blockchain and cryptocurrencies

DAOs are adaptive governance engines

With Darcy WE Allen, Aaron M Lane, and Jason Potts. Available at SSRN.

Abstract: We develop a new theory of Decentralised Autonomous Organisations (DAOs) that explains why they exist in terms of what they do. In New Institutional Economics, firms exist because they minimise the transaction costs of using a market. DAOs, which are a species of firm but made of smart contracts, would prima facie seem to extend this logic to further economise on lower transaction costs. Our argument here is that this is almost correct, but misses a critical factor that becomes readily apparent when you actually observe how DAOs behave in the wild, which we do by studying three DAOs-Shapeshift, Uniswap, and Optimism. Our theory is that the value of a DAO largely accrues to the dynamic adaptation in governance that the institutional form affords. DAOs enable low cost and fast change in governance structures in order to adapt to dynamic regulatory, competitive, and financial environments. A DAO is therefore not just a type of automation to distribute and minimise agency costs through token-governed smart contracts, as simple transaction cost theory explains. Rather, a DAO is a mechanism for cheap and fast variation in governance to enable an organisation to adapt to a complex dynamic economic environment. When the benefits of this mechanism exceed the costs we predict the existence of a DAO.

Open problems in DAOs

Available at arXiv. With Joshua Tan, Tara Merk, Sarah Hubbard, Eliza R. Oak, Helena Rong, Joni Pirovich, Ellie Rennie, Rolf Hoefer, Michael Zargham, Jason Potts, Reuben Youngblom, Primavera De Filippi, Seth Frey, Jeff Strnad, Morshed Mannan, Kelsie Nabben, Silke Noa, Elrifai, Jake Hartnell, Benjamin Mako Hill, Tobin South, Ryan L. Thomas, Jonathan Dotan, Ariana Spring, Alexia Maddox, Woojin Lim, Kevin Owocki, Ari Juels, and Dan Boneh.

Abstract: Decentralized autonomous organizations (DAOs) are a new, rapidly growing class of organizations governed by smart contracts. Here we describe how researchers can contribute to the emerging science of DAOs and other digitally-constituted organizations. From granular privacy primitives to mechanism designs to model laws, we identify high-impact problems in the DAO ecosystem where existing gaps might be tackled through a new data set or by applying tools and ideas from existing research fields such as political science, computer science, economics, law, and organizational science. Our recommendations encompass exciting research questions as well as promising business opportunities. We call on the wider research community to join the global effort to invent the next generation of organizations.

Towards legal recognition of Decentralised Autonomous Organisations

With Darcy WE Allen and Aaron M Lane. Published in Australian Business Law Review, June 2024. Working paper available at SSRN.

Abstract: Decentralised Autonomous Organizations (DAOs) are a typical organisation form in the Web3 economy. DAOs are internet-native organisations that are coordinated and governed by pseudonymous community members through a nexus of blockchain-based digital assets and smart contracts. There is over US$26 billion locked in over 2,300 active DAOs globally. This article examines the legal recognition of DAOs in an Australian context. A recent Australian Senate Inquiry recommended DAOs be recognised as a distinct business structure. This article makes three contributions towards this goal: (1) critically evaluate options for DAO recognition under Australian law; (2) a comparative analysis of United States DAO laws; and (3) an analytical outline of the key design features of an Australian DAO law.

Common knowledge theory of stablecoins

With Chloe White and Jason Potts. Available at SSRN.

Abstract: We propose a new theory of stablecoins based on common knowledge. We contrast this with the ‘better money’ theory of stablecoins, which emphasises marginal improvements over the standard origin of money theory as: medium of exchange, unit of account, store of value.

Voting with time commitment for decentralized governance: Bond voting as a Sybil-resistant mechanism

With Vijay Mohan and Peyman Khezr. Published in Management Science, online March 2024. Early version available at SSRN

Abstract: In this paper, we examine the usefulness of time commitment as a voting resource for decentralized governance when the identity of voters cannot be verified. In order to do so, we take a closer look at two issues that confront token-based voting systems used by blockchain communities and organizations: voter fraud through the creation of multiple identities (Sybil attack) and concentration of voting power in the hands of the wealthy (plutocracy). Our contribution is threefold: first, we lay analytical foundations for the formal modeling of the necessary and sufficient conditions for a voting system to be resistant to a Sybil attack; second, we show that tokens as the only instrument for weighting votes cannot simultaneously achieve resistance to both Sybil attacks and a plutocracy in the voting process; and third, we design a voting mechanism, bond voting, that is Sybil resistant and offers a second instrument (time commitment) that is effective for countering plutocracy when large token holders also have a relatively high opportunity cost of locking tokens for a vote. Overall, our paper emphasizes the importance of time-based suffrage in decentralized governance.

