The DAO Thesis, Finding Business Governance Fit | Season 2 Pilot

Transcript

before we jump into the app quick reminder that nothing on bell curve is financial advice everything is just a meme hope you guys enjoy we are back season two you ready to kick this thing off we are back I'm super excited about season two yeah season one was fun but this is uh this is where it really gets exciting me too you know you know why I'm excited about this we we tackled a pretty big concept here pretty big topic within crypto and you just know we're sitting in the depths of bear Market because it was very hard to find anyone who had many positive things to say about it yeah not too many people wanted to join this season I'll tell you it's a little harder to get a to get guests for this season than last season that's how you know we're in the depths

of the bear you know it was more just like you know we we do a bunch of research you know before these Seasons we ask a whole bunch of people hey this is roughly what we're thinking it does this make a lot of sense to you and even the difference between season one and Season Two Season one people were willing to talk people were excited hey I think this is gonna work here's this problem but like I'm super bullish long term on the future talking to people about this season was just like yeah this isn't working this isn't working hard to see any advantages to it yeah man you don't dig into that topic too deeply a pretty pretty bearish overall on the topic but but we are both bullish on the topic we are both excited about it I I think you and I are feeling like

yeah we're in the depths of the bear um but talking about this topic is important because it will be big in the next 12 to 18 months when when the cycle returns so I'm excited about it so what are we talking about this season okay so season three is all about governance and we're going to be my friend Season Two Season Two Season Jesus Season Two Season Two would go straight to season three honestly honestly uh all right so season two is all about governance to borrow a phrase from the first guest actually of the show basically the thesis of season two is business governance fit so dials are basically the subject here and we're going to be basically evaluating at a high level when is it appropriate to be a dow what does that what type of advantages do being a dow and that government

instructor confer onto your organization and what are the uh what like when should you be at Dallas post to a company and we can break down these this thesis into three different arguments which is one you need to find business governance fit so there are different types of organizations out there and it makes sense to have different types of governance for each one of those organizations two most of the Dows out there that exist today basically resemble a kind of a mix between a private and a public for-profit company and therefore we should be using corporate governance as our overarching thought process for these things for how to govern these things and three at the end of the day the advantages of a dow differ depending on how mature the organization is in the beginning the advantages of being a dow

as opposed to a company have to do with distribution and the community and at the end of the day when a dow is mature it will be dependability so that's the overarching pieces of the Season let me pick and do a couple of those because I want to better understand this and pull some of this stuff out so the first one you said Dows are one solution to the problem of business governance fit can you tell me just a couple of different types of organizations and and what that actually looks like in the maybe the non-crypto world yep so we're going to get into this in episode one with hasu and Chris but the way that Chris breaks it up in his piece which we'll Link in the show notes Here is there's almost a two by two Matrix of different types of organizations and uh public and private

and profit and non-profit and you can see examples of some of the different types of organizations right so non-profit organizations you have Charities hospitals things like that and then in you know for-profit organizations you have companies right like like meta or apple or whatever I think the the simpler way to understand for me is actually if you look at governments versus corporations right because I think that's things that people understand so if you're a Milton Friedman Advocate writer or disciple then you know that the point of a corporation is to Max maximize shareholder value and typically that refers to producing more profits right that is the stated goal of a company so you can look at every decision that a company makes through the lens of trying to achieve that objective of generating

outsize returns and profits a government is very different right you don't really have shareholders in the sense that a company does and typically what a government is trying to do is kind of at a large level organized Society in a way that's beneficial for the users of the country right which are its citizens very very different things there's no profit right to generate really what you're trying to do is raise the you know basically maintain a good enough lifestyle for each one of your citizens so that they can keep voting you into Power very very different end States almost at a philosophical level as such we have very different governance for a country for the United States as opposed to a corporation right in a corporation we have very distinct

sets of understood shareholders or uh stakeholders we've got our board of directors we've got our managers we've got our investors we've got our users and the government's very different even within the United States government right we have different organizations based on what that branch of government has to do we've got judicial legislative executive executive very top-down autocratic type design right which is optimized for fast decision making in the legislative branch because so many of the laws that get passed by there are um I impact the lives of each of its citizens is far more distributed it's far more decentralized and finally we have the forward-thinking long-term decision making which is the Judiciary part of the government and that is appointed by the executive branch and they are for life which allows them to

