Companies are people; DAOs are markets
April 22, 2024
Tokens and equity are two types of virtual property that govern organizations. They both reduce personal trust requirements by plugging into infrastructure that enforces an individual's rights within a group.
Equity, by design, centralizes the group's resources into a single execution arm—The Company. It's widely recognized that this pattern does not actualize the potential of the DAO, but the path to a fully aligned alternative is unclear.
Here, I argue that token-holders should leave The Company behind and look to other metaphors, specifically markets, as truer models of robust, autonomous execution. This points the reader to a few specific experiments, such as 1) opinionated, long-term token redistribution and 2) aggresive token inflation schedules.
Companies hold the native tools of personhood
Before companies, markets were made of governments and people. Governments did whatever they wanted, and people traded peer-to-peer. In 1600, the British government granted a group of merchants the exclusive and collective right to import goods from India into the United Kingdom, forming the first modern joint-stock company—the East India Company.
As a technology, The Company reduces coordination costs by enforcing property rights within group-social environments. Through its legal status, the group takes on the economic interface of an individual, giving it the ability to do person-actions in the market—borrow money, get a bank account, buy property, sell widgets etc.
"Companies are people" has, over time, become encoded into law. In addition to their economic rights, companies enjoy several social rights to citizenhood, such as free speech, due process, and protection against unreasonbale seizure.
Because companies hold the tools of people, they succeed by acting like tremendously capable individuals. Year after year, equity-holders re-invest the resources of the cooperative back into The Company, turning it into an ever-larger market participant.
Corporate governance accepts fragility in exchange for control
In search of progress, organizations choose between control and autonomy. A leader can direct their team with a product roadmap, a strategic goal, or a mission statement. As the leader's direction grows more abstract, the team gains autonomy and the leader loses control.
Equity-holders face a similar trade-off. When they direct all the group's resources into a single institution, they receive control and give up autonomy. This allows them to, for example, fire and replace the institution's leaders at will. But, it creates weaknesses elsewhere, as traditional corporate structures suffer from:
- Single channels of implementation; the group's goal can't be pursued in many different ways at the same time without social fragmentation -> productivity loss
- Information bottlenecks; a fixed number of leaders must process and act on changing conditions
- Interdependencies proportional to organization size; the bigger they get, the slower they are to change
These properties restrict dynamism, and companies lose their ability to self-correct with scale. Here, we reach a useful contradiction. Equity-holders plow all of their resources into a single, centrally-planned institution. Empirically, this does not yield autonomous, decentralized progress. If companies are not DAOs, token-holders paying close attention to the behavior of equity-holders must recognize that they need to do something different. But what?
The way forward for on-chain orgs is to climb the ladder of abstraction, and the parent of The Company is The Market.
Markets embrace chaos in exchange for autonomy
Markets, like companies, align large groups of people in search of progress on a common goal (e.g., "grow and deliver corn at the cheapest price"). However, unlike companies, they are jointly decentralized, autonomous, self-correcting, and allow for permissionless, parallel execution.
Markets succeed by allocating across an efficient frontier of opportunities. Unlike companies, they assign equal value to all implementations of progress with the same expected payoff, and they pursue them with equal effort. In exchange for autonomy and robustness, they offer few opinions and accept maximal chaos. (It's easy to tolerate chaos at great distance from reality.)
Just as companies hold the native tools of people, DAOs hold the native tools of markets. These tools—programmable value, permissionless interop, robust execution—are the essence of what separates smart contract blockchains from traditional, networked computers.
In the same way that products create net new value by efficiently extending the quality (more/better but proportionally cheaper) of person-actions, tokens create net new value by efficiently extending momentum in markets, catalyzing activity by acting as a sort of cooperative glue.
However, this is only possible if token-holders adopt the role of market designers and relinquish control over any single implementation of progress.
