The Encrypted Economy
The Encrypted Economy
The Future Of DAO's, DO's and O's. Dane Lund, Core Contributor to Alliance DAO. - E96
On this week’s episode of The Encrypted Economy, our guest is Dane Lund, core contributor to Alliance DAO. We explore the roles of autonomy and decentralization in DAOs and discuss some of the hurdles they are facing as they embrace these concepts. Be sure to subscribe to The Encrypted Economy for more insights on the innovative organizational structures in web 3 and how organizations acknowledge the challenges that arise in them.
Topics Covered:
· 0:00 Intro
· 5:30 Defining Features of a DAO
· 14:20 Framing Some of the Problems in the DAO Landscape
· 32:40 Anonymity in Voting
· 41:50 Discussion on Pseudonyms in DAOs
· 51:00 How does Current Legislation Impact DAOs?
· 1:02:00 How Can Builders be Policy Advocates?
· 1:04:30 Is 2022 the Year of the DAO?
Resource List:
· Dane’s LinkedIn
· Dane’s Twitter
· Alliance DAO
· Autonomy in DAOs
· Bermuda Test
· Ooki DAO
· Sarbanes-Oxley
· MiCA
· Lummis Gillibrand
· Stabenow Bill
· Lex Punk
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Eric: [00:00:00] So this week we had Dane Lund on the podcast. He's a core contributor of Alliance Dao. Now, Dane has been a thought leader on the topic of Dao’s and Alliance Dao is seen as a y Combinator when it comes to providing Dao’s with alumni networking and the tools that they need to be successful.
Now, we cover a lot in this episode, and as the title implies, we discuss the challenges of both autonomy and even decentralization for the organizations that today call themselves Dao’s. We also talk about many of the organizations going through sort of a soul searching. After the Ooki Dao complaint, perhaps it casts some doubt on liability remoteness for Dao members who vote, and there are certainly unintended consequences for that.
Lastly, we discussed some of the current legislation before Congress in the US and Mica as well as the impact of those legislative pieces on Dao’s. Whichever you want to call 'em. In any event, as you will hear it, is it might be too soon to predict the decline of Dao’s. In fact, they are likely to become [00:01:00] increasingly important in the longer term.
If you like this podcast, please share it with somebody else. And in the interim, sit back and enjoy a great episode with Dane Lund.
Welcome to The Encrypted Economy, a weekly podcast featuring discussions exploring the business laws, regulations, security, and technologies relating to digital assets and data. I am Eric Hess, founder of Hess Legal Counsel. I have spent decades representing regulated exchanges, broker dealers, investment advisors, and all matter of FinTech companies for all things touching electronic trading with a focus on new and developing technologies.
So, this is Eric Hess and Dane Lund with this episode of The Encrypted Economy. Welcome Dane.
Dane: Hey, Eric. It's great to be here.
Eric: Dane is a core contributor to Alliance Dao. Previous to that he was an attorney with Wilke Far. But I'm not [00:02:00] going to, I'm not gonna do justice to his background.
Why don't you give us a little bit about your origin story and a little bit about what Alliance DOA does.
Dane: Yeah, absolutely. You kind of touched on two of the important points here. I began my career as an attorney focused on shareholder rights, litigation and white-collar investigations.
I did transition to become an investment banker and an investor over the course of about seven years. So, I got quite a lot of financial exposure as well. And, for a lot of my career, I've been trying to bring those two things together. So, my last institutional job was in litigation finance.
I had always been very interested in blockchain. I started trading Ethereum in about 2016. Learned a little bit about Dao’s and then put it in the back of my mind. And in 2020 during the pandemic, I, it went mad scientist [00:03:00] and learned a lot more about das and realized that's, something that's very compelling for somebody who wants to bring law and finance together.
Through that process, I got connected to a local law firm in Chicago where I live. And we started to think about what a bill recognizing Dao’s in Illinois would look like. Still haven't successfully pushed that, but through that process I met Alliance. At the Time Alliance was an accelerator focused on, accelerating defi projects, but also expanding into Web three broadly.
The accelerator is still fully operational and has really gained traction. So, some of the best and brightest minds in Web three go through it. And what they were trying to do, and what I've been working on is to create a doubt that encompasses the accelerated community. [00:04:00] And so what that, that doubt is becoming.
Is an alumni community for the founders who successfully pass through the accelerator. And in some ways, that community has a mission to build on its own. The idea is to give the community ownership over decisions about what they do prospectively. So, I think it's a little bit different from, many of the other Dao’s that are out there.
There's no token that's floating out there or anything like that, but there is a very clear mission and a clear path to membership. And our idea is to reduce the value leakage out of the alumni community over time by having a central point for people to collect. I should be very clear, the governance is decentralized, but it is a more or less a selling point for alumni.
Of the [00:05:00] Alliance accelerator.
Eric: Great. And I, one of the topics we're going to be digging in today, obviously is Dao’s. And in light of certain regulatory developments, what has become a Dao’s. But I feel like, it's important even though a lot of people listening to the podcast know what a Daoist like.
Okay. Decentralized, autonomous organization. Let's dig a little bit into this concept of autonomy for a Dao. How would you define the autonomous component of a Dao? As an if the autonomous word is a central component and we're not simply using an acronym, right?
Cause sometimes when you strip away, like Dao, Dao sounds like a single word. It's the stock market index or whatever, but you get it. It's like a Dao. But when you strip away the various component parts and you look at each one as an element, how do you look at autonomy with
regards to Dao’s. [00:06:00]
Dane: I think it's a really important question that hasn't been answered. And I'll give you a couple of points that I think approximate what we talk about when we talk about Dao’s. But I'd also say that it's important to realize that there are also, dos decentralized organizations and those are very important too.
