On Tech, Business, Society.

Category: Decentralization

Re-Thinking DAOs as an Evolution of Coops

We should stop trying to force DAOs to exist based on their current path of evolution if they want to be a positive part of the blockchain future.

There is no doubt that most DAOs from the cohort that mushroomed during the 2020-2022 period are floundering, or being very loosely successful. 

Yet, some pundits continue to profess a type of analysis that obscures instead of enlightens. Machiavelli for DAOs: Designing Effective Decentralized Governance struck me as a very unrealistic opinion about how to design decentralized governance by espousing Machiavellian principles. 

One of the biggest problems is when we see DAOs as a lever to eliminate the need for human management. This is a naive and misguided assumption. No organization can run on autopilot, and DAOs are no exception. Even when you inject the strong community component that is always part of DAOs, communities also need to be managed with human intellect. In fact, DAOs can be even more difficult to manage than traditional organizations, due to their decentralized nature and the diversity of their shot-gun stakeholders.

We need to stop trying to force decentralized organizations as a panacea for something that doesn’t need it. And we need to be realistic about what’s viable. 

There is validity in rethinking the way we design and implement DAOs towards more simplicity, not complexity. We need to move away from the idea of DAOs as completely autonomous organizations, and instead think of using DAO constructs as a complement that espouses the novelties of blockchain and cryptocurrency. Maybe DAOs are meant to be a complement to something else but not an entirely standalone thing. 

I don’t mean that we need to throw the whole concept away. There are some very good embedded ideas, at the high levels:

  1. Decentralization is a good anti-single point of failure.
  2. Automation with embedded smart contracts does bring operational efficiency. 
  3. Community/user voices with decision-making influence have their benefits. 
  4. Giving back parts of the economic gains to participants that contributed to wealth creation is the right thing to do.

The “autonomous” part in the DAO vocabulary is perhaps the most misleading, misguided, and certainly the weakest part of the equation. 

Management by committee, delegation, or populist votes is a terrible idea. Conflating blockchain consensus mechanisms with human decision-making is blasphemy against human intelligence and decades of sound management practices. 

Voting on decisions, when you have an economic or ideological stake, is not a bad idea, even if it’s only a directional vote that could influence a future decision, but thinking that this is sufficient for running organizations or projects is a naive assumption. 

On the regulatory side, being “autonomous” doesn’t absolve an organization (or its instigators) from the rule of law as set by governments or regulatory authorities. 

Maybe DAOs could be applied when there is predictable repeatability, no issues, no surprises, and when a given system is stable. These difficult simultaneous conditions narrow DAO’s applicability field tremendously. 

The cooperative (Coop) corporate business model is the closest to the DAO concept. I think the industry should work more diligently to extend and adapt the Coop model instead of trying to push DAOs as we know them today. 


Source: https://coopcreator.ca 

Platform cooperatism is a concept that was recently introduced. It is described as “businesses that sell goods or services primarily through a website, mobile app, or protocol.”

This article, ‘Staking’ Identities: Looking at the Practicalities of Transforming DAOs Into Co-ops looks at the similarities between DAOs and Platform Cooperatives.

We can draw a lot of inspiration from the cooperative Coop model. At their core, coops are businesses that are owned and democratically controlled by their members. That happens to be the primary goal of DAOs, which is why the match is worth exploring seriously.

By combining the best of DAOs and the best of coops, we can create a new type of organization that is democratic, equitable, and resilient.

Picking Apart the State of Blockchain, And Have We Earned It?

Cutting to the chase, here’s what I’m seeing in blockchain and crypto markets. I started writing these thoughts last week, before signs of the current market downturns became visible.

Meme Coins Will Not Yield Anything Except Speculative Fever

I understand the power of community sentiment and excitement as levers that can lift demand, but the intent of a cryptocurrency is not just about the cliché statement: “number goes up”. A bonafide cryptocurrency must serve a purpose and have multiple utilitarian use cases. Meme coins are an interesting phenomenon, but they offer little utility outside of speculative trading. Cryptocurrency markets are already irrational to start with. If you add uncertainty on top of uncertainty, you get irrationality at a multiplied level. The meme coins mania will not end well. Cryptocurrency is not a game or a joke.

SEC and Regulators Still Too Slow

There are the two types of regulators: the slow ones, and the negative ones. As the leading body amongst Western regulators, the SEC continues to be slow and overwhelmed in terms of bringing significant change. A ray of hope was recently uttered by SEC Chairman Gensler when he hinted that a new regulatory entity might be needed in order to properly deal with crypto-regulation. In my opinion, a focused (new) U.S. regulatory body will be necessary if we want to see real innovation in the form of benign regulation. Otherwise, we will get a continuation of hit-and-miss positions, incomplete guidance, overlapping regulatory frameworks, more wild-west behavior and overall risk for all involved. No new regulation is as bad as some incomplete regulation.