Interoperability

Published in Internet Policy Review, Volume 13, Issue 2 (Glossary of decentralised technosocial systems)

Abstract: Interoperability describes the ability of systems to share services and resources with other systems. It is used in many fields — in the law, in communications and payments systems, in healthcare systems and in military alliances, to name a few — and describes a large number of characteristics from technical standards, to information architecture, to organisational governance. This glossary entry presents a topology of interoperability layers and presents some of the key economic and socio-technical concerns faced by interoperable systems.

The Governance of Cosmos Interchain Security

With Darcy WE Allen and Sinclair Davidson. Available at SSRN.

Abstract: Interchain security (ICS) allows the Cosmos Hub to provide security to other blockchains (‘consumer chains’) and represents a significant revenue model for the Cosmos Hub. This paper investigates the economic and governance aspects of these ICS agreements with a focus on ensuring that the agreements are value adding and robust. The paper identifies potential risks such as vertical integration, challenges in adapting to incomplete contracts, and opportunism in asset-specific investments. It proposes recommendations to enhance the sustainability of ICS relationships, including the establishment of individual governance bodies for each ICS agreement, strategies to manage foreign exchange risks, and a decision tree for the Cosmos Hub to assess new consumer chains. A draft template for consumer chain onboarding is also presented, detailing essential elements like governance, payment terms, and exit clauses. This paper aims to offer actionable insights for improving the governance structures in ICS agreements, thereby fostering robust and enduring interchain security dynamics.

Allocating Capital in Decentralised Networks: Mechanisms for the Cosmos Hub

With Darcy WE Allen and Sinclair Davidson. Available at SSRN.

Abstract: This paper helps allocate shared capital effectively in the Cosmos ecosystem by examining a range of different allocation mechanisms. We identify the core challenges of allocating shared capital – with a focus on knowledge, opportunism and coordination problems. We outline four mechanisms that capital allocation DAOs can use to allocate capital in different contexts: grants, prizes, tenders and in-house production. Each have implications for the transparency and accountability of capital allocation. Our findings help capital allocation DAOs make decisions about how to allocate shared capital across the Cosmos ecosystem.

Institutions to constrain chaotic robots: why generative AI needs blockchain

With Sinclair Davidson and Jason Potts. Available at SSRN

Abstract: Generative AI is a very powerful new computing technology, but the problem of how to make it economically useful (Alice: “hello LLM, please send an email to Bob”) is limited by its inherent unpredictability. It might send the email, but it might do something else too. As a consequence, the large language models that underpin generative AI are not safe to use for most economically useful and valuable interactions with the world. This is the ‘economic alignment’ problem between the AI as an ‘agent’ and the human ‘principal’ who wants the LLM to interact in the world on their behalf. The answer we propose is smart contracts that can take LLM outputs and filter them as deterministic constraints. With smart contracts, LLMs can interact safely in the real world, and can unlock the vast economic opportunity of economically aligned and artificially intelligent agents.

The exchange theory of web3 governance

With Jason Potts, Darcy W E Allen, Aaron M. Lane and Trent MacDonald. Published in Kyklos, June 2023. Working paper available on SSRN

Abstract: Blockchains have enabled innovation in distributed economic institutions, such as money (e.g., cryptocurrencies) and markets (e.g., decentralised exchanges), but also innovations in distributed governance, such as decentralised autonomous organisations. These innovations have generated academic interest in studying web3 governance, but as yet there is no general theory of web3 governance. In this paper, we draw on the contrast between a ‘romantic view’ of governance (characterised by consensus through community voting) and the ‘exchange view’ of governance from public choice theory (characterised by an entrepreneurial process of bargaining and exchange of voters under uncertainty). Our analysis is the first to argue that the latter ‘exchange view’ of governance is best to understand the dynamics of governance innovation in web3, providing the foundations for a new general theory of governance in this frontier field. We apply the ‘exchange view’ of governance to three case studies (Curve, Lido and Metagov), exploring how these projects enable pseudonymous, composable and permissionless governance processes to reveal value. Our approach helps illuminate how this emergent polycentric governance process can generate robustness in decentralised systems.