This is a new primer about the Learning Economy Foundation’s and Harvard’s research paper about blockchain economies, but through the lens of the new Decentralized Autonomous Organization (DAO) governance structure. The work is centered on the need for a new legal and governance structure for decentralized networks and economies.
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Garcia’s “Enhancing Blockchain Innovation,” a policy analysis from the Harvard Kennedy School, outlines a framework for addressing the regulatory challenges associated with innovation in blockchain technology. The paper compares blockchain to the development of other revolutionary technology such as the Internet and VOIP. Regulation has played a varying, often controversial role in the evolution of other technologies, and this paper draws on that history to suggest guidelines and recommendations for technologists and policy-makers alike.
Provided in Garcia’s analysis is a recommendation for the creation of a new corporate vehicle known as the E-Corporation; a way to provide clarity for innovators on how best to structure their blockchain-based startups so that they: (1) operate within the confinement of the law, (2) preemptively address several of the challenges that come with distributed ledger technology, and (3) give consumers and users increased confidence and trust moving forward. Many consider blockchains to be the revolutionary technology which lays the foundation to formally create, govern and operate a Decentralized Autonomous Organization (DAO). Thus the fate of one is tied to the fate of the other.
In their book Decentralization, Kaal and Calcaterra show how the guiding principle behind DAOs, decentralization, has been used to solve difficult business and political problems from Medieval merchants to modern democracy. The significance of scaled blockchain networks and their potential to broaden the impact of decentralization can not be overstated. Illuminating the landscape that shapes blockchain technology also brightens the path before the DAO. In this context, let’s use the framework of “Enhancing Blockchain Innovation” to introduce some of the challenges to DAOs and present some potential questions we will address in our research.
According to the paper, the main policy challenges facing the blockchain landscape fall under four categories: foundation of the entity, development of the technology, going to market, and long term adoption. Not all the challenges necessarily apply directly to DAOs, so here we will focus on those that do.
FOUNDATION
Starting with perhaps one of the most important and intriguing questions: how to define the ideal corporate structure.
Since the corporation was invented primarily to centralize planning and sidestep some of the inefficiencies of decentralization, it is curious to even consider this question in forming a DAO. However, since DAOs must operate in a world that engages with many centralized entities, it is imperative to investigate a formal structure for DAOs which can preserve those qualities that maintain disbursement of power and autonomy.
The paper discusses the Bitcoin approach which is completely without organization. Only 3rd party foundations which have interest in the technology participate in governance and maintenance. Next the paper critically examines the Ethereum entity, which is a popular approach as it stands. Ethereum is formed under the Swiss non-profit structure, which primarily provides favorable tax-benefit. However, this creates a myriad of violations and conflict between stakeholders. The main conclusion of the paper is that a new corporate structure called the E-corporation should be defined in order to plausibly support the particular needs of a blockchain enterprise.
E-corporation as described by the paper is a nimble and transparent organization which can be held responsible when it needs to be and disperses power across the stakeholders in the spirit of decentralization. The entity doesn’t necessarily require new regulation or political will. Existing structures could be adapted.
What is most important is that the E-corporation is formed with the precise challenges of blockchain in mind as well as the ability to remain flexible as is essential to decentralization principles.
It is not difficult to see that a public blockchain entity is a special case falling under the larger definition of a DAO. Thus we should look to expand on the concept of the E-corporation. The paper discusses only how the E-corporation can serve blockchain projects, while we will look to see how the E-corporation can serve the entire DAO community. We should assume in our research that there is no single best approach to formation. Paramount to answering this question is a taxonomy of DAOs as they may appear already, followed by defining the anatomy of an organization which is to be formed specifically with the intent of being a DAO.
Also under the issue of foundation, the paper examines the uncertainty of how to apply existing law as related to use cases of blockchain. While it is not necessary to look specifically into how the blockchain use-cases are presented, it is interesting in the paper how the author chooses to identify criteria for being regulated. The paper suggests that blockchain could be regulated under similar criteria as finance, ie. regulate certain types of institutions, particular types of markets, particular activities and for controlling systemic risk.
Our research will attempt a similar exercise for the DAO. We will identify 1) current use cases for DAOs, ie. how are DAOs currently implemented, 2) challenges that could be served by DAOs which currently are not being implemented and 3) we will imagine completely new problems and applications that may occur now because the existence of DAOs. Upon identifying use cases, it is useful as they have in the “Enhancing Blockchain” paper, to examine how laws are currently being applied in other sectors which may be applied to DAOs. Since DAOs are certain to be disruptive in existing markets we can speculate on how law may be applied in the future.
DEVELOPING TECHNOLOGY
The paper identifies writing a white paper and launching an ICO as the first public actions performed by most blockchain enterprise. The ICO is of prime importance to our topic, since coins often are intended to be a DAO. ICOs are a revolution in finance which embraces the principles of decentralization. They have disrupted traditional securities, debt and private equity markets and it is certainly to be expected that many DAOs will choose coin offerings as the method for raising capital.