China Needs To Blockxit

Let’s be straight: China does what is good for China. Corollary: China doesn’t care about the impact of its actions on the rest of the world. True for technology, economy, trade, healthcare, politics and cryptocurrency. When the Chinese government says they are banning cryptocurrency, miners, crypto-banks, ICOs, or whatever the next thing is, these directives are oriented towards its own people. However, these communications missives muddy the water because of global interdependence implications. For example, I’m looking forward to the day when Chinese miners aren’t the majority anymore. Like the boy who cried wolf too many times, China’s roars on cryptocurrency are often like thunderstorms that don’t bring rain, or a bark without the bite. Each time China tries to whack the next mole, the crypto industry goes “ouch”, feels some pain, but things quickly rebound thereafter, by discounting these actions, and the whole market gets stronger overall.

Exchanges Crave Volumes, Not Validation of Projects

Most exchanges are challenged about managing their vertiginous growth. Volumes are their drug, and they need increasing fee revenues to continue funding their operations. In addition, they are fighting like hell to differentiate themselves from what appears to be a commoditized business. However, exchanges are not the ultimate quality validators for projects, despite what they might lead you to believe. At the end of the day, they just want volumes and will list token projects that are making headlines. Just look no further to how quickly many of the top exchanges tripped over each other to list the top meme coins, caving-in to “popular” demand.

No Price Discrimination

The reality is: some projects are under-valued, while many others are over-valued. But here’s the key question: how do you rationally evaluate tokens? Transaction levels, number of users and fee volumes (if applicable) are still the true North of activity; assuming there is a real raison d’être for a token. Many token-based projects have “apparent” success if you judge by their market caps, a number that has become a vanity metric more than anything more indicative of real value. Many crypto market caps need to be discounted, as there is little correlation to their fundamental metrics.

Governance Tokens Are Overrated

At the heart of most governance tokens, you will see a common legal rider that “the token has no economic value…holders have no claim on financial rights…governance token is used to oversee the xyz ecosystem”. That said, the dichotomy is that, no sooner are these tokens declared to be governance tokens, and supposedly distributed to “voters”, that you see that same token being listed on exchanges (central or decentralized), and very quickly these “no economic value tokens” start to earn exponential economic benefits to their holders. Incidentally, many of these “governance-first” projects end-up with very low voting turnouts (1-3% is not uncommon), and most of them don’t even have a utility role that is critical to operations.

Bitcoin and Ethereum Still The Only True Leaders

I’m not only referring to market cap leadership, although these 2 coins command close to 64% of the overall crypto market cap (as of June 22 2021). Rather, the fact that there are only 2 true leaders in a new emerging era is problematic when you contrast to the 5 Web2 leaders that comprise the FAANG analogy. Today, Facebook, Apple, Amazon, Netflix and Google have a combined market value of $6.7 Trillion, and if you add Microsoft, those 6 tech leaders add-up to $8.7 Trillion. Bitcoin is sitting at about $600B market cap and Ethereum close to $220B. What will be the FAANG of crypto? We are probably far from seeing that group emerge, although for fun, I have made-up the CUBBE gang: Coinbase, Uniswap, Binance, Bitcoin, Ethereum, as potential blockchain lighthouse leaders.

DeFi Is Underhyped, And Mostly Mysterious

Despite its kwarkiness and risk, DeFi is the tip of the iceberg when you think of the future of global finance. But DeFi’s impact won’t be so significant unless it reaches awareness and adoption levels that are orders of magnitudes over the current ones. For that to happen, the barriers to user adoption must be lowered even further. Democratizing liquidity provisioning might be a foundational core upon which other layers build on top of. But each successive layer must be solid first, so that the whole doesn’t come crashing when things start to shake or when the boundaries get tested.

Talking Heads Who Are Not Experts

The market is fickle with commentaries from talking heads who don’t see anything but price action and momentum plays. Every other TV financial commentator is now asked to talk about Bitcoin or cryptocurrency when their knowledge is actually superficial or opportunistic. Most of them are clueless and just spitballing stuff. The loudest or most articulate mouth isn’t the smartest nor the most insightful. Beware of so-called experts who aren’t really experts. Ask them to enumerate several cryptocurrency use cases, or to intelligently describe DeFi, and their knowledge will be as thin as a razor. Someone who invested in an NFT company or just bought an expensive NFT last month is not necessarily an expert on NFTs or their future.

