DAOs Predate Web3

People have long organized themselves in decentralized and autonomous systems. Not only are these systems robust and productive, but they are arguably the the most effective way humans have ever been able cooperate at scale.

Ever since the invention of Ethereum, the idea of DAOs has captured the imagination of cryptocurrency enthusiasts. Typically, the thinking has been that instead of a traditional organization operating with bank accounts, real estate, employment contracts, etc. in a physical jurisdiction, DAOs could harness blockchain technology to operate in cyberspace. They would have a broad shareholder base around the world, access to DeFi, and answer to no one.

In practice, successful DAOs have looked a lot like traditional companies—except with tokenized shares. While tokenization is very important, this lack of differentiation makes one wonder if it is possible to construct things in a more decentralized way.

Has humanity ever managed to organize people in a decentralized and autonomous manner? The answer is yes.

We should study and learn from these examples.

A decentralized autonomous organization must, first and foremost, be an organization. In other words, it must organize people to accomplish an objective.

It also must be decentralized and autonomous.

Decentralization is a spectrum. The more decentralized something is, the less an individual contributor can determine the overall result.

In an interconnected world, autonomy is also a spectrum. The more autonomous something is, the less an external non-contributor can influence the overall result.

As an example, a traditional company is not very autonomous or decentralized. However, it is an organization.

Beyond this basic analysis, it is helpful to consider which attributes are likely characteristic of a well structured decentralized and autonomous system. These may not be strictly necessary, but it’s hard to imagine an effective DAO without them.

In order for a DAO to be truly decentralized, it must be resilient to untrusted contributors launching attacks. If an untrusted contributor can significantly hurt a DAO, then they have exploited a point of centralization.

It may be possible to filter out untrusted contributors in a decentralized and autonomous manner, however, such a system would face scaling bottlenecks as the number of participants would be limited by the contributor selection process. This is especially unsuited for the Internet era, where DAOs can potentially benefit from millions of anonymous contributors online.

DAOs should also optimize for incremental contributions. This means that participants should be able to contribute as much or as little has they please, while still adding to the collective effort. The smaller the minimum contribution size, the more contributors can be included. This increases decentralization, autonomy, and overall output.

Lastly, DAOs should parallelize contributions. This means that participants should be able to contribute to DAOs independently, without depending on each other. A DAO that does not parallelize contributions will suffer from communication overhead as it scales.

Bitcoin mining functions as a decentralized autonomous organization. People around the world work together to provide security to the Bitcoin protocol. The more people mine, the more secure the network is. There is no downside to adding more miners to the network.

Bitcoin is a great example because there is a “token” involved. Miners earn Bitcoin for their contribution in proportion to how much they contribute. Interestingly, Bitcoins don’t represent votes. Code changes are determined by the full nodes that validate the transactions. The community is capable of forking the ruleset and taking things in a different direction.

Note: some may consider Bitcoin to be a part of Web3, but I am arbitrarily designating Web3 to begin after Ethereum was invented. Since most people might be surprised that I would consider Bitcoin mining to be a DAO, I think it is fair to include it in this list.

BitTorrent also functions as a decentralized and autonomous organization. People around the world work together to host and share the world’s knowledge and media.

If you were to host all the content on the BitTorrent network, it would take an immense amount of storage and bandwidth to make that available to everyone in the world. There would also be considerable issues with the liability of operating such a service.

BitTorrent parallelizes this by letting users choose which content they wish to share. In doing so, it relies on altruism—which is most likely not an optimal system. However, BitTorrent’s UX is so good that it overcomes this deficiency. When users download content from the BitTorrent network, they typically also begin sharing it with others automatically. This causes the most valuable data to be free, replicated, and made available many times over.

The market is the oldest and most effective decentralized autonomous organization in the world. It is the main way that humanity determines how to allocate resources.

Markets rely on two important factors

• A protocol/ruleset (property rights and laws)
• Currencies (today, mostly fiat—but historically gold)

With these simple primitives, market actors are able to coordinate in a completely decentralized manner. According to Austrian Economic theory, knowledge is distributed across everyone in society. Market actors individually weigh their knowledge about the world and preferences—and, in aggregate, this generates prices (where supply meets demand). This pricing information then signals the comparative value of goods and services.

Without this decentralized weighting algorithm, it is impossible to know how much of anything to produce. This is because finding an optimal scenario if far too computationally complex and would require information not available to a centralized actor.

Another interesting characteristic of markets is that they tend to compound. This is unlike a centrally planned system, which will have trouble deploying resources effectively as the amount of assets or number of people under management grows.

Scientific research is a decentralized autonomous organization as well. It follows a ruleset known as the scientific method and utilizes a directed acyclic graph of evidence and analysis to create consensus without finality.

No single scientist is trusted. Even if their intentions are good, it is very common to make mistakes. As such, observations are replicated across many nodes and these attestations are cited in later studies.

Through this process, we have made tremendous progress. Particularly replication has proven to be a valuable technique to advancing this effort.

Note: I am not talking about peer review, which has merit but is also controversial. Peer review, in its current form, is a modern development in scientific research and is pretty centralized.

Common law is an example of a pseudo-decentralized system. In it, judges are able to make decisions without a centralized legislative body writing statute. Then, other judges reference this precedent for future decisions. For even more decentralized legal systems, an interesting area of study is polycentric law.

The Web is technically part of the market economy. However, the web browser can stand on its own as an app in which the functionality is built in a decentralized and autonomous manner. By creating the right standards and protocols, many different companies have built their own websites—adding functionality to the web browser and making it the most powerful app in the world.

A common objection might be that “these don’t really seem like organizations.” After all, it’s not like there is an explicitly designated group that is in charge of “scientific research”. But that is exactly the point—these structures don’t resemble centralized organizations.

Tokenized companies are a great innovation, but blockchain technology enables decentralized alternatives that can look very different and achieve much more.

Decentralized systems are proven to work. And Web3 protocol designers can benefit from analyzing these existing systems while designing new ones.

I am attempting to reimagine the traditional company in the Web3 era from first principles. Please see my latest thinking on how digital products can be developed in a truly decentralized and autonomous manner through forking.

Why DAOs Change Everything

DAOs enable you to fork the shareholder base. This is a permissionless way for anyone to compete as a shareholder.

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