[column] Chasing down the DAO primitives: Back to the basics of public blockchains

投稿日: 2022年12月16日投稿者: gencoguz

Author: Oguz Genc

Welcome back to the second article of our series on Decentralized Autonomous Organizations (DAOs). The previous article provided a few definitions for DAOs from the academic literature.

As a reminder, DAOs are community-driven organizations that aim to achieve decentralized governance via deterministic characteristics of public blockchain infrastructures. Featuring a combination of on-chain and off-chain governance components, DAOs are interfaces where ‘corporate’ decision making are instituted on smart contracts.

In this post, we will provide a deeper understanding of the characteristics of the underlying building blocks of DAOs, namely, the public blockchains. We have to admit that it is no easy task. As a beginning point, one of the main arguments regarding the innovative aspect of public blockchain networks is that they have introduced a novel architecture of trust. This new trust mechanism combines existing technologies that precede these blockchain networks [1].

Public blockchains are innovative solutions that offer a new trust paradigm, where the network is decentralized to an unspecified degree in terms of its operational setting based on technical primitives. Therefore, the set of all characteristics that constitute such a trust mechanism allows the novel trust paradigm called ‘trustlessness.’ The basic assumption is that nobody needs to trust anyone to keep the network functional since it is very costly to act dishonestly. If you wonder about the political motivation behind such a ‘paranoid’ mechanism design, look at Satoshi’s message in the genesis block of Bitcoin.

Source: Bitcoin News

To deconstruct this trust mechanism, we look at the meta-characteristics of “blockchain trust” [2]. Public blockchain networks build a trust mechanism that minimizes the need to trust third parties for the following six attributes. Please note that these explanations allude to an ideal architecture for a decentralized blockchain network and do not reflect the practical reality.

Characteristics of Trust Mechanisms for Public Blockchains

Something out of nothing
Distributed
Crypto-economic
Immutable
Transparent
Algorithmic

something out of nothing
The first argument implies that public blockchains have gained value despite being created from thin air. Therefore, it attains economic importance because of the user trust mechanism it provides. This argument is too deep of a discussion. We want to avoid going in a direction where we discuss the history of economic thought or the differences between consensus mechanisms in this article. For now, let’s assume that value has accrued to these networks because there is a community that shows persistent demand for the value proposition of public blockchains.

distributed
The discourse of decentralization for blockchain networks alludes to an understanding that a public blockchain network is diversified to a certain degree where no single party can command a monopoly on making changes to the operational setting of these protocols.

algorithmic
Application builders in such distributed networks operate with the expectation that the base layer protocol will provide a deterministic operating mode that works on autonomous smart contracts. Therefore, the distribution level is based on the design of the base-layer blockchain protocols. A detailed taxonomy of centralization for public blockchains finds that a highly-sophisticated systematization for decentralization is absent [3]. Therefore, there is no hard consensus on what decentralization means.

transparent
The idea that anyone could audit the ledger and the source code was the industry standard in the early times. However, with the upgrade of Ethereum to Proof of Stake, the future of audits for the entire transaction history of public blockchains other than the Bitcoin network has become a more complicated issue. Instead, we prefer to include a new characteristic for the base layer public blockchains. This new standard allows anyone to read and write on the blockchain without permission from a third party. Such an interaction is done with a wallet application, accessed by a secret phrase provided to the user who opens the wallet account. Ideally, no identifiers are connected to the users. In blockchain jargon, this defines the network to be permissionless.

immutable
This attribute may be taken for granted more than any other for decentralized blockchain networks. Undoubtedly, the ledger will be continuously, correctly updated and kept secure. However, we will see that this was not the case either.

crypto-economic
Last but perhaps the most essential feature is the economic incentive mechanism. Most users partake in a blockchain network with the primary motivation of making financial gains. These gains are made by owning a tokenized asset on the blockchain native to the protocol. While Bitcoin is the only token on the Bitcoin network, public blockchain networks such as Ethereum allow other applications to issue their token based on the technical standards they provide. The distribution of such tokens is often studied to designate vectors of centralization in the operation and governance of public blockchain networks.

So far, we have only focused on the characteristics of public blockchains from the intersection of their business qualities born from their technical mechanism designs. However, even if we assume that these characteristics are universal, we know the origins of trustlessness stem from the Bitcoin blockchain, which is not the network of choice for DAO builders as it does not have the smart-contract capability. Therefore, we find it essential to distinguish public blockchain networks between the Bitcoin network and smart-contract protocols, occasionally referred to as the base-layer protocols. From now on, we only refer to the latter when we talk about DAOs and blockchains.