I think the term Dao has come to encompass both decentralized autonomous organizations and decentralized organizations. So, it's important to think about, how to differentiate those and the autonomy is really important. So, when I think about autonomy, I think about two things. First, I think the classic view is that autonomous execution of smart contracts at the core of the Dao is what creates autonomy.
More or less a protocol that, that, can upgrade based on votes automatically. And not necessarily depend [00:07:00] on, dev deployment based on input from a vote and so that's a pretty rare thing. I think it, it resides in kind of the protocol territory. And the, the goal of many dos is to get the point where you have autonomous execution, but it's harder when you're coordinating, organizations that do have a fair amount of human activity to have autonomous execution.
The other point of autonomy and this is maybe not in the classical definition, but it's important to think about as we developed out theory, is the idea that Dao’s at their formation. Are more like political organizations than they are like, corporations at the founding. A Daoist more or less an internally coherent sense of rules that are similar to a, an act of sovereignty.
[00:08:00] The Dao itself, the smart contracts don't know what's outside of the Dao. They only know really what's inside of the Dao. Maybe a source of truth outside the Dao, but it's like forming a country. Obviously, Dao’s don't have sovereignty such that they can like, interact with states like stakes interact with each other.
But that element of being, set up without, clearly mandated rules from the outside is an important part of thinking about autonomy too. I'm not sure that's the original conception, but it's certainly something that people should consider when they're thinking about Dao Theory.
Eric: So just to break this apart a little bit more and dig a little bit into it, so a governance proposal that is not self-executing based on the results of an autonomous, based on the results of an unchain vote. Is it autonomous?
Dane: If it's [00:09:00] not self-executing, mean this goes to, there's a lot more theory on decentralization and a spectrum, right?
With the execution of the smart contract, if we're being very rigid, I would say that the case you just gave is not autonomous execution. There, there could be a world in which there is a, a dev committee or some such kind of target that receives. Governance input and deploys contract or deploys contracts such that the community could see it and then vote.
Yes, that's the contract that gets deployed. There is an element of autonomy there. It's somewhere on the spectrum of, not autonomous at all and autonomous execution because there are rules that govern how these things work. But it starts to be, closer to the do part of, this [00:10:00] organizational spectrum versus the pure Dao piece.
It's hard to conceptualize like a pure perfect Dao other than either protocols or AI interacting according to rules that we put out as a precedent matter. So, I think it's a good question. I would say purists would say not autonomous.
All right.
Eric: I'll move that test a little bit now to, to the Bermuda test.
Sure. So, if the core team can move away, and the, the entity continues to operate in Bermuda. Now, the Bermuda test is an old legal construction, actually, given how active Bermuda is in the blockchain space. Maybe we should call it Ma Mars, but then there's the Mars protocol. Yes. So, we'll choose Pluto or hopefully something that, that doesn't overlap with where blockchain is associated with.
But you basically remove the core development team to [00:11:00] another planet and if the entity has to constitute around a new core team through, again, an off-chain mechanism, does that change the fat or are we basically just talking about the same thing here? It's decentralized, but it just shows the how critical that core team is, that it can't pass absent some off-chain activities to reconstitute.
Dane: Yeah,
I think that's, it's interesting to see how the concepts of decentralization and autonomy can interrelate. If we were to assume a case where, the Bermuda test is passed, the core team's gone, but the protocol still runs. But there is an intern, intermediate layer where there's still kind of dev interpretation and deployment.
I, I don't know that I think that if we're thinking about, some [00:12:00] of the securities tests I don't think that this I don't think it would run a foul. However, if we're thinking, pure Dao theory, I still think that the autonomy piece isn't perfectly, satisfied.
Eric: And I think this discussion, even though it may seem, to some people may be like it may seem esoteric, right? Because it's there's different, there's a spectrum of decentralization, maybe less of a spectrum of autonomy. But people might say, Okay, stop being such a purist.
It's a Dao. But in fact, from a regulatory perspective it may actually start taking on a more important consideration. Because when a regulator is looking at a true, decentralized, autonomous organization, it is viewing something that is distinct from something that is just purely a decentralized organization.
And that is core to, to, to a lot of what we're going to talk about today, which is why we teed it up. I think
Dane: I, one thing I would [00:13:00] say is that we. We see a lot of potential value in decentralization and organization together. And autonomy is very interesting.
And I think, most Dao organizations, whatever, wherever they stand on the A piece, they aspire to autonomous execution. Usually there is a vision of a machine effectively working, apart. Any individual code deployments. I would, if I'm thinking from a regulatory perspective, I'd be careful about making a necessary component because we see tremendous value purely in dos.
And we can get into what they unlock and the likes. But I think that it's fine to have a debate on the decentralization piece. The autonomy is more of an ideal in many [00:14:00] cases than a reality.
Eric: Right. Agreed. And maybe as a sort of a segue to some of the changes that, that we're seeing now in the us how would you frame the challenges that Dao’s are currently facing, sitting here in October of 2022 and not the year, or the Dakota the beginning of 2022?
Yeah, so I, I
Dane: think it's if I were to categorize these problems, they would fall under existential. Right now, I think we're facing questions about whether or not Dao’s will continue to exist. In a call it, very visible form, and I think that it's important for anyone who's interested in, blockchain science or organizational theory to take that seriously.
I think that if I were to start to point at specific issues, I think the first is how to [00:15:00] classify whatever the units of governance are. So, I think that there are clear voices that say these are securities. There are other voices that say, no, these are, part of it, basically sewage nearest like organization.
And we shouldn't touch governance tokens. There, there's a ton of debate on that fact. I think there's also a lot of question marks on what is the right amount of disclosure around a Dao community? I think that there, there could be a world in which a disclosure regime that, that was realistic could make a lot of sense.