Token-holders are regulators, not operators
The core competency of a token is its ability to land in the hands of people who want to hold it. A highly-performant token-market, very simply, is one where the price goes up over time. DAOs-as-markets are tasked with a few key lines of work:
- Structuring an aligned holder base
- Setting narrative direction
- Implementing monetary policy
DAOs should absorb the work of identifying potential holders who, through their actions, are provably aligned with the group, and design their markets to rebalance into them over time. Rebalancing mechanisms are a counterweight to community members who are values-aligned and/or have demand to speculate, but do not practically contribute to progress.
Today, opinionated holder selection is private, manual, and infrequent. Projects choose investors who are long-term committed and quietly airdrop to specific in-groups (e.g., open-source devs, NFT collection owners) who are expected to be better-than-average community members.
Future attempts at social rebalancing should be large, open, and continous across long time horizons. This is an area where DAOs have a lot of opportunity to embrace chaos.
The highest form of leadership is values-orientation
Narrative direction in token communities is already quite prominent and well-explored. Memes like "Eth ultra-sound money" are widely recognized as contributers to token value accrual.
My main addition is that DAOs should affirm narrative direction through on-chain token inflation, and pay specific attention to the use-value of their narratives. (i.e., Rebalancing mechanisms like those mentioned above should explicitly reward narrative value.)
Narrative action that performs some legitimate information-discovery work is better at retaining traction and value than pure memetics. For example, a synthetic biofuel community that—through its shilling—actually points to new and correct opportunities will have a more credible claim to being interested in synthetic biofuels than a similar community that cannot predict the future. The token that is most credibly values-aligned will be most competent at attracting new holders and preventing existing holders from looking for new places to store value.
Today, early-stage investors perform much of this sort of work, adding momentum to new markets by staking out their willingness to invest, publishing resources like idea mazes, and shilling growth narratives.
More aggressive monetary policy is a pre-req for opinionated market design
Finally, DAOs-as-markets need to hold monetary policy as a foundational tool. Tokens today are released with their issuance nearly fully prescribed, technically limiting the DAO's ability to manipulate its holder base over time. If the DAO's product is the market for its token, today's DAOs are shipping v0.1 and calling it quits.
In the future, DAOs could find success inflating along a similar trajectory to that of new, technology-focused government agencies. In its first nine years, NASA's annual budget rose from $89m to $5.9b—experiencing 69% annual inflation—before shrinking. This pattern is mirrored in other agencies (to a lesser extent) like DARPA and the Atomic Exchange Commission. These organizations effectively make a committment to centrally seeding new markets. And of course, this pattern is mirrored in rapidly-expanding free markets (e.g., 'internet' companies).
The major value prop of aggressive token inflation is on-chain path dependence. Today's DAOs have just enough freedom to trace 'community' consensus and no more. Meanwhile, markets regularly re-allocate +50% of their value on an annual basis—when the future appears on the horizon, they speculate aggressively in ways that a company-run-by-committee can't stomach. Markets offer an electric car company the same valuation as its five biggest rivals combined, even though it sells just 2% of the cars. This aggressive allocation manifests growth, and is therefore self-reinforcing. A service provider that needs to build lots of expensive, new technology can't do so unless it's able to borrow value recognition from the future.
Further, we already know that token-monetary policy can set demand floors in highly-speculative markets and provide working capital to on-chain orgs. A builder with an interest in proof-of-personhood applications knows that market demand for their work won't drop below the amount of Worldcoins available via foundation grants. The Ethereum Foundation has a long history of shedding its own token at localized market highs in order to generate working capital.
Opinionated, path-dependent monetary policy is the core input of market design. Without it, DAOs can seed working-groups with a few hundred thousand dollars and preserve the relevance of their foundations, but they can't sustain autonomus, decentralized progress.
That's pretty much it. Most people think of DAOs as transparent, on-chain companies, but funneling shared resources into specific implementations of progress comes with freedom-of-movement restrictions that prevent DAOs from actually using the native tools of the chain.
Token-holders that embrace their role as market designers have the best chance of making good on the original promises of the DAO. I'm confident they will arrive with time.