think very very long term right and not necessarily be subject to the whims of the mob and the public or making good decisions on a quarter over quarter basis so that they can keep their jobs so even if you look at the United States purely as a as a governance example you can see different forms of governance for what that each part of the government needs to do right so I think one of the things that's important that we'll be exploring this season is is what is the intent behind your organization right if you take a protocol right if you look at someone like um uh like an Ave for example is the intent of Ave more like a company in the in the Milton Friedman sense is it to drive as much shareholder value as possible and to generate as much cash flow as possible or is the intent of Ave

to be this thing that maybe kind of sits in the background is just this protocol for borrowing borrowing and lending uh other folks can build on top of it in which case the governance fit should look very different in those two situations so we're going to explore over the next what six seven episodes what that actually looks like but but your argument seems like Mike that it's all about the intent right so there are two key things that I think organizations should consider whether to be a dow or our company basically one is the intent of the organization right so is this just maximized shareholder returns and profits uh or is there some some other intent right you can even look at doubts there's like Ukraine Dao right to raise funds for ukrainians that type of thing so it depends on the

intent of the organization overall and then the other thing that is very accepted in corporate governance it's kind of taking for granted but I never see disgust within the concept of Dow governance is how mature is your organization right what is the life cycle if you take the example of a company for instance the governance at a very early stage all always private company is extremely different of what the end state of governance looks like for for-profit Corporation in Dallas we almost have this one size fits all this is when you should be a dow this is when you should be a company and it never takes into account the maturity of the organization so it has to do with two things the intent of the organization and the maturity of the organization yeah you remember variant had that post maybe two years ago about exiting to the

community that reminds me of that right you start very centralized and then you start to eventually exit to the community um all right so so let's so that was kind of Point number one about different types of companies and organizations governance fit tell me about Point number two right you said most Dows today in our opinion broadly fit the term for you know for for-profit entities kind of fit into that bucket um in which case corporate governance is the correct lesson to borrow from is this kind of a thesis that that you believe is this something that you want to explore with the guest tell me more about this yeah so I think I'll just put my hand up and say this could change over time I think if you look at most of the DAP layer of dows that exist today these things look like for-profit

entities you can quibble about whether it's public or whether it's private or what stage of development they're at or whatever it is but in my opinion the implicit if not explicit promise of these organizations is that they're going to generate profits and I think the way that you can you know one of the things that you can test right let me just after that is that they've issued a token which is worth something right and I know there are regulatory reasons for not promising access to uh you know any of the cash flows that the protocol generates in many cases they have actually bend over backwards for the protocol itself not to generate any Revenue right because they don't want it to be a security but at the end of the day I think most of these things look like for-profit entities that resemble business in that case I think the

the Canon for governance that we should be borrowing from looks more like uh corporate governance as opposed to something like Sovereign level uh very you know governance which is kind of based more unfairness I would say yeah yeah and then the last thing I think that you and I both feel strongly about is uh that the advantage of Dao's is ultimately based on the stage of the Dow right you were talking about maturation there's two different things to determine kind of one is intent and the second is maturation this third bucket that we're exploring is that the advantage of dows is very dependent on the stage of the Dow right in the beginning it's kind of the value of the Dao is really the community you get distribution you get this rapid product iteration and then

later on maybe if you're just becoming that you want to become that protocol layer for others to build on top of actually something like ossification and dependability might really be the benefit of becoming a dow and you can look at things like ethereum and Bitcoin as an example here right yeah but before before we get on to that I just wanna I wanna get into the idea of decision making in organizations and how many different people should be involved in decision making so there is a reason at a very early stage of company where you want Nimble management teams that don't have to have a lot of is it one thing that I see over and over and over in literature around Dao's in what people talk about with the community is this

idea of crowdsourcing ideas and somehow greater access to ideas and opinions is going to lead to better decision making that is simply not true it is the opposite of that the vast majority of good decisions over basically I think human civilization have been through small groups of people who've been empowered there are good reasons to involve more stakeholders in the eventual outcome of organizations but that is a separate topic from crowdsourcing decision makings I just don't think that's how you make good decisions think about even internally use an example in Block works right like think about how you and I have talked about how decisions get made right as we've gone from you know eight to ten to 25 to 50 people right I think a lot of what good leadership is especially at a

very early stage of a startup or organization is figuring out which people should be involved in making decisions trying to limit that to making it as few people as possible and even deciding like what is the appropriate time for people to know information to make decisions all of that stuff is that that is a that is a those are that's a process would you be governed by a small group of highly motivated highly competent people and I think over a greater period of time when you have more and more people first of all after the organization has seen seen some success but after the impacts of the decision making in that organization reach more and more people that is when you give voice to more and more people I think but

