DAO

A DAO is the fundamental unit of consideration in the DGF project. The acronym DAO stands for decentralized autonomous organization. See DAO Primitives for an abstract definition.

Decentralized means the opposite of centralized. An ideal centralized organization has a completed pyramidal-hierarchical power structure with a single ruler on top (Figure 1a) which dictates authority, distinguishing those above from those below. Perfect decentralization would be absolutely flat (Figure 1b). Imagine a radical direct democracy, where every decision is made with consensus by the entire membership, without fixed roles of authority.

A DAO being an organization, means it consists of a coherent collection of members. Coherent means its members cooperate toward a common socio-economic goal.

Autonomous means the group rules itself. A DAO is not subject to direct control from outside the group.

Centralized

Decentralized

Figure 1: Hierarchical vs. flat power

Practical Definition

The typical DAO we consider in the DGF project is best thought of as a decentralized, global corporation that uses the internet and computing technology, to make business transactions and to govern itself. As such, a DAO is a community-driven, for-profit cooperative that relies on programming to stay organized.

The term for the technology that enables decentralized organization is peer-to-peer technology. P2P tech (see Main Article: P2P for DAOs) consists primarily of the internet, zero-knowledge proofs (including public-key digital signatures), hash functions (a universal tool for organizing data and error-correcting), and the software architecture of blockchains and distributed hash tables.

DGF can be applied to building any type of DAO, but the primary concern of the DGF project is to create the governance structure for most difficult type to build—a profit-centered, open-source, democratically-governed network which is open to pseudonymous, international members. These terms are defined in the following section.

Ideal DAO qualities

The following qualities maximize the effectiveness of a DAO. A DAO which embodies these qualities is called a primary DAO. In the context of DAO building, let us carefully explain and justify all these terms:

1.      Openness

2.      Pseudonymity

3.      Transparency

4.      Open Source

5.      Security

6.      Weighted Democracy

7.      Reputation Incentive

Before defining these terms, it is crucial to recognize they are ideals. As such they are never expressed with perfect purity in real world organizations. Actual DAOs exist on a spectrum of these qualities.

Openness

A DAO being open means its rules for accepting new membership is unrestrictive—everyone in the world has equal access to join, an equal opportunity to gain power, and an equal freedom to leave (while taking much of their personally accumulated value with them). It is preferable that a DAO adopt these properties of openness for two primary reasons.

First, an open network encourages greater growth, and the network effect shows a decentralized group grows in power faster than a centralized organization as its membership increases. To see this, notice how $n$ members don’t merely have $n$ connections, they have $1+2+...+(n-1)={\frac {1}{2}}(n^{2}-n)$ individual connections. Connections grow quadratically with membership. A group of  members also has an exponential number $2^{n}$ of potential subgroups. Each subgroup of size $m$ has $m!$ different role assignments. Etc. As a group grows, there is more talent and more knowledge with quadratically more connections and exponentially more arrangements to foster more powerful collaboration. An open DAO leverages the available energy of the population more effectively than a closed DAO. This network effect is a major reason that decentralized organizations can be superior to centralized organizations, because a rigid hierarchy is limited to a single power structure for organizing its members to achieve a task.

Metcalfe-Network-Effect

The second major reason openness is ideal is that it serves the social good. It is a matter of basic justice that all people in a society are given equal opportunity to participate in all of its institutions. People prefer not to participate in a group that does not serve their values, especially one that limits their opportunities to gain power in the group. More importantly, they should not be forced to participate.

However, openness is a major security risk that needs to be continually addressed. Equal opportunity to participate is essential, but the types of participation that are beneficial to the group are naturally limited. Members who behave poorly must lose some of their power in the group, lest the group be destroyed by selfish behavior which virally spreads until the group becomes completely disorganized. Corruption must be limited or it will multiply until it destroys the group. Therefore, to maintain openness, a DAO needs strong, automated, executive governance.

Pseudonymity

Pseudonymity means a member may participate with one or more fabricated identities. An example is when you invent a fake username on an internet message board. It is preferable that a DAO allow members to join pseudonymously for three major reasons.

First, privacy is essential for protecting the individual. Since all transactions must be openly monitored by anyone in the decentralized network, every behavior in the DAO is recorded eternally and broadcast globally. In addition to the fear of social censure decades after any particular behavior, keeping a record of a citizen’s minute behaviors is a powerful tool which encourages governmental repression of its citizens at all levels. Pseudonymity is the closest one can achieve to anonymity on a transparent platform that remembers transactions and gives its members power and rewards.

Second, this protection of individuals’ privacy encourages more members to join. Again, the network effect gives larger groups more than a quadratic advantage in the many sub-dimensions of power, capital, and knowledge.

Finally, pseudonymity encourages a culture of forgiveness. Mistakes are inevitable. Forgiveness is essential to promote the network effect. Regardless of the intention behind the mistake, if it is possible to forgive members without eroding group cohesion, a culture supporting redemption should be promoted. Though it should be recognized that, unfortunately, pseudonymity makes apologies unnecessary, since they can simply quit and start fresh with a new identity. Conscious of this fact, a culture of redemption can still be encouraged if the DAO sets up protocols giving greater power to someone who has atoned for a mistake than to new members.

However, pseudonymity is a major security threat in an open DAO as it opens the group to sock puppet attacks, which we discuss below.