Ethereum Killers Who Are Not

“Ethereum killers” will not kill Ethereum, but will make the market larger. So-called Ethereum killers are still gunning for it, touting this or that feature as their ace card. However, those claims aren’t going far, because each blockchain should stand on its own, by self-differentiating itself based on its peculiar features or achievements. The reality is that – as other emerging blockchains become successful, they make the market larger as a whole. Ethereum and Bitcoin are in a league of their own. Most other blockchains attempt to mimic Bitcoin/Ethereum key aspects, with some degree of variation. Claiming feature superiority is one thing, but acquiring a network effect level of users to validate market success is an entirely different ball of wax.

Working Together Doesn’t Exist

The blockchain is natively global. It knows no borders, and doesn’t like barriers. Just as global issues require global cooperation to solve our world problems, I wished there was more native cooperation between some blockchain standards to increase interoperability, and make the user experience more seamless. Take stablecoins for example. When sending them around, you often need to specify which blockchain network you want them settled on. Sometimes, it’s a choice of 6 different networks. The user shouldn’t need to worry about that. On the other hand, wrapping coins on Ethereum has proved to be another way to ingest standards instead of fighting them.

Wallets Are Still Archaic

On one extreme, there are innovative wallets that are optimized for DeFi (e.g Zapper or Zerion), and on the other side of the spectrum, there is a variety of straightforward wallets that are simply optimized for token swaps. Of course, there is MetaMask as the uber wallet for non-custodial transactions. But there isn’t an all-around wallet that combines ease of use, security, variety (e.g. voting/rights access), DeFi, NFTs and generalized Dapps entry. General-purpose wallets will be to blockchain what browsers were to the Web. We need to see an evolution of wallets that captures the imagination of millions of users. Just as browsers stitched together the hyper-connectivity of content, wallets are stitching together the hyper-connectivity of money.

ICOs By Another Name

ICOs are still happening, but they aren’t called ICOs in order to stay under US regulatory radars. They typically start via a private offering of tokens at a favorable price to accredited investors. Then, a small percentage of tokens is offered (typically to non-US investors) at attractive prices with a cap on the allowed amount (in the $500-$1,000 range) in order to fake the decentralization of ownership, which is a factor along the decentralization spectrum. All these have some lock-up periods that are not excessive. Then, the network is launched, and the token is gradually released into circulation, and finds itself trading on DEXes first, then it gets picked-up by exchanges, depending on the number of headlines generated.

I do not see how the industry can positively move forward while logging garbage tokens with it. Some large market cap tokens in the top 20 will be a train wreck when it is revealed that the Emperor had no clothes. Some other under-valued tokens that represent real token usage, transactions, a circular economy, and active users will emerge and earn their rightful place along the valuation spectrum.

Irrational exuberance and bubbles are good propellers of activity. But bubbles don’t discriminate between good and bad activity.

No matter where we are in the overall market cap spectrum, we need to ask again this fundamental question that Vitalik Buterin once asked in December 2017 when the crypto market hit its first half Trillion mark: “Have we earned it”? Now, this question needs to be applied to each and every token and organization behind it, not just to the market as a whole.

Gaining Perspective While Losing Capital

There is nothing better than a rude awakening to regain one’s sense of reality. I’m talking about the latest market meltdown that might have caught many by surprise. 

What’s important is to gain a sense of perspective while trying to analyze what just happened. Taking it from the top, by now, we know what just happened: crypto’s market cap went from a peak of $2.5 Trillion on May 12 to about $1.3 Trillion on May 23, 11 days later. On the way up, the euphoria overtook the sense of reality. As we are down now, we must acquire some wisdom as we shed the reality distortion that accompanied the artificial part of rise that didn’t seem to be sustainable.

What can we learn, and what are my views about what just happened? The full impact and implications will only unravel over the next weeks and months ahead, but here are some thoughts.

The fundamentals behind the blockchain are intact. Due to the acceleration in rising prices, the narrative had gotten a little distorted along the way because there was some hype, and there were claims that were not going to be realized. 

To start with, here’s how I look at the overall blockchain market in terms of segmentation. It might be overly simplistic, but simplicity brings clarity. 

  • Infrastructure – All the so-called L1 layers, and some L2 peripheral technology. 

  • DeFi  – That segment is the locomotive pulling the financial revolution forward.

  • NFT’s – The 2nd largest emerging market, after DeFi.

