There are three basic ways to organize large numbers of people: mobs, mazes and markets.
A mob is a large group of people coordinated by a shared belief or emotional state — think sports fans and political movements.
A maze is a hierarchy, or a set of overlapping hierarchies, that coordinates people based on formal delegation of power — think the bureaucracy of the federal government, or a large corporation.
Also, it is important to note that there are two forms of hierarchy: representative hierarchy (where authority flows from the bottom up) and executive hierarchy (where authority flows from the top down).
A market is a group of people that are coordinated by mutually beneficial transaction that reflect individual preferences. It can sometimes be difficult to differentiate a market from a mob, and the line can be blurred at times (see, e.g., the GameStop episode).
Most organizations combine multiple organizational forms. For example, consider the US government. Authority initially resides in individuals, who then form mobs (i.e., parties) and delegate authority upward to representatives, who then elect various leaders and committees to create legislation. We also elect a president, who delegates authority downward through a vast hierarchy to enforce the legislation.
A decentralized autonomous organization (DAO) is an organization whose structure is coordinated with the aid of an automated contract on a blockchain.
One way to interpret the “decentralized” part of a DAO is that there is no single decision maker (individual or group) at the top. Even “centralized” organizations, like the US government, can have authority that starts with a lot of people. But a lot of that authority often ends up in (or at least passes through) the hands of a small number of people (i.e., a power bottleneck).
One way a DAO can avoid power bottlenecks is to implement some form of direct democracy (or the corporate equivalent of direct democracy where votes are proportional to ownership). However, we should not be limited to thinking of a DAO in these terms. Rather, we can (and should) get creative in how mix and match mobs, mazes and markets to create robust large-scale organizations. In some cases, it is the most complex structures that turn out to be the most robust (see, e.g., the complex method of electing the Doge of Venice)
Tokens, Votes, and Budgets
DAOs have a very powerful tool that can help structure the coordination of activity: the tokenization of rights. A token is a digital asset that have automated methods of transfer and delegation. Tokens can be used to capture the power of markets (they can be traded on one of many different exchange platforms), the power of mobs (token votes can be tallied automatically, and in some cases, the consequences of the votes can also be automated), and mazes (tokens can be staked, delegated, etc.).
For example, let’s say we have a DAO where token owners vote in proportion to the number of tokens they own. We can then allow token owners to delegate their voting power to a representative. If we think a representative structure is superior to pure direct democracy, we can impose restrictions or incentives for delegating authority (e.g., by only counting the top 100 voters).
Votes aren’t the only thing that can be delegated. As mentioned above, executive power can also be delegated. One way to do this is to have tokens that represent “budget”. For example, imagine that a DAO has a structure where all shareholders vote on a distribution of budget tokens, and the holders of those tokens can then delegate portions of their budget downward.
Again, structure can be imposed by creating conditions that must be met before delegation is allowed. For example, you could impose a minimum or maximum number of hierarchical layers, a minimum or maximum on the number of delegates in each layer, or restrictions on who or what is eligible to be a delegate. Random elections/delegations can also be used to mix things up a bit.
Why Impose Structure?
Ok, so a DAO can impose all different kinds of structure by choosing what to tokenize, and whether to allow/facilitate different kids of transfer and delegation of power. But why?
One reason for avoiding a simple direct (or proportional) democracy model is that the participants in a DAO are human beings. Human beings have inherently limited mental capacity. So, for example, if the whole body of the DAO had to vote on which brand of paperclips to buy, the sheer number of decisions to be made could overwhelm the voters. So it is necessary to delegate most decisions to a lower level. If it doesn’t happen on-chain, it will happen off-chain in one form or another.
Another consequence of being human is that we operate differently depending on our social context. For most of our evolutionary history (i.e., paleolithic pre-history), people lived in small bands and these bands sometimes grouped together into larger tribes (e.g., to do war). Human beings evolved the ability to think and act in different contexts. Thus, when we act as individuals, we use different brain functions than when we act in a small group setting, and yet another mode of being kicks in when something triggers our mob mentality.
So it might make sense for a DAO to incentivize the formation of deliberative bodies of different sizes that trigger different kinds of human interaction. It generally makes sense to rely on the formation of mobs (or markets) to make certain decisions, but create deliberative decision making bodies of smaller size to make other decisions.
