Welcome to the third in our four part series on strategies to navigate the present and future landscapes of composable organizations.
You can read Part one here. Part two here. Part four here.
The programmability of smart contracts has caused an explosion of creative projects that use some composition of tokens in order to achieve a stated purpose. Different types of tokens can be to fund a venture, to reward users, to coordinate resources, etc. It could even be some combination of multiple types of tokens to take care of something even more sophisticated. In this way, it is possible to use tokens as a mechanism to compose an organization for some set of criteria.
For a primer on blockchain and crypto check out this article by one of our designers, Jesse Seaver
The posts from last week and the week before have all been leading up to the big reveal – how to protect your web3-native organization (e.g., DAO, DAC, LAO, cybOrg, etc.) with the best strategy as possible. This means taking into account what is the most responsible strategy for your organization, as well as in the way that offers you the best opportunities to adapt to the changes demanded by the future. Building on the knowledge from previous posts, the technologies that are used to represent organizations necessarily shape the types of risks and opportunities present; key to understanding the risks and opportunities is understanding the different features that can be used to describe e.g., DAOs, including legal status, behavior, technical mechanics, etc.; therefore, the architecture of each digital organization is going to be well suited (or not so well suited) to a specific set of circumstances.
Yet, as the technology underlying these innovations is immutable, there is lots of pressure and strain on the initial setup of these organizations. Not to mention, there is also sometimes lots of money riding on the proper set up of one of these organizations. For example, when not set up properly, it is possible to lose millions of dollars and cause Ethereum to hard fork. Instead of imagining these decisions as only being static and at one place in time, it would perhaps be more helpful to instead think about how to reframe the task of protecting your organization to responsibly growing your organization.
When unpacking general strategies for what will be most helpful to different organizations at different points in time, two themes emerge:
Not every cryptographically enabled organization needs to be set up with a robust governance package. In fact, a simpler set up is often more desirable than a complex setup. In Herbert Simon's The Architecture of Complexity, the renowned computer scientist and economist points out exactly how much easier it is to progress complex tasks forward using simple architectures than it is with complex ones. Additionally, this is in line with Gall's Law – "A complex system that works is invariably found to have evolved from a simple system that worked".
Largely missing from the conversation about DAOs, composable governance, etc. is an interrogation as to whether or not forming one of these organizations is necessary in order for the project to be successful. There are lots of folks out there focusing on the technical aspects of building these new types of organizations (and we applaud them – they are necessary for the ecosystem to flourish). But there are far fewer people who are exploring mindful building strategies for deploying these new types of organizations.
In many cases, the answer is likely to be that a DAO is not necessary to creating a great project. To illustrate, Barak D. Richmond looks at how even incredibly lucrative parts of the economy, such as the diamond trade, can serve as an example that there can be large financial successes borne from informal institutions (e.g., beyond the reach of public courts) in circumstances where other incentives are aligned effectively.
This builds on an acknowledgment of regulation and governance that Larry Lessig points out in his book Code v2. Governance and regulation can take place through law (obviously), but also through behavior, such as norms between people or behavior of the market, or governance can even take place through the architecture. In many cases a safe or a vault might regulate or govern the behavior of theft more effectively than a law alone that says "do not steal."
Taking into account these new insights about not only features of DAOs, but also the features of governance and composability, it is now time to think about assembling these new organizational building blocks to see how they function.
By taking into account an approach which respects the rapid development in the space by 1) looking to standardized components, it then becomes easier to 2) develop a plan that accounts for the flexibility necessary to build, deploy, and maintain the wide variety of crypto-enabled organizations in a more predictable manner with fewer externalities.
To understand a bit about why composability is helpful, it is useful to draw from the discipline of architecture. In his work with geodesic domes, R. Buckminster Fuller demonstrated the potential benefits of an approach to building, rooted in composability with his set of parametric definitions. Each prototype consists of a certain type of structure, made out of a certain material, assembled in a certain order, with various additional components. For example, the concept of a geodesic dome can be assembled as a playground toy, a green house, or even self-assembling architecture in outer space.
This is the assembly or the engineering of shapes and structures in physical space. Next we look at the assembly of governance and social structures in the web3 space.
In looking to extend this framework to governance, the assembly of tokens into structures suited to regulate certain types of behaviors represents an exciting opportunity for the entire industry. The public nature of a blockchain means that the transactional history of different tokens – is available to view on sites like Etherscan and Solana Explorer.It is important to note here that because public blockchains typically are open source and without any central authority, for certain token types (e.g. ERC-20) it is possible to build features on top of popular blockchain architectures that enable users to choose how to power-up their tokens. Similar to the concept of "wrapped" tokens like wETH, power-ups enable users to decide which incentives to bake into some of the tokens that they already own. For example, if you want to bootstrap a project using ETH, you could add a vesting contract that includes schedules that unlock tokens for early investors, team members, partners, and advisors as they continue to contribute. In this way, power-ups enable a more gradual form of composable governance that adapts to changing circumstances as they happen, instead of trying to foresee all potential liabilities and complexities and solve for everything in one moment.
To gain a better understanding of power-ups, the remaining analysis focuses on the best fit for your web3-native organization.
Token Lockups and Vesting are a simple way to implement rules that keep members of a prospective crypto organization working together and collaborating on a project. Token Lockups and Vesting are functionally equivalent to implementing an Employee Stock Option Plan at your startup or making sure founders stick around after raising funds for an organization by making it impossible for their shares to vest until a certain point in time.
Governance is a novel way to build decision-making around what people with different tokens are able to do in different circumstances. As mentioned earlier in the article, governance comes in lots of different flavors, but typically can be broken down into roles (e.g., who can do something with a certain token) and permissions (e.g., what a person can do with a certain token). Lots of people think about governance as being related to voting (and it certainly is), but token-gating access to certain assets or events is a great example of an additional strategy that can be used here.
Staking contracts are a tool used to incentivize people to contribute to a project, usually by providing stability to a group, either by providing liquidity for certain types of transactions or by requiring a certain number of tokens be "staked" in order to create a proposal or vote on a certain project. Staking is quite similar to the idea of having skin in the game. If I want some action to happen, I need to be willing to back that action with a certain assurance. In this case the assurance comes from locking my tokens up for some specified amount of time in order for some specified action to occur.
Like with Staking, Market Making is another mechanism that is used to provide liquidity for transactions. Traditionally, market making is used in a variety of ways to create two-sided markets in a particular security. In crypto, market making is used by decentralized exchanges to achieve similar outcomes. In effect, however, market making takes place at a larger scale than staking. Market making is functionally equivalent to creating a bounty for a cryptocurrency that allows people who want to contribute to the network to be rewarded for their efforts. Usually a person must submit a pair of the tokens they want to stake. For example, if I want to promote the transactions of token A, I might creating a market for those tokens by providing a reward to people who stake a pair of tokens – token A and token B – and give them a reward token – token R.
Next week, in our final bonus edition of this series, there will be an additional feature on the different blueprints or packages for building tokens in popular assemblies as we discuss blueprints for governance.