  • Services – The oracles of the world, including any technologies that rely on blockchain infrastructure and serve the variety of apps or other market application segments. In other words, this is all blockchain middleware.

  • Apps – Where cryptocurrency is used, from financial applications, exchanges and in-app use cases.

We need to go back to a place where adoption metrics matter, if one cares to look at these metrics, and not just at the technical momentum of token prices.

  • If you’re an L1/infrastructure, the number of on-chain transactions, fees, and actual wallets / accounts matter. Speed doesn’t matter more than adoption. The faster car manufacturers are not the ones with the largest market share adoption. 

  • If you’re in DeFi, TVL, volume of transactions, fees matter.

  • If you’re in NFT, since NFTs are goods, it’s an ecommerce story. Revenues matter.

  • If you’re a Services protocol or enabling technology, number of transactions / calls matter.

  • If you’re an App, transaction volumes, number of users and wallets matter.

One of the factors that made the current situation unsustainable was the fact that valuations were a bit unrealistic because the good and the less good were rising in unisson, without discrimination. High valuations were giving a false sense of security to some projects who were thinking, “look, our market cap is high, so we must be doing well”. Meanwhile, upon on-chain transaction volume inspections, it turns out the Emperor had no clothes!

How will we know if the correction is over, or if we have acquired some sense of wisdom?

If everything continues to move up or down in unison, that’s a bad sign. If significant developments from market leaders don’t move prices forward, that’s a bad sign. The herd mentality is an artifact of dumb investing or FOMO jitters. Sell-offs are never rational, but in the aftermath, there is always an opportunity to find value where value is to be found, and to avoid re-investing where the value doesn’t exist. For example, DeFi protocols might be a good place, because DeFi isn’t going away anytime soon. Rather, DeFi is just getting started. Total Value Locked  will grow again, even if some of the yield farming might become harder to find and mine. Rising volumes will make-up for lower transactions fees as DeFi markets become more efficient. 

No more meme or cute animal coins. Please. Social, cultural artifacts are dangerous ingredients to responsible value-based investing.

I’d like to see some of the zombie chains (ones with low to no on-chain transactions) not recover as well as the rest of the market. Further separation between winners and losers needs to happen. In the latest run-up, Ethereum has distanced itself from other “competing” Layer 1 protocols. As Ethereum cemented this lead, it increased its overall dominance, and got closer to Bitcoin on a relative basis, even if the proverbial flippening may have been postponed for a while. 

The reality is that many projects’ treasuries are flush, and can show signs of life even without much to show for. Some protocol tokens have decades of runaway ahead of them, so they could continue faking a lot of activity, fooling supporters, and clouding the rest of the market.

Bitcoin mining is going to get more environmentally responsible, thanks to whistle-blower Elon Musk. The environmental responsibility narrative needs to gain even more awareness. Even if some Chinese miners are making progress in shedding the industry’s bad reputation around carbon emissions, the shift towards less reliance on Chinese mining is already underway, and is a good de-risking move for that whole sector. 

The naysayers are going to repeat their refrains – that you can lose all your money in crypto, and that’s a risky market. Traditional finance is either scared, or in the avoidance phase. However, the demand for cryptocurrency and its many applications is not abating, despite the crypto markets tendency for sadomasochistic behavior. What doesn’t kill you makes you stronger comes to mind.

A market correction is always a good thing when it serves to reset expectations. Hopefully some weaker projects won’t recover as quickly as others, if money gets smarter along the way. If everything starts rising again in unison, it means dumb money is still in the system, so we must be prepared for more erratic behavior.

We will know over the next few weeks.

How Will DeFi Enter the Mainstream?

I’ve been thinking a lot about DeFi, the latest significant emerging blockchain technology segment.

Despite the excitement and positivity surrounding it, DeFi is not on a good trajectory. DeFi users (just like its creators) are geeky. They are mostly crypto nerds or early adopters.

The innovation around DeFi merits that it grows beyond its early adopters beachhead, but it is facing headwinds because its growth will be limited if it doesn’t break out and start attracting more mainstream users.

For DeFi to thrive, it must enter the mainstream and attract those users who do not tolerate nor understand DeFi’s geekiness.

I’ve written a post on CoinDesk explaining why and how DeFi could grow further: For DeFi to Grow, CeFi Must Embrace it.

I do believe that the central exchanges have an opportunity to incorporate DeFi products into their offerings, but both sides have some work to accomplish, in terms of technical integration and market education.

Here’s the link to the article: For DeFi to Grow, CeFi Must Embrace it.

Powered by WordPress & Theme by Anders Norén