Course Learning Materials

IOTA DAO Pioneers – Session Four – Nov / Dec 2021

How can a decentralized autonomous organization (DAO) be legally structured?

Biyan Mienert, Lawyer, lecturer for digitalization law | IOTA Foundation24. November 2021

The decentralized structure and automated operations of decentralized autonomous organizations (DAOs) raise complex questions about the determination of applicable law, corporate status, and external actions that cannot be adequately answered using classical theories. This article draws up the different current legal possibilities for structuring DAOs.

IOTA: overall governance ecosystem & DAO initiative

By @Null – Discord (go to link above for slide presentation on discussion below)

Hi everyone, I’m briefly joining the DAO discussions to share my weekend thoughts. I should preface this by letting you all know that I haven’t had a chance to follow many of the great discussions you’ve been having – there’s just not enough time to keep up with all the activity going on in our community at the moment (which is a good problem to have).

Nevertheless, I thought there might be some value to the things I’ve been thinking about, so I’ll leave here my current vision/suggestion for how we could build up the decentralized IOTA ecosystem.

We currently have only one strong source of IOTA R&D: the IOTA Foundation. The IF is great, but it’s not for everyone. We need another equally strong source of R&D in our ecosystem. This is where the IOTA Public Treasury (IPT) could come in. “IPT” is what I call the community DAO we’ve all been discussing.

Currently, I get the feeling the IPT is being bootstrapped into existence. If so, why is that? Can’t we just apply for $1M in EDF funds to kickstart the whole project? The community DAO has a reason to exist regardless of whether we vote to burn the 65Ti, so we might as well just fund it now with an EDF genesis grant, no?

Anyway here’s how I’ve been thinking about the overall governance ecosystem & DAO initiative: https://docs.google.com/presentation/d/1SbfcDclG3TR3bw75oqZzQA-NoqsSBNqrefwVIMVC0HQ/edit?usp=sharing

I see the “Build vs. Burn” vote as completely separate from the community DAO. It’s just 1 of many votes we’ll have to make. Let me know if this is compatible with what you all are envisioning. Oh and feel free to share your thoughts, duplicate the presentation and change it as you wish.

This house is self-owned – no1s1

Tweet: @Coopahtroopa.eth

Null — 11/30/2021
The more I follow DAOs on Twitter, the more I realize web3 folks don’t really know how traditional organizations work? Or am I missing something about DAOs?

As far as I can tell, in practice, DAOs work exactly the same way as a traditional organization would. Traditional orgs mint tokens too (called “shares”). These “share tokens” are bound by “protocol rules” (e.g. an operating agreement), and they’re used to vote on organization decisions. They can also be sold privately or publicly.

The big difference is in the tech stack and who secures the organization. Traditional orgs are secured by governments (with laws, police enforcement, etc). DAOs are secured by protocol and smart contract rules embedded in a distributed computer network.

Other than that – as far as I can tell- nothing changes.

The “D” in DAO should therefore stand for “Digital” or “Distributed”, not “Decentralized”. The underlying network might be decentralized, but “DAOs” themselves can be just as centralized as traditional orgs.

People have been designing governance models for a very long time. Now these models are going digital and distributed. Still, doesn’t change the fact they’re the same (or very similar) governance models.

Every DAO pioneer should internalize this.

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[2:28 AM]
And as usual, please correct me if I am wrong.

@Null
The more I follow DAOs on Twitter, the more I realize web3 folks don’t really know how traditional organizations work? Or am I missing something about DAOs? As far as I can tell, in practice, DAOs work exactly the same way as a traditional organization would. Traditional orgs mint tokens too (called “shares”). These “share tokens” are bound by “protocol rules” (e.g. an operating agreement), and they’re used to vote on organization decisions. They can also be sold privately or publicly. The big difference is in the tech stack and who secures the organization. Traditional orgs are secured by governments (with laws, police enforcement, etc). DAOs are secured by protocol and smart contract rules embedded in a distributed computer network. Other than that – as far as I can tell- nothing changes. The “D” in DAO should therefore stand for “Digital” or “Distributed”, not “Decentralized”. The underlying network might be decentralized, but “DAOs” themselves can be just as centralized as traditional orgs. People have been designing governance models for a very long time. Now these models are going digital and distributed. Still, doesn’t change the fact they’re the same (or very similar) governance models. Every DAO pioneer should internalize this.

Λntonio Nardella [IF] – #49 — 11/30/2021
Thank you Rafael, let’s do some sparring together.

Yes, DAOs are slowly bringing traditional organisational structures back to their DAO world.

What the people experimenting with DAOs are looking forward to is to change the power dynamics (shareholders vs CXX vs wokers) and ownership towards co-operative working and using tools to slay Moloch which means to optimize distributed work, avoid coordination failures and pay the contributors/workers their fair share, which seldom happens in traditional organizations.
And as you pose it correctly, transparently, immutably share the way they operate for accountability.