Like in some ways it would make the work of a founding team easier if they knew what they needed to communicate to a community and knew what is appropriate and what is not. [00:16:00] And they were able to follow a template effectively. Figuring out how to communicate for Dao, I think is very difficult.
And also figuring out the extent to which the founding team should be doing X, Y, or Z or leaving it to the community at a later date. I've written about this concept of an initial state, and I think we don't know what the appropriate initial state is. Some Dao’s effectively say here's your Dao day one.
Here are all the people who are doing things. At a later date, we can vote on changing that. And that's more like a, already being written story. And there are another Dao’s that, pop up and say, hey, we don't know what we are. But we all, rally around one specific point.
Let's figure it out through governance. And that's more like a, almost a, blank slate Dao. So, figuring these things out from a [00:17:00] regulatory slash theoretical perspective are important issues and some of the threats that, that relate from this discussion really get at whether or not we're going to have Dao’s
in the future.
Eric: And I think possibly, there's a number of different things happening. I think we recently had a podcast with Kaylan Sadeghi on the CFTC and Oki Dao. And certainly, one of the. Challenges that case presented was the potential liability joint in several for the governance token holders or those who had actually participated in the governance.
How does that change, like from what you're seeing, like how does that change the calculus going forward for like public and open doors?
Dane: Yeah, I think that it, let's think about this. I think there's a political angle, there's a [00:18:00] reaction angle and then there's theory angle. So, the political angle is, are Dao’s going to step up and advocate for more clarity on, recognition.
Of their organizational status. We have seen some progress there, there have been teams who have worked in Wyoming on recognizing Dao’s. I won't opine on, the propriety of US based LLC type rappers. But I think there needs to be a much more coordinated effort to explain to policy makers why Dao’s are different and why they should be respected without potentially a corporate rapper.
And I think that inherent in that question is a tradeoff between decentralization, which is important for getting to the ideal of a Dao and [00:19:00] state recognition, if you contain a bunch of token holders within an entity structure, we need clarity on whether or not you can consider that decentralized.
But if you don't put it in a structure and then you're exposed to unlimited liability for the actions of, your punitive partners, that's really bad too. And what will happen is that people won't participate. I think that, putting aside the facts and the culpability of any actors and hike, I think the tragic thing is that a lot of people are asking, Should I be involved in Taos at all if there isn't a corporate entity around it?
And that can lead to an unwinding of the communities, because if people don't vote, then only a few people are participating. And then, you're more or less relying on the actions of a few [00:20:00] governance participants who are willing to stick their neck out. And then you end up in, the question of decentralization is this insecurity or not?
So that's not right. Call 'me Sea Dallas. Yes. Yes. And there's a world in which they could be privately managed. I'm actually a big believer that there will be if the regulatory storm, continues a similar phenomenon to what happened with, companies.
Going public after Sarbanes Oxley will happen with Dao. So after, if you looked at the cumulative public company chart, it just dropped off. There were very few public issuances from about 2001 to 2000 and 21 basically maybe end of 2020. I think that if we continue to attack [00:21:00] Dao’s that have, publicly traded tokens, whatever you want to call it permissionless access, you will find communities that bootstrap more or less in a permissioned form.
They will build valuable networks, but they will not be accessible to the general participant. You will have to somehow be permissioned to come in, whitelisted, maybe you're an accredited investor, whatever it might be, that could lead to a tragic skew toward people who have means or people who are incumbents in the industry.
So, there's a tradeoff between, maybe we don't want people to just cowboy Dios that, that have no utility. But at the same time, we don't want to create like a, what I call a network class which would be a lot of the people who are participating now to the detriment of, future [00:22:00] generations.
I mentioned a few of the other categories of, things think about, at the theoretical basis, I think we really need to think about, where Dao’s win. This is a concept that's come up more in the academic form, but, figuring out exactly where these types of organizations are
our superior alternatives to a traditional corporate forum. I've mentioned an alumni association. I think that's a good specific use case. It's not a very large set of organizations. I think unions could be a good one. I tend to think infrastructure projects are also very good use cases as well as things like water rights shared resources where we have governments that, that, that do step in to help solve collective action problems.
But the interaction between the participants who are being [00:23:00] regulated is fairly minimal. Other than when they go and sue each other I think we could probably use tokenized voting to help manage that better. There are other classes of problems that, that I think AI and other types of technology will yield where I think data will be very interesting and potentially the dominant strategy.
We won't know unless we can experiment. So, we have to be very careful where we draw the line on what people can do in experimenting with Dao’s. Recognizing that, unfettered they can, cause some harm,
right? I think the notion of Dao’s being linked with AI is definitely powerful, particularly if you get AI to the point where it can, the capabilities of that, self-executing is expanded versus, and not to be confused with machine learning, which would be a catastrophic disaster since machine learning requires tweaking all kinds of data and is not really [00:24:00] learning
I what I'd say is maybe a niche theory that we actually need decentralized smart contract systems to manage ai. And the example I'll give you is that if. Somebody runs a centralized, centralized company, has a ton of discretion and is building ai they can build things according to their will that could have, pretty massive ramifications for society.
They can do it in a way that, that effectively, can be continued without interruption. No
Eric: transparency.
Dane: Yeah, and without transparency, there's a world in which we, create a community that stewards certain pieces of. And decides whether or not to like, contribute tokens that pay gas for the AI to do something, right?
Smart contracts are seen as liberation for many people, but it can also be a constraint on things like ai. I'm obviously [00:25:00] talking in a very futuristic manner there. But if the rules are very clear on when AI can act and what the substance or the what the utility is that powers it can be controlled by tokenized voters.
If the AI that was supposed to be noble becomes evil, you could cut it off by, making sure that no Ethereum goes into its, executing smart hundreds. It's called it's animating smart contract. And that would be a way to cut it off. I think there will be incredible uses for decentralized management of.