yeah and you also you're supposed to you're supposed to qualify the people that just have access to this information I can't tell you how many times I've been lurking in governance forms and are really qualified service provider to a dow for instance will say hey uh I put together this proposal you know oftentimes it's extremely detailed very well thought out you know 10 page proposal and they kind of just put it out there and someone from the community just comments too expensive like on what basis on what basis man you're looking at that you have no idea what the market cost is for that you don't know what the return is for doing that you don't know what the risks of not maybe it's a risk management type proposal right where you're where you're

simulating different you know you know different scenarios or outcomes it's just uninformed people commenting on there's there's not only no value from uninformed people that are commenting on complex decisions there is negative value intense negative value I would say yeah and I think it's very dependent on that maturation phase right where where are you in the protocol if it's maybe later on that is okay for the whole Community to be making decisions and you see this with something um like some of the kind of earlier protocols in crypto but if it's something like a 10 person startup that should just you should be running a centralized Playbook right there yeah yeah I think so um and and I think then you know that that aspect of decision making

that kind of leads into what are the advantages of being a Dow at an early stage of Adele like how should it look versus a later stage and you know I thought about this quite a bit I think when it comes to a doubt right now the current state of Dow governance first of all it varies very you know definitely Based on data Dao but basically a lot of first of all there's a lot of Shadow stuff that takes place off the forums but in theory the way that it kind of works is every major decision for a Dao is put to a vote in front of everyone and token holders vote on it and the decision gets passed or it doesn't pass um and that's both financing decisions and it's very technical sometimes product decisions

and I'm going to make the controversial step of saying Capital allocation decisions especially in the early stage of a community I think the community should have no say over whatsoever I think you see this in treasury management I think one of the reasons why Dows were late to preparing for this downturn in Bear Market was this idea of not wanting to be front run by the Dow so they didn't want to sell native token into usdc or something like that which was one thousand percent the right decision but they basically didn't want to get the idea of King front run by the Dow is hilarious but that is a great example of why Capital allocation decision should be made from Financial professionals and not buy back holders basically and I think there should be extreme I think

there should be a there should be a way for the community to contribute to product decisions but you should essentially have to prove that you're a user there should be some steps of qualification before you can have input I don't think you should basically just be able to permissionlessly join the community and start giving advice day one it's just it's just not helpful but I think where Dao's sorry what what do you what do you think about that well just on that point I think that that is I would probably push back I think that it is fine for anyone to weigh in on on decisions just like people weigh in on block work stuff all the time I mean look at our ruthless YouTube comments it's just that you don't listen to them right and you don't have to listen to these things where it

gets interesting and Dows is different voting mechanisms are still really early stage right so if you look at a lot of the protocols it's like one-to-one token to vote so but if you actually look at where people's tokens are coming from oftentimes they don't have the capital to buy the tokens themselves so they're getting delegated by someone and if you actually follow the flow of the delegation uh usually it's coming from one or two people so like one massive whale will control the delegation of like the 10 most important voters so really it's actually quite a centralized system even though you have like 20 important people voting on these things and that's another so that is a system where like you do have quote unquote the most important people the people who own the most amount of like in this case like Equity slash

tokens voting on things who have the power but really sometimes I've seen they don't want to upset the person who has delegated tokens to them so they vote a certain way what could you be referred to here is there a very well-known Bellwether type dial where this situation might be applicable I wonder um you know what you know what I think is going to get put to the test dude is this idea of the shareholder and the user being the same thing in the token holder we will see I because there are definitely companies that I you know in my little personal portfolio that I'm great at losing money in uh there are definitely companies or tokens or whatever that I like uh and for that reason I want to be a an owner of that company a protocol but I have no

interest in being a user and vice versa there are also products that I love and use but I don't think their business prospects are particularly good and there's been this idea that aligning being the having the users and the shareholders be the same thing is going to be this extremely great alignment of incentives and interests and I think that is still up for debate whether or not that ends up happening frankly and tangentially I think there's a I mean we saw with Lido like the Dual class the Dual governance scheme right which isn't really users um and investors I think in lightest case it was uh it they were trying to prevent validators from amassing like undue Power by giving steath holders veto