You can find a lot of material about it in the Session 1 document here:
https://docs.google.com/document/d/16qbcSlmbJSY7dVHj9Ly4CUPpJ1RCJPtCqfPmnWGo7xY/edit#

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[2:40 AM]
The first DAOs were also born to become incensorable/unstoppable to show the to the institutions, a little like crypto/bitcoin be able to run and achieve a goal without any force having the ability to stop such an organisation.

Since the DAO concepts are now over 5 years old, as is often happens, the more the community grows, the more the idea flattens and becomes more generally accepted and modeled by what is common knowledge or common purpose. Also here, the punks launched BTC to free themselves from traditional finance systems and with DAOs they tried to free themselves from governmental systems; now BTC is just speculation and celebrating bakkt, while DAOs are looking forward to regulation and less creative but more clear way of operating..

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Null — 11/30/2021
Nice! Ok, we’re on the same page then. I’m totally onboard with that vision. In fact, I can’t wait to convert my own org (which is already distributed, but still anchored in government law, etc) into a DAO, as I prefer the DAO tech stack to the traditional org tech stack.

The only reason I brought that up is because I think the “D” in “DAO” is misleading – and I hope more DAO pioneers realize this.

We don’t think of McDonalds as “decentralized”, even though they’re a public company that exists in 100+ countries. Sure, if a meteor fell down on McDonalds headquarters, the organization would probably still continue to exist – and in that sense, yes, it is “decentralized” – but the governance of McDonalds is still centralized. The same will be true of most DAOs. Anchoring a DAO to a distributed ledger doesn’t automatically make it decentralized when it comes to governance! Just an important thing to keep in mind.

Tweet: @chaserchapman

Discussions

Deep_Sea “Bring_the_Shimmer”!!! — 11/30/2021
Nice conversation. Would you say that the reason DAOs aren’t currently decentralized is because on the protocol level it doesn’t allow that? Or, that the original founders and creators of the DAOs have setup a system to favor the wealthy (ie: token holdings equal power voting)?

If we compare McDonalds to a DAO, I would say a DAO is way more decentralized to “some extent”. For instance, if I buy McDonalds stock it really doesn’t allow me to decide on the direction of the company. Also, if I buy stock in McDonalds it wouldn’t allow me to submit a proposal for the company. Maybe, if I bought a $billion dollars of stock I could do a hostel take over.

So to some extent many DAOs seem similar. Sure, if I buy a $billion dollars worth of the token I would have a higher voting power and can then direct the DAOs operations similar if I did a hostel takeover of McDonalds. Though I believe that is not necessarily because a DAO is centralized, but because the creators built the DAO to be like this.

I think if we look at 1. why don’t more people vote, 2. why is power held by a few, and 3. barriers of entry; we would find that it’s a mix of things such as transaction fees, no incentive to participate, one token equals one vote, and with the one token equals one vote then combined with pre-mines, early VC investors, and % of token supply held by private companies; we see that DAOs have the ability to be decentralized; however, the setup and creation of the DAO is designed to limit such decentralization.

Deep_Sea “Bring_the_Shimmer”!!! — 11/30/2021
I believe building a DAO on the Tangle has a unique opportunity to overcome participation by not having transaction fees. On top of that IOTA wasn’t pre-mined, nor VC’s or private companies hold a large amount of tokens. Yes, early founders have a huge stack and as well the IF, but then it is up to the community to build a system that is more than simply (one iOTA equals one vote). With DiD & VCs I think eventually we can build a hybrid system that is much more fair. Add fee’less voting and we may see a much increased participation.

So I think a DAO has the ability to be decentralized; however, at current DAOs are being setup to be centralized. Though it’s not that it can’t be done.

dumdave — 11/30/2021
Many thanks

@Deep_Sea “Bring_the_Shimmer”!!!
Nice conversation. Would you say that the reason DAOs aren’t currently decentralized is because on the protocol level it doesn’t allow that? Or, that the original founders and creators of the DAOs have setup a system to favor the wealthy (ie: token holdings equal power voting)? If we compare McDonalds to a DAO, I would say a DAO is way more decentralized to “some extent”. For instance, if I buy McDonalds stock it really doesn’t allow me to decide on the direction of the company. Also, if I buy stock in McDonalds it wouldn’t allow me to submit a proposal for the company. Maybe, if I bought a $billion dollars of stock I could do a hostel take over. So to some extent many DAOs seem similar. Sure, if I buy a $billion dollars worth of the token I would have a higher voting power and can then direct the DAOs operations similar if I did a hostel takeover of McDonalds. Though I believe that is not necessarily because a DAO is centralized, but because the creators built the DAO to be like this. I think if we look at 1. why don’t more people vote, 2. why is power held by a few, and 3. barriers of entry; we would find that it’s a mix of things such as transaction fees, no incentive to participate, one token equals one vote, and with the one token equals one vote then combined with pre-mines, early VC investors, and % of token supply held by private companies; we see that DAOs have the ability to be decentralized; however, the setup and creation of the DAO is designed to limit such decentralization.