So
Eric: in many ways, Dao’s could become for a period of time, we could be struggling with it. We could be trying to get our footing, trying to manage all the issues with ai with Dao’s. But they could ultimately become, they could have their upswing again, particularly as the capabilities that stem from that self-execution.
And AI will also be a spectrum, much like [00:26:00] decentralization is a spectrum. And so, it could become very relevant again, although currently it's probably arguably, a bit challenged because we haven't really nailed Down the, a component of it. And then that leads to how do you really, if you are a decentralized organization, but you're operating on a spectrum of decentralization, then, the question is how that does, what kind of impact should that have on a classification or in the case of qui Dao, where the governance, should the governance token holders, have that.
Liability. Certainly, that was not expected. But I would anticipate that regulators aren't just simply going to say, you know what, oh, it's a Dao even though it's not really autonomous, even though it's not completely a hundred percent decentralized. And I know I'm like, there's probably a lot of purists out there that are like throwing darts at me now.
But it's just the reality. You can't always just put up the [00:27:00] Dao and say, hide behind it. Now, the action that the CFTC took was trying to shape the law in a way that hasn't really been developed yet and needs to be explored. And so, it was premature. So that was. Problematic, but certainly this is not a one and done.
And I think that's really the point that you're referencing. It's this is something you have to contemplate whether you should do private Dao’s or find other ways to be protective. Some, I saw law firms like spitting out, memos that said you need to be a wrap Dao and you're wrapped out.
And I personally, I don't even, I don't understand how that would be the natural consequence of the UIE or the UIE complaint. You have Una's, you have other vehicles, and Dao’s are collection of entities. So, you could find other ways, insulate yourself from liability while still operating within a Dao and not being wrapped by a Dao.
So, I thought that was that wouldn't have been my take. But anyway,
Dane: I, I think it's a really interesting thing, people [00:28:00] with legal training know that a complaint is not the law. And we will, you and I can point at issues that will be litigated strongly in the scenario, but we also have to look at the complaints to see where the regulatory knife is going.
And so, when law firms start to write these memos, they effectively, what they're saying is you don't want to be the subject of a regulatory action. And that's true. It's very costly. It's potentially destructive to the entire project. In some ways it is the law. And that's the, I think the really unfortunate thing, and the thing that, that we should fight against is it shouldn't be the case that a complaint makes the.
And we won't find out whether the u key action complies with the law or was it is within the confines of the [00:29:00] CFT C'S authority, satisfies due process for some time. So, we're left to, we have what I call grown lawyers writing memos that are basically pointed to this and say now you have to react.
You have to wrap your DAO and Court said that The CFTC just had a complaint. They have a legal theory but we don't have the capacity to have this theoretical debate without taking action as an industry. And that's something that I hope we can resolve.
Eric: And in certain cases, if for all practical purposes your doubt could easily be wrapped, to some extent, the pure decentralization isn't really the objective.
You do rely on a much more contained group of members then, Sure. You have other forms you can be in LLCs. It's. It's not ridiculous to contemplate being an LLC if you're in the digital asset industry. Particularly if you're not really a [00:30:00] Dao anyway. So, there's that Oh no, we have to be a Dao.
Are you really a Dao? Yes, I think for a lot of projects, and I'm not going to point fingers, but for a logic, a lot of projects, the answer may be yeah, we're really just an LLC. It's just, I hate to say it, but it's true. And others are definitely aspiring and that might cut off their aspirations, but,
Dane: I think that's a, there, there is a, obviously I'm more of a liberty maxist on this, and I like, I would like to see the ability to have unincorporated Dao’s that, that do have, legal recognition.
I'm not saying I, I believe in, complying with the law and everything like that, but there, there is a counter thesis that, I often debate in my own head, which is, okay We force Dao’s to justify their existence if they [00:31:00] can't just crowd up. And I think one of the, one of the things about.
Many Dao’s that popped up and call it the first Dao wave is that they corralled around very weak missions. And some of them were very entertaining, right? The idea of having a Dao that’s focused on ensuring that people have a certain type of fast food that, that's really fun, right?
If you get pizza delivered at a conference from a specific day, that's super cool, but is it sustainable? No. And so is money basically going to a temporary act? Yes. That can be very good in certain circumstances. I would argue that there are special purpose Dao’s like Constitution Dao that, that bring people together around a mission.
And obviously that one was like kind of a millennial Gen Z like rah moment., but I think it was an [00:32:00] important one. And so, if we force this more legal formality, it does set a bar for what I'd call product market fit. That's a typical term in more of a product-based building environment.
If it doesn't work if the thesis isn't strong, then you won't build it. You won't take the time to actually go through these legal formalities. So, it does apply some pressure to have good ideas at the same time, I think it may kill some good ideas that take time to form.
So, I'm mixed on this point.
Eric: Ooki right, so let's talk a little bit about maybe the concept of anonymity in voting. Because I think, the UIE DAO complaint did put that front and center like, they, they filed a complaint on a [00:33:00] HelpBot or some help, in, in chat.
And so now you have a lot of what it does do is, for your ordinary person or maybe, where you have less potential exposure, maybe it moves a needle a bit. But if you're a venture capital firm and you've got your board members, and other partners to report to on this, you don't want to be in a position where you ignored something like this potentially and be called to the mat.
So, it, it forces that whole delegation. We've even heard about obviously there's. Academic blockchain societies that, hold, the delegated voting rights from a 16 z other VCs. But then ooki Dao happens, and now you have them saying do we want our school mixed up in this?
I've even heard of certain universities being subpoenaed in the Ooki Dao case due to their governance, potential [00:34:00] governance participation. Now, do I really think it goes anywhere? I don't really think so. That wouldn't be popular. But and I don't think it'd be warranted for sure.
