Discover more from Innovators
Collective Entrepreneurship 👥
The tale of how strangers will band together to get things done in Web 3.0...
Welcome to Innovators. Join hundreds of smart, intellectually curious folks by subscribing below:
If you like this post, share it with a friend:
My initial affinity for startups stemmed from their ability and their mission to be creatively destructive; “move fast, break things, and change the world”.
Many years ago, Facebook founder and CEO, Mark Zuckerberg coined the phrase that has become the key to entrepreneurial success, “if you aren’t breaking things, you aren’t moving fast enough.” This methodology emphasizes testing out new ideas, iterating products quickly based on available data, and ultimately increasing the frequency of new insights.
Startups are able to be much more agile and malleable when dealing with external pressures. They have the ability to shift on a moment's notice, do customer centric things that are not scalable, and operate in a way that is not possible for a large incumbent organization.
For these reasons, most of the time, world changing innovations are driven from the bottom up.
The primary difference in the way operations are carried out in a startup versus an incumbent institution rests in the corporate structures of each type of entity.
For organizations with thousands of employees, maintaining a flat structure where there is no fixed chain of command is virtually impossible. This creates the need for a reporting system where employees are only responsible for their specific tasks and they only answer to their direct superior. Collaboration amongst various teams becomes difficult because communication is segmented based on responsibilities. In this instance, lower level employees are rarely aware of the grand vision, they only know the parts they are tasked with.
A typical corporate hierarchy
In an early stage company there are so many existential threats lurking, there is no time for a chain of command for orders to pass through. Communication channels are open and everyone is focused on a common goal; building something people want. Benefitting from a small team, there is little need for a hierarchy, allowing the company to move quickly and efficiently. Removing layers of middle management creates open communication amongst employees and enables them to work autonomously. This radically increases decision making times whereas in a multi-tiered management structure decisions are made at a much slower pace.
The common denominator in flat corporate structures and corporate hierarchies is that there is a central authority or a figurehead (CEO) establishing the vision for the organization to work towards.
Since decentralized systems are inherently devoid of central authorities, the question becomes, how do things get done in Web 3.0? How are new initiatives carried out and taken from idea to mainstream adoption?
It turns out, these questions have answers. In fact, the mechanisms by which things get done in Web 3.0 (as I’ll describe below) are far superior to the systems we have available in Web 2.0.
Let's get into it.
Traditionally, when incorporating a business you make various decisions related to the governance of the institution; if you want shareholders you establish a C Corporation, if you want to form a partnership you establish an LLC, etc. This vestige of the corporate age has allowed massive businesses to flourish but it is not seamlessly portable to the internet. The native structure of the World Wide Web is not as hierarchical as a corporation.
The formation of corporations to allocate resources and minimize risks is one humanity’s greatest business achievements of the modern era; Decentralized Autonomous Organizations (DAOs) are a natural extension of this model in the digital age.
Instead of being governed by a central government or controlled by a small group of owners whereby decision making is done behind closed doors and future prospects for the business are left to the opacity and subjectivity of a handful of individuals, DAOs provide users with a clear and transparent set of rules and regulations.
DAOs are run on a blockchain and automatically initiate smart contracts when predefined conditions are met.
A smart contract is a transaction protocol that runs on a computer program and automatically executes according to the terms of an agreement. They are able to be interpreted by humans but ultimately enforced by machines. The rules of the game are clear and the results are immutable.
These properties remove the necessity for an intermediary to facilitate transactions because smart contracts are trustless and operate autonomously. You can now transact directly with anyone on the planet without ever having to trust them or trust a facilitating platform.
These organizations are totally transparent in that the code is open source and the transactions on the network are viewable to anyone at any time. It is much more trustworthy and efficient to have the operating conditions baked into the code rather than relying on a central body to execute.
DAOs are the Delaware C Corporations of the internet that only exist on software. Not every project is suited for community involvement or autonomy; when the path forward is clear and there is a central roadmap where you are just executing on things that evidently need to be built, then it probably is not the right time to turn the project into a DAO. DAOs add the most value when there is a community opinionated about building features that would take the project in slightly different directions. In such a case, you have to use political processes to make sure that the involvement is heading in a direction that most of the community agrees with.
I am a member of a DAO that invests in early stage crypto projects and this is the mechanism by which community members can submit proposals for future features and iterations. Though generally not extravagant, submitting proposals costs money to ensure that the quality of submissions is maintained at a high level.
Individuals or a small group of people start DAOs to satisfy a specific need but once everything is in place it becomes community driven and autonomous where human decision making is pushed to the edges of the system.
In early stage DAOs, user participation may not be the greatest because the project is in the phase of growth where the roadmap is centralized and the moves are very telegraphed. This stage will not elicit excitement from the community because everyone is in agreement and the way forward is logical. This is when you need an individual or small group to be visionaries and entrepreneurial to spearhead the project and get it off of the ground.
For more mature organizations, many are entirely community run and the creators (founders) do not even need to be involved. People can apply for grants in the community pool where they make a proposal, solicit funding, and have community members vote on the proposal; if the vote passes the projects get funded and a new product is brought forward a few months later.
This is like autonomous art, it's beautiful because the community is setting its own roadmap and executing according to the popular vote.
DAOs uniformly enforce collective action. If enough people came forward with enough capital a DAO could purchase a sports team and people could submit proposals for contract sizes, desired trades, etc.
Now that we understand the mechanics of a DAO I want to add another layer to the various ways a business can incorporate. I told you that the vestige of incorporation is inherently far too hierarchical for the internet but the reason is because the internet has enabled billions of people around the world who may never meet face to face to interact with one another and form community around common interests. DAOs capture this broad scope in a way that is like a subreddit with a bank account and rules attached to it. You’re now able to capture the collective energy of a large group of people who are interested in a particular subject. They have always been able to communicate and share their affinity for the subject but DAOs unlock the ability to take more proactive action toward participation and ownership.
Community models like Discord or Reddit add organization and value to this evolution of incorporation on the internet.
Each DAO issues its own coin that is liquid and listed on major exchanges alongside other currencies. Token holders become shareholders in the DAOs network; generally, ownership is accompanied by rights and responsibilities for the shareholder i.e. voting on proposals such that the long term value of the project will increase and the asset you’re holding will correspondingly appreciate in value. This technology gives real time control over resources and decision making.
Community governance seems tricky because there will always be people with ill intent but the law of large numbers nullifies bad actors. Overwhelmingly, people will obviously vote for what they believe to be the good of the project because they have a financial interest in the project. Types of governance can vary from DAO to DAO and are not locked in to a 1 token = 1 vote method. In some instances, the impact of a member’s vote can increase based on their contribution to the project.
Tokens are liquid. If a shareholder does not like the direction of the project, they can sell their share and leave the community.
One of the major hesitations for people investing in DAOs is that having too many people in the same sandbox will inevitably lead to strife. A viable solution would be to elect organizational leaders and a board of directors to guide and build the project and put decisions up for vote such that the default is to pass the proposal but community members have the power to veto the initiative. This would allow the community to weigh in but not set the agenda.
DAOs are still in the very early stages of their evolution but the prospects of new community centric business models, ownership, and governance are exciting; they hold the promise of a more community centric and participatory future internet.
Until next time ✌️,
If you like this post, share it with a friend.
If you didn’t like this post, share it with a friend, maybe they will!