Wednesday, 5 February 2014

Decentralized Autonomous Organizations (DAOs) are a new type of organization which only became possible after 2008 with the invention of a decentralized global asset register which enabled consensus based on proof of work amongst unknown parties at scale. This invention, called the blockchain was first described and put into practice by Satoshi Nakamoto with its first application - Bitcoin.

DAOs are decentralized organizations in which all relationships are peer-to-peer and it is not necessary to know the individual identities of the peers for the organization to function.

DAOs operate across networks such as the internet and gain value from the “network effect” in which each node added to the network increases the network value exponentially.

DAOs are unique in that they consciously optimize the roles of all participants so that each role is incentivised to support every other role in the system.

We can take Bitcoin (the system) as an example of how this works.

There are a number of roles in this system:

1 The “Miners” – they are analogous to “workers” in other organizations in that they acquire their own tools (mining hardware and software) and use them to mine for bitcoins in exchange for payment in the form of new bitcoins issued (currently 25 every 10 minutes or so).

2 The “Owners” – they are analogous to “shareholders” in other organizations as they purchase bitcoins (shares) and expect these to gain in value.

3 The “Merchants” – they are analogous to “traders” in other organizations as they use the bitcoins to trade and thus carry out transactions which are recorded on the blockchain.

4 The “Users” – they are analogous to “customers” in other organizations in that they make use of bitcoins via wallets to purchase items or services from the merchants.

All four roles are incentivised to support the entire system in order to meet their needs, so we have a win-win situation which generates a self-reinforcing positive feedback loop. All 4 roles have an incentive to talk to everyone they meet about the benefits of the system and thus to increase uptake of the currency thus increasing the overall value of the system to all participants.

It will be noted that there is no management structure or layer in this system, so it can be said that here an organization has been created which has embedded all management functions into the software.

This can be seen as a development of a general process of automation which began by automating basic unskilled worker tasks such as automobile assembly by robots and which has now reached the highest level of executive management by replacing these levels with computer programs.

DAOs appear to operate with an optimized intelligence which may be considerably superior to that displayed in any traditional (hierarchical) management structure.

It appears that we are witnessing the birth of a higher order of organization which is capable of operating at a higher power and efficiency than traditional organizations and which has the ability to serve the needs of all stakeholders in such a way that they all support each other irrespective of their roles.

This appears to be the first time in history that such a structure appears to be possible.

In order to understand the dynamics of DAOs it is necessary to understand emergence.

In philosophy, systems theory, science, and art, emergence is the way complex systems and patterns arise out of a multiplicity of relatively simple interactions. Emergence is central to the theories of integrative levels and of complex systems.

Emergence describes a dynamic process of self-organization in which radically novel and coherent structures, patterns and properties arise in complex systems which are built up from a network of simple structures or nodes.

With emergence, the resultant system is very different and much more sophisticated than the sum of its parts, so a DAO is very different from the sum of its constituent members.

A DAO presents a special case of a network in which all peers are seen to be equal insofar as any attempt to add differences between peers in the form of a hierarchy will fail because consensus demands and depends upon peer equality.

It is a self-regulating system in which all stakeholders have power which they utilize in the general consensus which keeps the system running and balanced.

Because we have almost no experience of DAOs – even the Bitcoin system is an ongoing experiment whose properties are not yet all entirely evident – there is probably much more to discover about the real properties and power of DAOs.

However, in observing the evident superiority of bitcoin as a currency over old-style (national) currencies in virtually every way it is reasonable to assume that all DAOs will display decisively superior results in meeting the needs of all stakeholders than traditionally structured hierarchical organisations.

Many people are puzzled at first when they encounter a phenomenon such as a DAO because traditionally human beings have grown up in and have been surrounded by centrally controlled hierarchical organisations - therefore it is difficult to find a reference-point to a human organization which is so radically different.

We grow up in centrally controlled hierarchical families, schools and employers are also structured in this way as are local and national governments and virtually all NGOs and voluntary organizations.

Such traditional organizations have served us more or less well down the centuries, simply because until now we have had no other way to organize human groups at scale because communication was difficult, uncertain and without solid proof of consensus. However, no matter how decent and well-meaning those in charge of these traditional organizations are, they have always been unable to combat corruption and co-option simply on account of there being a structure which accords privileges to some members and not to others. This corruption and co-option invariably results in creating increasingly self-serving organizations which use up scarce resources for members of a privileged hierarchy (most glaringly evident in the “Nomenklatura” in Soviet society), and being unable to effectively serve the needs of the customers.

A DAO will always win because it is optimized to allocate resources fairly to all of its stakeholders.

It will be very difficult to overestimate the effect of the phenomenal changes in all of our lives as more and more human organisations are organized as DAOs – eventually replacing most centrally controlled hierarchical organizations simply because DAOs serve the needs of all stakeholders so much better.

In practice we will see this switch towards DAOs first in the commercial world where efficiencies will be quickly seen, rapidly taking customers away from traditionally organized companies which will have to either adapt or cease to exist. We are beginning to see this in the world of financial services where bitcoin has the ability to carry out these services directly and without expensive gatekeepers.

Later on the same DAO model will be increasingly used by local and national governments as a superior way of meeting the demands of its constituents.

In both the commercial and public sectors however I expect the transition to DAOs to be a difficult one, largely owing to the inability of entrenched incumbents to conceive of a better way to deliver services that the traditional one.

In a wider perspective we can look back to our history as hunter-gatherers over 10,000 – 12,000 years ago when human beings moved in bands of about 40 members in what were essentially peer-to-peer, leaderless organizations of a very efficient and harmonious nature.

Once people became settled and began to domesticate animals, individual leadership and a hierarchical structure became more and more apparent, and its consequences have now been with us for so long that most of us are incapable of envisaging ordered societies without it.

Perhaps we are now able to return to that type of egalitarian, open and transparent human organization, but this time on a global scale, all enabled and mediated by that astonishing invention of Satoshi Nakamoto and this time who knows what the consequences for the world will be.