But it does have a chilling effect. And now you start to say okay, who do we delegate it to? And I, who's, you might have some libertarians or some other, die hards out there telling me, get me in the ring boss. For a lot of others, to your point, it chills that participation.
Yeah. And I think that's sort. Maybe that's where the private LLC or the private Dao comes in, where you don't have that visibility. So, you're not docs, at least not publicly docs. But how do you see that the impact on governance and even potentially does, is this, some people have floated this idea of Aon governance.
Do you think that really works?
Dane: So, I wanna two, two lines of response. The first is, I [00:35:00] want touch on one, one thing that you mentioned, there's I would say this is more rumor than confirmed, but the concept that, university clubs might it subpoenaed for participation in governance.
I really hope that some congressional hearing centers around how destructive that type of regulatory action can be. There are. Excellent schools and excellent students who are working on understanding blockchain, they're not making money doing this. If you look at Stanford, one of the most subscribed classes is an introduction to blockchain.
I think that trying to bully students is an absolute line that should be drawn. And I think that Congress should take a look at that. And I think that it goes to your other point, which is, this concept of privacy around governance, around activity. I have two [00:36:00] perspectives there.
One is the more than this, it's setting price controls, right? Like we set price controls. You just create a black market where you try to eliminate a certain type of structure. It may go underground. What are the implications of that? It might mean that you won't find me around but you might find a lot of people who are doing the things that they're trying to not have done in the blockchain community.
Be the last one standing. I think it would be a real tragedy if we create a situation where this excellent technology is sent to the dark web. That's an analogy. Obviously, this isn't a dark web, it's a blockchain. But I think that would be an unintended and bad consequence.
Or maybe it's intended, I don't know. But also, let's just talk about privacy and its utility. So [00:37:00] I think there are reasons why legitimate above-board actors may want to have privacy in in their Dao activity. Bat gave a very good example of this when he talked about donating to Ukraine.
And he used tornado cash to do it. So, he added himself as having used tornado cash, but specifically because he didn't want, specific actors to be identified in, receiving donations or, having, being identified himself as promoting something that maybe, Russia would take note of.
So, there are reasons why good people might not want every action to be fully discoverable on the blockchain. And this is one of the things when you think about. The chain, everything being transparent is a bit different from what a bank does, [00:38:00] right? A bank is it records what happens, it can report it to the government, whereas the chain has everything accessible to everyone.
If we were to start purchasing Netflix with Ethereum, people would see what we watch. Like they might realize that in fact I like romantic dramas, but they thought I was, more of an action person. Maybe my private life is at odds with the image I project, but that's something that, that should be private to be quite honest.
So, this and it applied to Dao voting, we could imagine circumstances in which having more public voting leads to momentum for certain governance proposal. It's oh, a 16 voted for that. I'm going to vote for it. Just tackle long. If we think about governments if we think about, the un there are times when they take secret ballots.
There are times when, we as [00:39:00] citizens give secret ballots. It's not as though this is like entirely a pernicious thing. It can, all these things are neutral, right? They have positive applications; they have negative applications. We don't want people to use it to launder money. I totally agree.
But the people launder money apart from chain, right? And that's what we need to target. So, I get really uneasy when we say we shouldn't have CK proofs in voting. I just don't think that A, we understand the technology enough. B that we've really thought through the downstream consequences of restricting that type of technology and c the upside potential of using it.
Long winded answer, but a lot of thoughts there,
Eric: right? And that could also have the exact opposite impact on what the regulators are trying to accomplish. If the regulators don't respect or there isn't a respect for [00:40:00] the construct of the Dao, or there isn't some sort of enshrined judicial or legislative respect, that gives some degree of comfort, then you basically, much like we've done with securities laws where we just basically say everything's security and there's no viable path for registering.
So good luck with that. So, like, all Dal members are liable and there's no viable path for, and again, I, that's an overstatement, but it could force. A lot of these things to be more secretive and the end result may, with less transparency, less information, you create this construct where it forces people who want to be able to vote with privacy to do so in a way that may not be long term beneficial.
And so, on the whole Aon point part, I guess a while ago now, we had Janelle Backer on the podcast and we're talking about basically his social tokens and what they had done to align [00:41:00] reputation with the social tokens. So, there was this whole, you could really build up the, because you could have multiple pseudonyms and your reputation in any particular pseudonym could be built up based on what you participated in, et cetera, how long you've been on chain.
Hopefully there's, there's some time element where people can't game the system. But you could potentially also have the same kind of thing operating within a governance structure, where even maybe through a you know a possibly a less transparent process as to what weights are put on specific things, but maybe transparency as to the process overall where different governing members Can actually retain their pseudonyms, but have some reliance on a reputation that they've acquired through either their participation in that one Dao or otherwise.
Do you think reputation starts to become like more of a driver behind? Reputation is [00:42:00] already a subtle driver. The question is now reputation is often linked in sometimes synonymous, sometimes less synonymous. Does it really push it more toward the synonymous or even anonymous side?
Dane: Yeah. So that's a really interesting point that you raised. I, so reputation is one of my favorite topics. I'm spending a lot of time studying it across Dao communities. Both, both docs, non docs. I think it's interesting. I think that, if you take the Ray Dalio concept of having an idea meritocracy that in essence is a Dao.
And in some ways, the way he describes building Bridgewater, right? Its logical conclusion is like a Dao. So, let's bring it back to the territory you're talking about, which is using pseudonyms. We often, like law schools, typically grade papers blind because the name of the person has some [00:43:00] influence on a professor's thinking about what they're saying with a pseudonym from the initial point.
The interesting thing is you strip away the, like the person and the assumptions you have about them, and you take, a more basic identity. And then if it builds reputation you end up assessing that pseudonym based on, it’s like value input. If your reputation system is designed well, which is a whole different problem that's where I'm focused, is like, how do you design good reputation systems?