Powers over proposed changes to the protocol so like we're starting to see in like dual class voting exists in in corporate governance all the time right so we're starting to see these things that do look kind of like corporate governance so that's that's the hottest Topic in I would say corporate governance and apply Finance Rate large so at the time of us saying this uh probably the the most interesting experiment in governance or development in governance is actually happening outside of crypto it's happening with Mark Zuckerberg over at meta right who famously has dual class voting shares uh is embarking through reality Labs through metaverse unit I saw on it on a podcast episode if you basically chart out what meta says they're going to spend on reality Labs which is something to the tune of like uh you know they've said it's it's going

to be 10 billion next year but that's drastically going to increase right so maybe let's call it like 25 billion or something a year if you pull out that out and then and then compare against 10 years so say they're going to spend 250 billion dollars if you compare that to previous Capital allocation programs in history inflation adjusted that's about what the U.S spent to reach the moon on the Apollo Mission so it's like an extremely tremendous amount of uh Capital allocation that's happening through one person and it's making people upset right but I wanna I wanna say the advantage that I think that Dao's have as opposed to early stage companies is distribution I think that is I think that is the key advantage that they have

because when you're a young company you might not have access to a whole bunch of funds you don't have a brand name anything like that usually the way that you grow for many for many young companies is word of mouth right creating evangelists this is a lot of what uh you know the modern kind of function of growth is based on especially at an early stage the ability to issue tokens and potentially make people wealthy and then have them talking about you and creating this virtuous flywheel is enormous and I would actually I would actually say issuing tokens and getting people wealthy is how every single crypto product that exists today that arguably has product Market

fit has achieved distribution I think every single one and vice versa it's the reason why some of these newer layer ones might struggle because they came out at such a high valuation right so they won't have that core base of users that they make wealthy um let's talk about some of the episodes we have coming up I wanna I wanna just say then the the end State basically so that's the advantage that I'll have in the beginning I think at the end what's very important and this was another uh post that you and I drew on for inspiration for this season was a post that vitalik wrote vitalik buterin on why Dallas should not why Dows are not Corporation and there's a different form of governance so you should definitely read that which is the Counterpoint to a lot of what what we're saying right now

but I would say that the end state for why Dallas will be good what successful Dallas will look like is products that have very minimized surface area so they don't do a whole bunch of different things and have such a distributed governance that it actually takes it takes very very long to make decisions to the point where other companies organizations protocols will feel safe building on top of it and what I mean by that is if you think about the US government people say this all the time it takes a long time to make decisions is that a feature of a bug in some instances it's a bug but in many cases it's a feature because we have very well established you know property law in the United States we have a functioning

justice system and judicial system in courts that enforce those property laws you and I as entrepreneurs it makes us feel very safe and secure in the idea that we can build the company and another group isn't going to inherit power in four years and say oh yep I'm going to grab this and take it from you so we feel very safe building something meaningful here we don't even think about it as opposed to let's say you are a company and you're thinking about using a vendor right or a selection of different vendors to build a product on top of and your selection of vendor is going to be critical to uh building the product if there's only one vendor that you can use to build a product on top of you might as well not build that product right another great example of this is Zynga right building

on Facebook unilaterally boom they ripped it out from under you and that built on Twitter using the Twitter API and then they just shut down and then they shut it down right so if you and companies have internalized that and learned that lesson so I think one of the the features of Dao is that people complain about so much now right it was really hard to get anyone to say a positive thing about Dow governance to summarize what most people said there are no advantages we're like what are the advantages of Dow governance people are like there is no Advantage but I think at a mature stage what people find so frustrating right now which is I can't get anything passed there's a whole bunch of people weighing in blah blah blah I think in a mature stage of Dao that ossification actually becomes an advantage because

it will make things the changes will come so slowly that other protocols will actually feel safe and comfortable building on top of those dials so what does that mean for you know Capital allocation in those dials what does that mean for the return on tokens of those dials that start to look more like utilities and public goods than anything else I don't know but I I do think at the end of the day it is the ability to having decisions come very very slowly in a very Equitable Fair Way there is an advantage to that uh in some cases and I think that's just for mature Dao so a lot of the friction that we see today I think with people complaining about Dow governance has to do that

