the concepts such as blockchains, smart contracts, decentralisation, tokens, voting, crowdsales etc. These concepts are obviously fundamental building blocks of DAOs in the current state of the technology. But the real value of DAOs is not in ‘being recorded on the blockchain’ or ‘distributing tokens’ .

The real value of DAOs lies in providing a mechanism for evaluating, funding and distributing risks & rewards of new ventures that is accessible to everyone in the world.

In this regard, DAOs are similar to joint-stock companies of renaissance Italy.

The early joint-stock companies allowed shareholders to share risks & profits in sea expeditions that were notoriously dangerous — high profit but also high risk. Some of the voyages generated huge returns while unsuccessful ones brought zero. (Read more: So it made sense to pool resources together to fund these expeditions and distribute risk to ensure more consistent returns. The invention of the joint-stock company as a mechanism for risk/reward distribution has generated a great wealth for Italian cities at the time.

In the XXI century, sea expeditions were replaced by startups as the wealth-generating engines with founders being new captains and startup teams being the new ship crews.

But the opportunities for funding and participation in new ventures haven’t changed much since the early sea expeditions. These opportunities are still geographically concentrated (the centre of wealth accumulation is now Silicon Valley), limited to wealthy individuals and still rely on national, legal and judicial systems for enforcement. The technologies of print & paper and hand signatures are still used to finalise agreements.

We praise the technology for being the great equalizing force in the world. It surely equalizes access to information but the missing component is the equal access to investment opportunities. Everyone can access information using Google, but only a selected few had access to investing in Google back in the 90s.

What if the ability to invest in the next Google was as widely available as the ability to access Google is today? On the flipside, the ability to lose money on the next (one of the great failures of the dot-com era) should be also equally distributed.

I believe, that due to Ethereum and programmable blockchains, we’re on the cusp of the major transition in the way new ventures are evaluated & funded and DAOs will be central to that transition.

But even though we’re using the XXI century tech, old rules of human economic activity still apply.

To generate returns for investors DAOs will have to solve the same challenges that traditional organisations aim to solve:

  1. Attract and allocate various forms of capital (talent, technology, money) to create new solutions and deploy them in the real world.
  2. Allocate the risk of failure — define who absorbs the risk if things don’t work out as intended. Economic activity by definition has uncertain outcomes and this uncertainty has to be taken into account.
  3. Distribute rewards — define who reaps the benefits of success? how these benefits are distributed? What does success really mean?
  4. Design the evolutionary/scaling mechanism — organisation has to grow and adapt to the changing external conditions. It has to be able to attract more resources over time, by acquiring more talent, money and develop organisational structure that allows it to scale.

Bitcoin (we can call it a proto-DAO) proved that 1–3 are possible to achieve without the legacy organisational structures.

To use an example of Bitcoin, the Bitcoin’s software managed to attract talent, deploy thousands of specialised chips in the real world, evolve its code base, push the Moore’s law to its limits and bootstrap an entire industry just by providing certain incentives in code. Without any legal entity at the top, Bitcoin’s code made people behave in a certain way, work on certain things by exploiting their curiosity, ambition, greed, fear and appetite for risk.

But most importantly it distributed rewards of its success to people based on objective measures — everyone could participate. People made money, and people lost money but the risks were visible to those who wanted to inspect them.

The challenge we have is the point #4 — how DAOs can grow and adapt over time?

The topic that is rarely discussed in is the evolutionary/scaling mechanism for DAOs. How DAOs can adapt and evolve over time, attract new talent & capital and become more competitive.

Most of the blockchain and DAO designs focus on incentivising early adopters. But not many discussions are focused on how to incentivise the late adopters to join the original DAO rather than to fork.

What we learn from Bitcoin and it’s recent scaling discussions is that DAOs won’t be immune to universal market forces that affect traditional organisations.

The combination of talent, capital, community and products that contributed to organisation’s early success, very often is not optimal to take the organisation to the next level.

Different skillsets will be required at various stages of organisation’s evolution and organisational design should account for that.

In the traditional organisations, founders cash out and are replaced by professional CEOs, early investors who no longer contribute are bought out and replaced be the new ones. New talent and new investors have to be vested in the success of the organisation to help it evolve and compete externally.

How to achieve this feature in the context of decentralised organisations where the participants don’t know each other, the organisation itself is embedded in code and there are many conflicting visions for the future?

How to accommodate interests of early adopters who came in early and want to sit on their investments and watch them increase in value with interests of newcomers who could contribute to the DAO but the equity has been allocated already.

Without the equity, they’re incentivised to fork the DAO and allocate new equity to themselves effectively launching a competitor.

In the traditional company, the early investors would be diluted to allocate new equity to talent coming in at the later stage and create a win-win for everyone. Early adopters would have a smaller piece of the larger pie so the absolute value of their investment grows. Newcomers are compensated with equity and have ‘skin-in-the-game’ to join forces rather than to go on their own.

So far, achieving this has been impossible in the cryptocurrency world. The evolutionary mechanism that emerged in the cryptocurrency world forces innovators to fork the original chain and launch a competitor.

The success of Bitcoin inspired the founders of Ethereum and the recent rise of Ethereum, immediately resulted in the Lisk ‘competitor’ and its succesful crowdsale.

“Why join Ethereum and be the 10000th investor, when I can join Lisk and be the 1st. After all, it’s like Ethereum but better because XYZ” (I’m not talking about the technological merits here, just the reasoning of the average investor).

Will the same process repeat itself with the successful DAOs on the Ethereum blockchain? Probably yes.

If a DAO achieves even a moderate level of success, why late-comers should contribute to the original DAO instead of launching a fork with a new allocation of shares?

My bet is that Ethereum based DAOs will be forked even more often that Bitcoin was in its early days. You don’t have to bootstrap the entire network from scratch and the DAO code has to be open source anyway.

But what if we designed a DAO that leverages forking as its decision making mechanism? If forks cannot be prevented, we might very well leverage them as a feature not a bug.

This way we could decrease one of the major risks facing the DAO investors — the risk of being forked.

I’ll explore this topic in more detail and propose an ‘evolutionary DAO’ model in the next article in this series.

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 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 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.