I tend to prefer Docs communities because I think it's just easier in light of where we are. But I think there's a world, like I, I totally buy the argument that there's a world in which you can coordinates, anonymously, strip out, some of our biases about, who's behind the [00:44:00] pseudonym.
And assign reputation a way that says, this node here Node one has done incredible things for our community. It's been, entirely stand up. It’s never had never committed an error. Totally reliable. And then node four has been just absolute garbage. So, if Node one wants to propose something, it, it gets escalated quickly and Node four has to like really to push against an assumption that, what they're saying is not very valuable in order to convince us to elevate their proposal.
So, I think that the if I were to design it down a vacuum and I knew that, money was not going to be laundered or anything like that. I think it really interesting to have an entirely anonymous Dao. Now given the world we live in I would personally err on the side of doxing, but I think you raise a very [00:45:00] interesting question.
Eric: We also talked a little bit about the work you've done on structuring the Dao versus governance. Do you want to develop that a little bit?
Dane: Yeah, so I think that an understudied area and I think it's understudied in large part because of regulatory questions, is how do structures around Dao’s affect governance?
And what I mean by that is, you can envision a Dao as a fully on chain organization, but in practice you see a lot of people putting certain type types of organizations around them. It could be a Wyoming LLCs, Daollc, it could be, a trust of some sort. Each of these components comes with a governance implication.
An example I'll give you is optimism. Optimism has components that are, token weighted voting. They have a component that [00:46:00] is N F T one person one vote, and then they have a foundation. And the foundation has, people that have a steward role for their effective go. And they are able to oversee certain aspects of governance and propose changes to the governance system in a way that I think would be harder to do if it was fully on chain.
So, in some ways it's a way of having a gentle nudge to the protocol if things, more or less go awry or, being able to inspire participation. I don't wanna speak for them because I think, they're probably going a radically different direction than I'm describing but having certain structures around the Dao does have implications for governance.
And another example of this, which is bad governance, is, the s e C brought a complaint against the [00:47:00] organizations around Dragon Chain. And one of the pieces of the complaint was that the founder was the head of all of the organizations around, Dragon Chain. And so, there's a corporate governance interface.
Having a common controller is probably not a good thing if we're thinking about how that influences any kind of chain activity. So, I, I think that what I would love to see is data on how the real-world structure chain governance interface works. What I fear is we won't see that because there's too much fear about, regulatory environment for much of that data to end up reaching the world.
But that could be really interesting also from a policy perspective. Like how do we want to recognize ds? Is it better having a steward organization or are we better off having, [00:48:00] an unincorporated Type of organization that has limited liability? Can't answer that question because I haven't seen enough permutations to tell you what works
Eric: best.
Yeah, I, we've covered the cooperative model a lot in this podcast. And certainly, once you start talking about wrapping a Dao, then you. The next logical question is, if you're talking about wrapping, does a cooperative work because a cooperative has certain advantages, may not like it if you're talking about more centralized control.
Where you do have those stewards, potentially the cooperative makes more sense. Not always because they do have that state law securities exemptions in a lot of states, which often translates into a federal law exemption, Let's just be honest Yeah.
If it has a state law securities registration exemption, it's probably not gonna end up running afoul of the s sec. It's enshrined and [00:49:00] it goes back to what, 1933 or even before, cooperatives, but, preexistent, but were incorporated into statute. Cooperatives are more of a shared ownership organization versus a shared governance, although you could do a number of things to still achieve some of those objectives as
Dane: well.
Yeah, I think so. So, something you just touched on there, I think there's a future where Dao’s have a real-world organization integration. So, you could imagine certain corporations like having a Dao for their customers, right? Like they can vote on, they can vote on the menu at McDonald's.
And that, they get rewarded in, X, Y, or Z discount. But McDonald's now has extremely specific feedback on, what's, what works. They could even make it regional, although let's just assume that [00:50:00] works, right? There are, they're operational hurdles, but. I think that the Dao’s are not necessarily only standalone.
I think that they are also compliments to, broader organizational structures. And in fact, they're most prominent. Rather they're they may be greatest in number attached to some type of corporation in the future. And I think that as we see corporate adoption, we might realize that we want to protect that type of organization more.
And so, I'm hoping to see the Disney’s of the world push to adopt this technology faster. Because I think that when they do, we'll have a different discuss. On the
Eric: regulatory side. Yeah. I just know I'll have to be getting off when it's called a Big Mac Dao. I'm just I'm done at that point.
I'm gonna demand [00:51:00] some changes on that thing. Exactly. So, you've also been looking at the potential legislative implications. These days there's a bit of a fire hose because you got Micah out there from Europe. You've got the Lummis Gillibrand bill, which isn't up, obviously not gonna be voted on
this session you've got the Stabenow bill, which apparently now has started to gain traction. In fact, most people are anticipating that will overtake the stable coin passage. Although, who knows, by the time Congress meets again next year, we could be changing the players. But you've taken a look, at the Stabenow bill, the DCCPA, what do you see in that, in its relationship to the operation of Dao’s prospectively?
Dane: Yeah, whereas I was pretty optimistic about Lummis Gillibrand brand. With respect to the people who have worked on the DCPPA, I would say that as somebody who works with builders in the space, [00:52:00] very often it does not seem like they consulted people who actually work in the industry.
I know that they have access with some of the trade groups. I've discovered trade groups that I don't think anyone who actually works in the industry know exist. And I think that it, it doesn't really solve anyone's problems. It provides some benefits of clarity for Bitcoin and Ether and hopefully, a broader swath of digital commodities.
But it doesn't answer what a security is. I think that there are two. Interpretations of a carve out for security. One is, you know that Congress considered the question and considered it adequate that the 1933 definition of security governs. The other is that Congress considered the question and one of the courts to determine where the line is.