we're trying with what we're trying to borrow is the end state of Dow governance versus the beginning and again to just repeat in corporate governance it changed it's an accepted known thing that in a small company no one expects like in many cases a board of directors or all this distributed decision making it's the explicit expectation that the founders are supposed to make all the decisions and then it gets distributed over time because people understand that in a large corporation with a lot of stakeholders that is beneficial yeah Eric Voorhees said this thing on stage at permissionless this past year um he said the Dows are simply regulatory Arbitrage today I'm curious how much you want to explore the regulatory side of Dao's and why whether or not regulation

is driving these Dows um or if you are looking or or if you just want to avoid regulation in general yeah I think I do want to talk about that because I would agree with that I would agree with that idea uh I I think one of the lessons that we learned from season one is we had a very specific thesis I know what I just outlined was was pretty specific as well but I think what we want this to be is an exploration right of of this topic of Dow governance we wanted to come in with a perspective and a point of view on doubt governance so to say hey we're going to explore Dow governance but I fully expect a lot of what we're saying to get pushback from our guests and I would hope that at the end of this season we are proven wrong about some of

what we you know of some of how we're looking at this this topic in the beginning so you know to I do think today mostly we didn't really talk about this angle but the other Advantage Dallas have probably is a global audience and it is regulatory Arbitrage which by the way the inner internet got the internet is basically a whole regulatory Arbitrage play too so I think yeah I think that is a I think that's a massive so topics we'll explore outside of what I just explicitly outlined is we're going to do a whole bunch of work at uh looking at treasury management basically we're going to try to categorize like okay these are a lot like what buckets exist for Dows right like what are kind of more Social Clubs and what at their end State should be almost like for-profit public companies uh we're going to be looking at

regulatory Arbitrage we're going to be looking at treasury management and we're going to be explicitly talking near the end of the season about what are some of the explicit changes that Dows are already undergoing right so what are some of the experimentation that's happening within doubt governance and how do we think Dows are going to look in the next the next bull market versus where we currently are yeah we have some great guests lined up we've got the team at reverie Larry and Dara coming on from reverie we've got hasu and Chris I've got Mika honkasalo tarun Chris bernitski uh Jules Rosenberg Charles St Louis we've got some really great guests um so we're excited about this one uh anything else about the about the show about the season I want to give a shout out to to the sponsors for the season but anything else before we do that Mike

I was just like this is an exploration of you're in my interest so guys please give us feedback would love it uh a lot of people give us you know assistance and support in developing these Theses and ideas um and we'd love to hear back from from all of you what you think about this yeah um big shout out to uh this this show is completely free because of the sponsor so I want to give a shout out to Avalanche and uh Reserve protocol Avalanche uh hopefully everyone knows Avalanche by this point if you're listening I'd assume you know Avalanche uh blazingly flat fast amazing L1 uh they've had some incredible developments in the bear Market uh they rolled out the core wallet it's like a competitor to metamask um I've been using it it's amazing it's really really fast uh they've they've worked with I think it

was pair swap to do swaps inside of the inside of the wallet it's really really nice you guys should check it out there's also a bunch of cool defy stuff happening on Avalanche right now they also have uh the Avalanche Bridge you can natively um you can move Bitcoin native uh Bitcoin natively into the Avalanche bridge I think it was like 70 million dollars worth of bitcoin we're bridged over to Avalanche in just the first month since the bridge launched in the core wallet so this is an example of a team who's just been really heads down building um in the bear market and what they have going on with subnets is super interesting so we're going to keep talking about Avalanche in throughout this entire season but if you don't know Avalanche hopefully you do know them uh but if you do know them and you haven't

looked at what they're doing recently you should go check out the core wallet should Bridge them some assets into it and um yeah go check out Avalanche the second one is uh is reserve Reserve is super interesting so Reserve protocol is a uh a platform to build deploy and govern asset back stable coins so I've known their team for a while no bear market and Stables baby no bear marketing stables and their thesis is that the world would be a better place if uh if anyone could go create their own stable coin and you let the market decide you'll have to free market decide where Capital should flow into so they have just launched a protocol um to give anyone the ability to go create these custom bespoke stable coins using the reserve protocol so you can

build a stable coin backed by maybe specific USD Stables you can get more complex you can use like inversely correlated assets right The Branding the governance the composition they're entirely up to you um we're going to talk a lot more about Reserve uh in the show but yeah I've known their team for a long time uh spoke on a panel with Nevin back in I think SF blockchain week in 2019 been inside excited about what they're doing and wanted to work with them for a while so yeah go check out Reserve we'll put some links in the show notes sweet buddy looking forward to the season you guys the real ones appreciate you yep let's get into it see you next time [Music]