Book Release: DAOs & Purpose-Driven Tokens

Published by: Shermin Voshmgir on Feb 9 2024

This third edition of Token Economy is published as a series of three books: “Money, NFTs & DeFi,” “DAOs & Purpose-Driven Tokens,” and “Web3 Infrastructure.” The purpose of this book is to explain the institutional impact of blockchain networks and tokenization – both from a theoretical and a practical perspective – with the goal of providing a common understanding of the concept and practice of Web3-based institutions. The history of money and finance, and the impact of Web3 and tokenization on money, real-world assets and financial markets are discussed in the book “Money, NFTs & DeFi.” The technical and political aspects of blockchain networks and core Web3 infrastructure will be discussed in the book “Web3 Infrastructure.”

At the time of writing this book, the term “Decentralized Autonomous Organizations” (DAO) is often used to refer to Web3-based institutions. However, the term DAO is still quite under-defined and there is no common understanding of what constitutes a DAO, or how a DAO should be designed. The lowest common denominator of the term seems to be that it is a new type of Internet-based institution that can be more or less decentralized and in which network participants can have various degrees of autonomy – depending on the purpose of the organization and the design of its “purpose-driven” network tokens.

The unclear nature of the term might be one of the reasons why many authors over the past decade have come up with alternative words to describe the same phenomenon, such as Decentralized Autonomous Corporation (DAC), Decentralized Organization (DO), Decentralized Cooperative, Coordi-Nation, or Network State. Another reason for the ambiguity of the term might be that Web3 is an institutional infrastructure upon which we can build any type of organization, which can have elements of traditional institutions – such as nation states, companies, cooperatives, or public infrastructure networks, etc. However, these decentralized organizations are rarely pure representatives of these traditional institutions. Instead, we find new and hybrid forms, sometimes with completely novel types of organizational structures and institutional dynamics which introduce completely new possibilities and pitfalls.

The goal of this book is to critically reflect the concept of DAOs, starting with its first real-world example – the Bitcoin network. I will explain why the Bitcoin network can be considered the first practical instance of a DAO, and how the groundbreaking cryptoeconomic mechanism behind Proof-of-Work paved the way for a novel type of organization that is steered by purpose-driven tokens and relies on “trust by math” rather than “trust by legal contract.” The first two chapters of this book will explain the concept of Web3-based decentralized organizations – its origins and impact from various perspectives: history, cybernetics, organizational science, political science, economics and complex systems.

Since there is no one-size-fits-all solution for the design of DAOs, theory alone will not do justice to the complex nature of this topic. Any meaningful organizational design, including that of the purpose-driven tokens which steer Web3-based institutions, will always depend on the purpose and political principles of said organization/network/Internet community/cooperative.

To provide a more tangible approach to the best practices and pitfalls of DAOs, I selected a range of DAO use cases, and based the analysis of each use case on a DAO design thinking framework, which I developed specifically for this book. I hope that this combination will give readers a basis from which they can derive common interaction patterns, and understand the different requirements on token design, depending on the purpose and the principles upon which the DAO is being designed.

One challenge I faced when selecting my use cases was that best practices for designing DAOs and the purpose-driven tokens that steer them are still underdeveloped. Many early use cases lack a sustainable token design to achieve their self-declared purpose. I therefore decided to display a wide range of purposes that a DAO can achieve or aim to achieve, even though some of the use cases selected have considerable design flaws. My assumption is that the reader will also benefit from learning the “don’ts” of token design, not just the “dos.”

While all use cases featured in the book have compelling value propositions, and in some cases even considerable traction, they sometimes display unintended design flaws that contradict the purpose and political principles upon which they were designed. The use cases selected are:

Except for Rebalance Earth, all use cases have a long track record of protocol evolution. They provide historical data to correlate token design choices to their effects, i.e. power structures that emerged over time, and the long-term success of the protocol/network/organization in question.

I am convinced that the design of purpose-driven tokens which steer DAOs requires as much rigorous research as the development of Bitcoin’s Proof-of-Work consensus mechanism – which was a result of decades of theoretical and applied research. Yet, many newer DAOs were designed with a “trial and error” mentality, conceptualized within a relatively short period of time by only a handful of people, which is why many of them had to conduct fundamental protocol changes, sometimes even repeatedly.

A P2P payment network such as Bitcoin requires market mechanisms and brings institutional complexities that differ from, for example, a data exchange DAO such as Ocean Protocol, a telecommunication DAO such as Helium, or a stable token DAO such as MakerDAO. Depending on the purpose of a DAO, there will be different stakeholder types with different preferences, areas of know-how and other constraints, including all the downstream differences that become relevant when creating the market design for their protocols. Creating sustainable token governance rules for a DAO is an optimization problem that aims to maximize the personal goals of all network participants – such as their revenue or reputation – under a set of internal and external constraints. Use cases that require reliable data from the outside world, such as hardware oracles and software oracles, create additional complexities for the token mechanism design.

I worked on this book for almost 3 years and the greatest challenges that I had were research- and scope-related. Except for Bitcoin, the governance rules of all other use cases changed often, and when they did, the changes were significant. It was not easy to keep up with the changes. To make things worse, the exact political and economic governance rules and token distribution policies were often under-documented – which is quite remarkable for Web3-based organizations that claim to be publicly accountable by default.

Furthermore, each ecosystem seems to use its own special-purpose vocabulary to describe the same thing with other playful words, which makes research and documentation even harder. In order to increase the readability of this book, I tried to harmonize the special set of vocabularies that each DAO uses, but at the same time I had to maintain the terminologies used by the founders, which was quite a conundrum.

The second challenge was trying to provide a wide overview, while not getting lost in too many details. Each one of the use cases presented would merit a book of its own, and could be analyzed in even greater detail than done here. As the saying goes, the devil very often lies in the details. Unfortunately, too many details can be overwhelming for first-time readers of these use cases.

At this point, I would like to mention that the analysis of the use cases in the second part of the book is mostly qualitative. Additional quantitative analysis could be carried out as well, but that is not the purpose of this book.

Quantitative analysis only makes sense once one understands what needs to be analyzed, and in which context the data should be interpreted. A metric such as a “market cap” or “gross network value” of a token is not significant on its own, if one does not first consider the purpose of the token design, the industry in which the DAO operates, the stakeholder structure, and many other qualitative aspects relevant to different types of DAOs.

Last but not least, I would like to mention which parts of this book are new and which ones have been rehashed from previous editions. The theoretical chapters of this book build on the body of work that has been published in the first and second edition of Token Economy and some other publications on the topic that I wrote together with Michael Zargham from Blockscience.

The chapter describing the DAO design thinking framework is completely new, as are the six use cases analyzed in the last part of the book – with the exception of the chapters on Bitcoin and Steemit. However, while both Bitcoin and Steemit were covered in the previous editions, my analysis here is more systematic.