[00:53:00] I obviously take the second perspective, but that is no different than where we are right now. I also think that there is a huge unintended consequence of making Ether a commodity but continuing to pursue claims against tokenized environments on Ethereum. The reason being that once ether's a commodity, there will be a huge surge of demand when Fidelity and others say, hey, buy Ethereum like it, and they're gonna brand it as Bitcoin Junior, which is such an error.
And people will buy it and some people will buy it on the promise of what Ethereum, represents. They'll read vitals, white paper and they'll say, this is great, but then Ethereum won't be able to deliver as efficiently on its mission if you continue to attack the Ds, right?
The things that really make Ethereum interesting. And so, who will hold the bag? [00:54:00] If. If I'm being honest, it would be the public. I think you're actually running the public into a trap. And I think that you could run the public into a valuable circumstance if you allow Ethereum to develop according to plan.
But this is almost like saying, hey, you can invest in a share of the internet, but we're not gonna allow websites to operate with any kind of, So you can
Eric: put your money in Google, but there's no websites. Yeah. So, search way,
Dane: but searching required you to spend $500,000 on legal bills to figure it out.
That's, so I would love to see, the senators who are involved continue to research a blockchain, invite people who are actually building things. There are things with clear utility. They typically don't get the headlines because I think a lot of journalist’s fear having a positive narrative on crypto right now when the market's down, That's always [00:55:00] the case.
But also doing it in a way that, that I think there's skepticism, right? I think there needs to be an assurance that if you go and speak to policy makers that you're not running into a trap. And so, some kind of almost safe harbor, and I realize you can't just create a safe harbor, but an understanding that if you go and talk to Congress, you're gonna be respected and you're not immediately gonna receive a subpoena from, the SEC.
I think that's important,
Eric: And if DCCPA is successful, then unless you're, your Bitcoin or Ethereum, you could get a subpoena from both the CFTC and the SEC, because it's not like one precludes the other. So, it's wow. How'd this make my life better? Now I got two regulators, I got to register as an exchange on two different places.
It's you may have to do that anyway, but it certainly, if it's just if it's two on one side and the broad-based definition of how we on the other side, then yeah. [00:56:00] Like they have a whole the dcpaa, envisions this sort of whole regulatory structure which underpins it with exchanges and, all kinds of scms and, very explicitly having to register now.
It just if you still have to do that under the securities regime and finra, great, phenomenal you've made it even more expensive to operate, so why even bother making Ether a commodity? You might as well just make it illegal as well.,
Dane: It's definitely a catch 22 at the, like just in the definition section of the bill.
I think that the important realization too is like the bill makes it nearly impossible for defi to exist in a compliant way with some of the ways the registration requirements are drawn. And I'm less of an expert in this area, but I've spoken to, many excellent thinkers in the defi kind of legal world.
And [00:57:00] really the only, only people I can see that stand to benefit from this are centralized actors who would like to take, a fee from volume trading. And I think this is actually a problem with some of the trade groups. There are centralized exchanges that are part of the process of what we're gonna advocate for.
And they see a huge profit potential. By the way, I counsel Unity between CFI and Defi. Like there, there is a way to have a common mission, but. If this bill were to pass in the way that it is, what you're doing is handing money to centralized actors. You're potentially like, making banks richer and you're really going against, one of the like most important missions of, blockchain.
I tend to I really advocate that blockchain is not purely a financial tool but it does have important [00:58:00] financial utilities. And so, I think if this bill were to pass, if it were to, effectively be rushed through the Ag committee and included the year end bill I think it would put the industry back quite a bit, not permanently.
I think that it would ultimately be repealed or amended dramatically, but at great cost. And I think that, the United States in particular could use the innovation This won't give it
Eric: to them. Yeah. Particularly with MiCA. MiCA, more so on the issuance, not so much on the secondary markets, which is probably the next thing we have to worry about.
But first I guess we have to deal with the primary issuances, which are all screwed up here. Micah's got the primary, still has secondary complex. We've got the primary issue and the secondaries, so yes. That's super important.
Dane: Like these things are inter jurisdictional, right? It's very rare that a token is purely in one jurisdiction.
And [00:59:00] so if there isn't collaboration across jurisdictions to come up with some basic uniformity then you're just gonna have, a turf war between jurisdictions. Europe. Europe might say, hey, come build here. The US might say, hey, come trade here. But they make it almost impossible to create the substance of what this technology promises.
Eric: So, when Dao’s find themselves under attack in the us do you counsel them to contemplate? No. Hold on. Maybe I gotta be careful with this. Do you raise the notion of over, offshore foundations that are numberless, that have less of that potential that maybe more consistent with that true Dao’ structure.
Do you think that the whole foundational structure, offshore is something that's going to grow? Do you think it's gonna be stalled? Do you not have a view on it?
Dane: So, I definitely, if I do were to come to me, I'd [01:00:00] say get a lawyer I don't act as attorney for, our cohort companies.
Eric: Yeah. This is
not legal advice. This is the first time I said it on a podcast. But I,
Dane: I think though that you have to really think about what that structure means. I think there's some people who rush into it and they dunno what they're doing and it may not accomplish their goals.
I think that what can be interesting is there are certain structures that are not necessarily you know, created in the United States that, that have they’re similar to trusts, but also similar to companies. And there are certain things that can be accomplished in the purpose of, decentralization.
And in giving the Dao some, ability to like to be a counterparty. Particularly I'm not sure I would personally sign a contract with [01:01:00] the Dao without there being some counterparty that could, guarantee the contract. So, I think there, there can be reasons to find what I call, offshore structures when the United States isn't suitable.