Because of this, our research must include a thorough investigation of cryptocurrency and ICOs. We should seek to define what are coins besides speculative instruments. We must examine the case that coins serve other purpose beyond risky instruments. What are applications for coins which support economic benefit and in what way are coins destructive or dangerous to the general population? The “Enhancing Blockchain” paper scratches the surface of the ICO issue by introducing us to the most public issue regarding coins, ie. are coins securities and what role ultimately will the SEC play in regulation? Our research will aim to explore with great detail in what ways coins can be economically innovative. Disruption and uncertainty is certain to follow this kind of innovation. Our research will anticipate skepticism of digital coins and make the case for acceptance where it is fitting.
Governance is the second issue the paper approaches regarding developing technology. Specific to governance of blockchain is accountability over the technology. Who is to maintain the technology? Who is to make decisions? Who is responsible when the technology fails or if someone is injured by it? How is conflict over the technology resolved?
The paper further describes some specifics regarding the Bitcoin fork as well as the more centralized approach of Ethereum which places great importance on the opinion of its founder.
Again it is clear to see how these questions are not specific to blockchain, but reverberate throughout any DAO. This paper offers the E-corporation as the solution to addressing these questions. While the E-corp can provide a structure for functioning that permits innovation, governance as a philosophical and practical problem requires more. Technology, eg. blockchain and standards, plays an essential role in implementing any form of governance powerful enough to sustain a DAO. Our research will examine the benefits and drawbacks of systems of design like vote buying, delegation and reputation as potential elements to governance of DAOs as well as the technology behind it. We will also address the self reflexive question of, who will govern the development of the technology which will govern us? DAOs are primarily tech driven enterprises, thus, as much if not more than usual, it is essential to engage in project management, which is specifically tricky for a DAO.
GOING TO MARKET
In going to market, the paper specifically addresses maintaining lawfulness, data privacy and integrity, resolving bugs and technological issues. While these are all interesting topics which certainly apply to the DAO, they are all issues which our research will address under the topic of governance discussed above.
LONG TERM ADOPTION
The path for making a case that the DAO has benefits till now is largely an academic engagement. This is so because in fact, as indicated by Kaal and Calcaterra, there are no entities in existence that one could refer to strictly as a DAO. There are many organizations that implement decentralized policies, but none that intentionally and fully embrace decentralization in every corner of operation. Which leaves us with the important question of whether or not people are willing to adopt DAOs as a viable option for organization.
The paper points to interoperability, concentration of power and environmental sustainability as the key factors to adoption. Of these, our research will tend to focus on interoperability and concentration of power. The interoperability research already assumes itself since the Learning Economy is working parallel to the academic research to develop protocols and standards for the Internet of Education. It goes without saying that long term adoption of DAOs is impossible in the face of fragmented protocols to connect with each other. Technically, it might be that the ability to share data with trust and privacy is the single greatest advantage of blockchain and the DAO paradigm. The paper suggests that blockchain will only be adopted in the post-interoperable world and there is good reason to believe this true for DAOs as well. Without the ability for DAOs to exchange information without friction, most of the benefit is lost. Incorporating information from the edges, as Kaal and Calcaterra point out, is what allows a DAO to be robust and nimble, although perhaps inefficient at times. This information advantage is precisely made possible with interoperability. Our research looks to explore how interoperability (or the lack thereof) affects the adoption of technology and investigate how that might affect the adoption of DAOs.
The last point of comparison is one of the most distinct connections between this paper and our own research.
The paper suggests that if blockchain does not remain truly decentralized, it will not be adopted. How much more relevant can that be to DAOs?
Perhaps the most famous DAO in history (from the SEC’s “DAO Report”) is famous exactly for being not truly decentralized at all. It’s easy to simply say that DAOs need to be decentralized, because it’s right there in the name, however, what we want to look at is deeper. When abandoning principles of decentralization, how does a DAO become less effective and lose power? Is there a common forbidden fruit that lures a DAO astray? Unlike many of the other topics discussed above, there is already a wealth of interesting literature on decentralization and it is growing constantly. During our literature review, we will explore if there is more that our team can add to the canon of this topic. Regardless, what our research will do is connect the existing literature to implementation of DAOs. The DEVxDAO community will be a fecund ground for unprecedented data on fully decentralized action.
CONCLUSION
“Enhancing Blockchain Innovation” presents a framework for understanding many of the key challenges the blockchain community faces in the journey to adoption, impact, and sustainability. Because the synchronicity between blockchains and DAOs, Garcia has also spotlighted the path the emergent DAO community must consider. The Learning Economy Foundation’s DEVxDAO-sponsored research intends to extend the work of Garcia by expanding the topic to include a deep investigation of DAOs. As well as covering the topics touched on above, Learning Economy will consider including quantitative analysis and acquiring qualitative primary source data as well. This nascent community is a rich source of expertise, which we can excavate for questions about the design and implementation of DAOs. It is the commitment of the research team to conduct and prepare definitive research on Decentralized Autonomous Organizations that can make a broad impact on decision makers across the globe. It will be widely distributed by the Diplomatic Courier to 50,000+ global ambassadors, ministers, NGOs, Orgs and Companies.