Transparency

Transparency means the functions of the DAO are publicly observable. In particular, the types of technology used, the specifications for the design of the technology, the membership, the actual rate and quantity of computations or transactions, the protocols for acceptable transactions, protocols for policing transactions, the protocols for changing protocols, and even the culture of decision making, can all be made more or less transparent in any network. Inasmuch as knowledge is limited to certain individuals, when transparency is limited in any way, power becomes centralized among the subpopulation of the DAO which has the knowledge. Thus transparency is correlated with openness and power decentralization in DAOs. However, transparency is a major threat to members’ privacy, which is ameliorated when the DAO supports pseudonymity.

Open source

Open source means, minimally, that the computer code that runs the technology the DAO uses is publicly available knowledge. Similar to transparency, open-source protocols are generally necessary in an open DAO because inasmuch as it is decentralized, all members are more or less equal. No member has privileged information. Without a more powerful leader, everyone in the network needs to be able to monitor everyone else. Everyone needs to have access to the knowledge of the architecture of the system in order to audit its functioning. This is not strictly necessary in a weighted democratic governance system, since certain members can have greater power than others. But inasmuch as such power disparities obtain, the DAO is less decentralized.

Maximal open-source tech means the legal right to use that technology is given away freely, without claiming any royalties, to anyone else who wishes to use it, for any reason. An example is the Apache license, which governs a significant portion of internet technology. The Apache license allows you to adapt their free tech and improve it. Moreover, you can then claim ownership of your improvements and demand royalties. Such maximal open-source protocols are not necessary for any DAO to adopt. However, it is good practice to assume your protocols will be maximally open source when designing a DAO, because the international character of any open DAO makes jurisdictional questions impractical to decide and enforce. Protecting your IP in this environment is better handled by using the first mover advantage, combined with the network effects that make your DAO more powerful than any later imitators. This works best when additionally, a culture of proper referencing evolves to acknowledge and fairly reward improvements from the past. Such meritocracy can promote a more effective collaboration environment than one which stresses competition and secrecy.

Security

Security is a constant concern in the design of an open-source protocol. Especially when the network is open to pseudonymous members. Byzantine behavior in a decentralized network, is defined as actions which violate the majority agreed protocols. When there is no dictator ruling your platform, and you accept asynchronous distributed transactions entering from any node, it is impossible to achieve perfect intelligence about the state of the network, since Byzantine nodes can pass false messages in the gossip network. There are several theorems in computer science that govern what is possible when designing a protocol for distributing digital token rewards in a DAO. A famous example is the 66% non-Byzantine limit for the pBFT algorithm. In general, no decentralized system can survive forever in the face of 51% Byzantine actors. Therefore some restrictions to openness are necessary.

Another major security risk to a decentralized platform is a sock puppet attack. Sock puppets are multiple pseudonymous accounts that a single member creates and controls with separate passwords to hold digital tokens. The purpose of sock puppet accounts is to trick the network into believing the different pseudonymous identities represent multiple people. This eliminates any chance that a DAO without KYC protocols can achieve honest governance under simple one-person-one-vote democracy. Since anyone on the planet has equal opportunity to participate under a fabricated identity, a single actor can create countless sock puppet accounts to overwhelm the voices of honest members. Therefore, any DAO work model or governance design must account for this eventuality. The solution to fighting sock puppet attacks, is a weighted democracy which assign rewards and power based on carefully audited measures of positive contributions to the group.

Weighted Democracy

A weighted democracy is a governmental structure where the power to decide the protocols for the DAO is determined by vote (democracy), but the power of each person’s vote may be different (weighted). This is necessary in an open pseudonymous group, because it eliminates the threat of sock puppet attacks: 100 sock puppet accounts voting with 1 weight each have the same power as a single account voting with 100 weight, since both situations have the same total.

How is this weight of power determined? In most of the original functioning DAOs, power is dictated by ownership of the currency token. In that case plutocracy is the de facto governmental structure. Little reflection is needed before most new DAO architects reject this design. Instead the common solution is to build their DAO on reputation.

Reputation

Main page: Reputation

Reputation is a personal judgement based on your past actions. Business relies on your counterparty’s reputation to predict how they will act during a transaction, to give you the confidence to enter a bargain. History has repeatedly proven the proper attitude for a healthy market environment is to seek to improve and protect your reputation for the long term, not to simply acquire as much money as possible in a single business deal. A secure and reliable system that accounts for meaningful reputation transforms such zero-sum competitive behavior concerned with immediate profits into an environment which motivates future-oriented, sustainable cooperation. When a single game turns into a repeated game, the incentives are transformed. In a system with repeated business, reputation is actually a positive sum quality, since it can be created from nowhere. Whenever two parties behave well and collaborate productively, perhaps sacrificing their own short-term gain on some aspects of the deal, they produce valuable reputation that signals further positive interactions in the future.

How can we foster a culture which respects and values reputation more than money when your DAO allows pseudonymous members to join or leave at will? Properly designing and programming a robust mechanism that is secure against the infinite strategies for gaming any algorithmic reputation system is not a simple task. The remainder of this chapter is devoted to explaining how to capturing the meaning of genuine reputation with digital REP tokens, analyzing the system’s security, and specifying precisely the economic value of a REP token, and detailing important applications.