I think if what you think is you're somehow doing an end round around US regulations, you're gonna be sorely mistaken. Agree. The jurisdictional reach to the United States, and particularly if the d CPA passes is almost unbounded. So even when you think that you're not within the United States jurisdiction, you often are.
So, I think they have some use, but it should be purely a matter of whether or not it makes your community do the thing you want it to do. I think rather than a clever legal scheme,
Eric: I would agree with that. [01:02:00] Anything else? I have one final question, but before we get to that final question anything else that we didn't cover that maybe should have covered?
Dane: I think we've touched on a lot of really interesting things. I could probably talk about Dao’s all day. In fact, that's what I do. I would just advocate that anyone who's building a space, realize that now is a time to. Be heard, like particularly in the next couple of months with, the potential passage of a bill that really affects the industry.
It's not just lawyers who should be talking, it's builders who should be finding ways to reach policy makers to, to actually make the case for why these technologies useful. I think that really needs to be underlined.
Eric: So, I'm gonna
put you on the spot on that one though, because Sure, sure.
Because if you're a small builder, what is the most effective way to do that?
Dane: Yeah, so I think there are a [01:03:00] few. One is, there, there any individual voice is an inconvenient to like it's inconvenient for a builder to put their head up and say, hey, I'm gonna also be a policy advocate. It takes away from their building.
So, I think that the ways to do this are to interface with some of the interesting policy groups. There are, if you're going pure, like web three native as they call it, l do is an interesting place to speak. Speaking to the Lex Punk group is a very interesting place to go. There are also, I think there are plenty of people that would listen at blockchain association at Global dca, some of these trade groups.
Also, if you have an interesting illustration of how your technology works, I think it'd be really interesting for people to actually write in, op-eds to general Readerships or have an interview with newspaper. Don't get into, [01:04:00] all the legalistic aspects of what you're doing.
Just Hey, we're building this thing. This is why it's helpful. I think we need more of that and not just the decrypts and the block works of the world. Like talk to the Chicago Tribune, talk to the New York Times. Be careful. Don't want it run to a hit piece.
But we need people to actually talk about what they're doing in a way that shows the good. We don't just need the disasters to be headline.
Eric: Good point. Good point. So, my, my, my last final question was, I alluded to it earlier, so 2022 was some people called it, the year of the Dao. Is 2022, the year of the Dao?
Dane: I don't think so. I think that I'm not sure we'll have a year of the Dao in the way that people anticipated. I think that we will have Dao’s take on a meaningful role in [01:05:00] blockchain space over the course of the next decade in ways that we don't quite understand yet. Right now. I think 2022 is actually the year of building the appropriate tooling to get Dao’s to where they need to.
There's a lot that needs to right now we have what I call fairly primitive tooling to build Dao’s. And I think that we're going to see breakthroughs in how people actually construct them, how they protect treasuries, how they manage governance. And so, I think there is a subtext, rather there's a sub story.
A lot of things are being built that I think will be valuable, four years from now. But 2022 was not, definitely not like the year that the Dao all of a sudden replaced all companies. It was quite the opposite, I think. I think there was kind of a bubble in Dao formations that has that has
come to term,
Eric: right.
I think there's actually some value [01:06:00] to starting to talk more about what we're actually doing, yes. Like instead of falling into an NFT narrative, talking about what it is that we're doing is an identity token, Is it a social token? Is it an art token? Same thing with Dao’s. Is it. Like we said initially, if it's not autonomous, maybe we shouldn't be calling it a DAO.
Dane: Yeah.
I agree. I think with the proviso that like; it would be great if we came to agreement on something that was that was able to be accomplished. Meaning what? It's fairly lightweight, but here are the things that do, like das that are being formed should say to people who want to participate.
And if you say things within this format and you're honest you're compliant. That'd be great. Because it would be great to see NFT projects like really say what they're about rather than giving a visual roadmap that [01:07:00] like, is all shorthand for what they may or may not do.
I think that you. That day will soon come to a close. But it would be nice if we allowed people to describe in more detail what their vision is and how they tend to accomplish it. And allow them to do it in a way that like if they follow the, those rules and what I call a short form disclosure regime they're not going to get in trouble for what they've said.
Eric: Yeah. Can you imagine what a disaster would be if like, for some reason, I guess we would say in an alternate universe, because it would never happen, but like legislators actually got together and they said, you know what, if you have a download a security. And everybody was like, Yeah, but we'd be like no.
We're like, you have to be decentralized, you have to be fully autonomous organization. People are like, what? Yeah. From relation to complete despondency, over in an instant
Dane: I think that Hester Pierce, [01:08:00] Representative McHenry. And even the Lummis Gillibrand effort, having a concept of a safe harbor that does have meaningful benchmarks.
Eric: Yep.
Dane: Has self-certification. I think those are excellent approaches. And I think, you should have to put yourself out there and say, here’s what we intend to do. Things fail. Startups fail but here's what we intended to do and we either did or didn't accomplish it, and if you didn't accomplish it, then here's how you can, fall into the regulatory map.
And if you did accomplish it, go ahead. You're decentralized protocol. I think that would be that would be welcome.
Eric: Yeah. Also get props to the Rig X proposal by Lex Punk as well on that. Yes,
Dane: yes. Absolutely
Eric: Great stuff. Dane, thanks for coming on the podcast. It's great to have you talk about [01:09:00] DOAs.
Dane: Absolutely. Eric, thanks. Thanks for the time and thanks for the excellent questions.
Eric: And if anybody wants to find out more about you, where do they go?
Dane: They should go to alliance.xyz. If you're a builder, I highly encourage you to apply to Alliances Accelerator. And if you want to see some of the things that I'm writing and thinking about you can go to my Twitter, it's l underscore Dane.
And you can send me a DM if you want to, talk about anything specific.
Eric: Awesome. Thanks so much.
Dane: Excellent.