The degree of decentralization for a smart-contract protocol is probably a significant variable in DAO founders’ decision-making regarding which network they choose to build their DAO. Therefore, much further research is needed to understand the main determinants of DAO founders regarding the determinants of choosing a base-layer smart-contract protocol. However, it is essential to know that the debate on decentralization is older than any DAO.

Although the underlying protocol may not be ideally decentralized, most DAO managements are probably not very concerned about this situation yet. One might think this is because it is only a matter of extra technical work for DAOs to switch to another provider once they decide to do so. However, this may also be infeasible, as we will discuss in the following posts. Indeed, the business network within the blockchain industry, such as DAOs, are probably not concerned with how fundamental is the decentralization of their base layer protocol. As entrepreneurs and builders, DAOs run experimental businesses and take the associated risks to the maximum.

In the following articles, we will start exploring the characteristics of these experimental business primitives. We will also revisit this article to see what deviations from these characteristics have been occurring in practice.

[1] Sheldon, R. (n.d.). A timeline and history of blockchain technology | TechTarget. WhatIs.Com. Retrieved December 16, 2022, from https://www.techtarget.com/whatis/feature/A-timeline-and-history-of-blockchain-technology

[2] Werbach, K. (2018). The Blockchain and the New Architecture of Trust (p. 322). MIT Press.

[3] Sai, A. R., Buckley, J., Fitzgerald, B., & Gear, A. L. (2021). Taxonomy of centralization in public blockchain systems: A systematic literature review. Information Processing & Management, 58(4), 102584. https://doi.org/10.1016/j.ipm.2021.102584

Disclaimer: All generated content is for research purposes only. The author does not and will not provide any investment advice.

[column] Introduction to Web3 Primitives: Decentralized Autonomous Organizations

投稿日: 2022年11月30日投稿者: gencoguz

Author: Oguz Genc

Since Satoshi released the Bitcoin Whitepaper, blockchain applications have come a long way in gaining real-world utility. Although the blockchain industry is still very nascent and volatile, innovation has been its central theme.

In our Web3 Research Hub, we aim to explore the past and latest developments in the blockchain industry. Although we will gradually cover multiple components of Web3 in our research, I will focus on the blockchain applications within the scope of organizational analysis and their innovative implications.

The categorical name of such applications has come to be widely known as Decentralized Autonomous Organizations (DAOs). As a starter, let’s look at some definitions from the literature over recent years to understand what a DAO means.

Wang et al. (2019) define a DAO as a new organization form. They purport that the management and operational rules are typically encoded on blockchain as smart contracts and can autonomously operate without centralized control or third-party intervention. Similar definitions are prevalent in the literature. Hassan and De Filippi (2021) suggest that a DAO is a blockchain-based system that enables people to coordinate and govern themselves. The mediation is done by a set of self-executing rules deployed on a public blockchain whose governance is independent of central control. Bellavitis et al. (2022) concisely suggest that “DAOs are blockchain-native, decentralized organizations collectively owned and managed by their members via smart contracts.”

Since the term “blockchain-based” often implies a presumption of an on-chain operational setting, Santana and Albareda (2022) begin their paper by pointing out that it is not the case in practice. They define DAOs as blockchain-based organizations fed by a peer-to-peer (P2P) network of contributors whose management is decentralized without top executive teams and built on automated rules encoded in smart contracts. Their governance works autonomously based on a combination of on-chain and off-chain mechanisms that support community decision-making.

Many other definitions are provided by industry participants as well. Consensys, a leading multi-disciplinary firm in the Ethereum ecosystem, uses the metaphor of “a very large vending machine living on the blockchain” to define what essentially a DAO is. The list can go on much longer than anyone is willing to read. But to sum up some primary attributes of DAOs, we can deduct the following:

DAOs are built on top of public blockchain infrastructures.
DAOs are decentralized, at least in the premise of governance.
The governance mechanisms have on-chain and off-chain components.

In future articles, we will provide relevant research and opinions on these statements to explore the underlying explanations and whether these analyses are accurate.

Furthermore, we will also see that in practical terms of their current state, DAOs are crowdsourcing platforms that aim to consolidate ‘liquidity’ within an open-source business initiative. We will provide detailed examples of what sort of business ideas have been tested. The upcoming pieces will cover many other topics, such as the advantages and disadvantages of DAOs, a library of research tools and databases focused on DAOs, the state of regulatory developments, and practical use cases.

Any suggestions and exchange of thoughts are welcome. Feel free to contribute to our research on DAOs.

Disclaimer: All generated content is for research purposes only. The author does not and will not provide any investment advice.