Digital transformation

DAOs as new decentralized community organization

May 10, 2023 - 4 minutes reading time
Article by Paul Van Vulpen

We increasingly read and hear about DAOs: Decentralized Autonomous Organizations. In this article, I explain what DAOs are and how they can help us reap the benefits of blockchains.

To explain what DAOs are, let me first tell you about smart contracts. Blockchains are becoming more intelligent and gaining more and more features. With the advent of Ethereum (open source platform and mining network for various crypto currencies), blockchains got smart contracts. These are pieces of software that perform certain actions based on data in the blockchain. For example, if someone puts in one euro and clicks on 33, the smart contract gives a can of Coke.

Public ledger

An individual smart contract cannot perform much yet. But if you take more of them together, you can speak of a Decentralized Autonomous Organization (DAO). A DAO (pronounced Dau) consists of a set of smart contracts that together form an organization. Decisions about the direction and policies of the organization are made by votes and proposals submitted and executed by the blockchain. Here, the blockchain acts as a kind of public ledger in which all transactions and activities of the DAO are recorded and confirmed.

No central authority

Blockchain technology ensures that DAOs do not need a central authority to make decisions. A DAO is designed to work completely autonomously and is decentralized, so there is no central authority or hierarchy. But can you still do anything with it? Or is it a very technically challenging Rube Goldberg machine: a complex device that performs a very simple task unnecessarily slowly, indirectly and circumstantially?

Commons

I believe, and this is also the direction of my dissertation, that we can use DAOs' to deploy large-scale digital assets for commons governance. Commons are goods whose use belongs to everyone, such as the sky, a forest, a lake, or digitally, a Wikipedia page. Because the property belongs to everyone, it is difficult to ensure quality. Therefore, we often see commons either become owned by a single party (Forestry Commission for a forest) or slowly die off.

Elinor Ostrom (Nobel Laureate in Economics in 2009) has conducted groundbreaking research in the field of commons. She has studied many commons around the world and distilled from them eight principles that successfully governed commons adhere to. These forms of governance are complex and diverse, but all allow for the vibrancy of the commons without centralizing ownership.

Table

Design principles illustrated by long-enduring CPR institutions

  1. Clearly defined boundaries: Individuals or households who have rights to withdraw resource units from the CPR must be clearly defined, as must the boundaries of the CPR itself.
  2. Congruence between appropriation and provision rules and local conditions. Appropriation rules restricting time, place, technology, and/or quantity of resource units are related to local conditions and to provision rules requiring labor, material, and/or money.
  3. Collective-choice arragements: Most individuals affected by the operational rules can participate in modifying the operational rules.
  4. Monitoring: Monitors, who actively audit CPR conditions and appropiator behavior, are accountable to the appropriators or are the appropriators.
  5. Graduated sanctions: Appropriators who violate operational rules are likely to be assessed graduated sanctions (depending on the seriousness and context of the offense) by other appropriators, by officials accountable to these appropriators, or by both.
  6. Conflict-resolution mechanisms: Appriopriators and their officials have rapid access to low-cost local arenas to resolve conflicts among appropriators or between appropriators and officials.
  7. Minimal recognition of rights to organize: The rights of appropriators to devise their own institutions are not challenged by external governmental authorities.

    For CPRs that are parts of larger systems:
  8. Nested enterprises: Appropriation, provision, monitoring, enforcement, conflict resolution, and governance activities are organized in multiple layers of nested enterprises.

Forms of governance

DAOs then are small, super-efficient and super-flexible organizations that allow people to come together at scale. So what exactly is the role of these smart contracts? They help us implement Ostrom's eight principles. If for each principle we set up a number of smart contracts to describe the principle with, we will come a long way in this way to set up forms of governance for our commons. While we won't be there yet (people also need to participate in those systems), it is a step forward in how technology can make our lives better....

Contributor(s)

Paul van Vulpen is innovation lead decentralized technology at Centric and has written a PhD thesis on decentralized governance as a PhD student at Utrecht University.

Topics
Digital transformation
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