Null — 11/30/2021
It might be useful to think of a distributed ledger as a country. In the real world, lawyers and politicians have been using language to invent & enforce all kinds of rules for issuing & governing tokens (aka “shares”, “bonds”, “currencies”, etc) since the dawn of the first contracts. In the DLT world, developers are now using computer language to invent & enforce all kinds of rules for issuing & governing digital tokens. In terms of governance, it’ll work similarly to the real world.

Assuming you have basic freedoms where you live in the real world, you can (theoretically, of course) move to the country with the “protocol rules” (i.e. laws) you like best. Don’t like the rules where you live? You can move or advocate to change those rules. Each government is its own “DAO”. The United States “DAO” issues USD and unique identities which their citizens use. To vote on “DAO” issues (e.g. who to elect as president), you use your identity. 1 identity = 1 vote. (Notice how it isn’t 1 USD = 1 vote. Lobbying is a different rabbit hole.)

Now let’s look at the DLT world. You can live in the Ethereum “country”, where middlemen are paid for security; the IOTA country, where transactions are feeless; and so on. Each of these “countries” are bound by protocol rules. In the IOTA “country”, the IOTA Foundation & a few trusted community developers are sort of the government (they gatekeep the codebase, aka the laws), and IOTA holders are the citizens who can advocate for changes to the codebase.

You can build a DAO on top of IOTA, but you’re still living in “IOTA country” and bound by IOTA holders’ governance decisions. (edited)

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[3:03 PM]

Now, here’s where DLT world and the real-world will vastly diverge:

In the real-world, you can’t easily declare independence from (or “fork”) a country. We’ve seen it happen a few times, like how the United States “forked” away from the rule of the English crown and decided to establish their own rules in a new plot of land that they stole instead. But that is precisely the problem – to create new rules in the real world, you need to either convert existing land or steal new one. In DLT world, this isn’t a problem. You can go ahead and fork Ethereum, give it a different name and a different set of rules, and you’ll have your own “country”. Then all you have to do is attract citizens to live in it.

Enforcement in the real-world comes down to the removal of rights (namely, your right to roam free, and sometimes even your right to live). In DLT world, enforcement is done through code and blacklisting.

In the real world, countries often go to war with one another (due to scarcity of physical resources on Earth – which we all must share). But in DLT world, we can build as many parallel realities as we want.

Unlike people and assets in the real world, digital assets and digital identities can travel at the speed of light, and the logistics of travel are all automated. So things can move from Ethereum “country” to IOTA “country” very quickly, as long as we build bridges.

DAOs will live in these networks and be bound by their rules, just like real-world organizations live in countries and are bound by their laws. (edited)

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@Null

Deep_Sea “Bring_the_Shimmer”!!! — 11/30/2021
This sounds very similar to Economic Clustering that CFB often talked about.

I agree with it all and I think DAOs offer huge amounts of freedom. Though again, all these DAOs eventually are built upon a governance structure. The governance structure will show whether a DAO is truly decentralized or not. As well, the governance structure will show the limits of true freedom within the DAO as a DAO member. I’m really looking forward to how DAOs evolve. Just as NFTs will evolve from .jpeg’s, DAOs are already branching off into so many different areas. I do hope that we as a community build a DAO that leads by example which offers decentralization. I hope our DAO has a limited freedom as in it will be to promote the growth of the IOTA ecosystem; however, within that vision I hope their is a large amount of freedom for people to submit proposals and fund projects.

@Deep_Sea “Bring_the_Shimmer”!!!
This sounds very similar to Economic Clustering that CFB often talked about. I agree with it all and I think DAOs offer huge amounts of freedom. Though again, all these DAOs eventually are built upon a governance structure. The governance structure will show whether a DAO is truly decentralized or not. As well, the governance structure will show the limits of true freedom within the DAO as a DAO member. I’m really looking forward to how DAOs evolve. Just as NFTs will evolve from .jpeg’s, DAOs are already branching off into so many different areas. I do hope that we as a community build a DAO that leads by example which offers decentralization. I hope our DAO has a limited freedom as in it will be to promote the growth of the IOTA ecosystem; however, within that vision I hope their is a large amount of freedom for people to submit proposals and fund projects.

Null — 11/30/2021
Agreed!

@Null
Agreed!

Deep_Sea “Bring_the_Shimmer”!!! — 11/30/2021
I really like the country metaphor and now I want to go back and read up on Economic Clusters but now integrate DAO into the picture.

Null — 11/30/2021
Do you have links to those writings?
[5:09 PM]
Btw whenever you see a useful metaphor here that helps you further grasp the concepts of DLT, don’t be shy to hit ’em with a ! If you think it could help some of the casual lurkers who just look at community-highlights gain a better understanding of what’s being built here.

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