By Kyle, Investment Manager@Bing Ventures
According to the Book of Genesis, Noah’s descendants built a magnificent city near Babylon. They also built a tower of Babel to make a name for themselves. God was offended by the arrogance of man and decided to make a confusion of tongues so that they could not speak to one another.
There is no mention in Genesis of whether God destroyed the tower, but in many deductive versions God did so. So humans began to wander around the ruins, unable to communicate and understand each other.
Source: Daniel Larimer
The story of the Tower of Babel is the best metaphor for the fragmentation of the world since the pandemic. Serious problems have cropped up between countries. We lose trust, fail to recognise the same truths, and cut ourselves off from each other and the past.
For a long time, most people have been coy about cryptocurrency’s encroachment on real power systems. It was not until the Russia-Ukraine War that the DAO was directly elevated to the status of national strategic organisation, which also meant that the social and political experiments based on DAO were no longer castles in the air in the ideological sense, but actually entered into the practice of decentralized governance.
In this paper, we will explore the possibility of productivity liberation and production relations optimization from the perspective of social consensus and proof of physical work.
Look for colonial incentives
Every bull market has a new growth narrative. The next cycle is bound to see many countries trying to establish new forms of violent institutions and new international economic organizations. DAOs in the decentralized sovereign category are more like national experiments. The tokenomics of cryptocurrency defines the distribution laws of the country on a macro level, while also defining the rights and obligations of its citizens on a micro level. It no longer needs to be demonstrated that bad monetary policy can wreck a country’s economy.
From the perspective of international law, people, territory, government and sovereignty constitute the key elements of a sovereign state. Judging from the development of DAO today, DAO has already taken the embryonic form of a sovereign state. Mainly reflected in the following two points:
- Protocols and tokens: This is the basis of sovereignty, coordinating the exchange of benefits according to rules written into the code of the smart contract. Ethereum is the most typical value protocol. Tokens are universally recognised and enforceable units of value, including governance tokens representing voting rights, DeFi tokens representing fiscal rights, NFTs representing sanctity of private property rights, and security tokens representing mapping the real physical world. All of these tokens operate as code, meaning that the distribution of power should follow programmable logic.
**- DAOs : **These are groups organised around government affairs, that is, the government in general. Allocation relationships are coordinated through sharing rules enforced on the blockchain. If DAOs and protocol tokens can establish good engagement and interconnected value networks in the ecosystem, new forms of digital organisations and states may emerge.
Source: Andy Martin, IBM
We need to understand how value is created in newly sovereign states, because the sustainability of value creation and the moat of governance determine the number of citizens. Similarly, creators of sovereign DAOs must understand the investor perspective to focus most of the DAO’s resources on core assets that improve sovereign value and encourage members to contribute ideas from the bottom up.
It is challenging for protocols and DAOs to keep similar companies efficient and profitable and to include token holders in sovereign governance decisions. There is a misconception that token holders should not enjoy too much of the value of the agreed income. This is classic web2 exploitative thinking. Citizens in the Web3 era enjoy absolute data ownership, which not only means that a richer application ecosystem can flourish through growing user interactions, but also that sources of power and value accumulation can be transferred completely freely.
Mature DeFi protocols currently look most likely to be transformed into successful sovereign DAOs. These protocols have steadily growing cash flows and ample treasuries. They offer a variety of financial products, from lending to structured products, in addition to the fees charged by the core DEX (decentralised exchange).
DeFi is therefore the most prosperous colony in the digital world. The DAO, as the coordinator of the exchange of colonial interests, creates more value through the open construction of applications within the ecosystem, captures more value through tokens and establishes token-driven network effects.
Avoid the Illusion of Power
Blockchain protocols are expected to replace the constitutions and governing laws of nation-states, and since DAO participants are citizens of the network, they must be subject to cyber laws and policies. As a government, DAO also needs to establish governance rules, legal system, organizational structure of power balance, and high-quality public products and services. Cryptocurrencies have raced through millennia of human simulations of social governance in a few years, and experiments that bring different power systems around the world to blockchain at Internet speed are bound to experience similar growing pains.
The biggest mistake of all would be the failure of the project founders to abide by the basic principles of economics and to believe in the illusion of power derived from the short-term token boom. The determinants of sustainable value of DAO are:
1. Sustainability of the underlying ecosystem.
2. The long-term intrinsic utility of tokens in the ecosystem.
The traditional nation-state aims to increase productivity and build competitive advantage to achieve the long-term utility of population, trade and monetary policies. Developed countries are rich because government is more of an inclusive economic institution. Countries with so-called “inclusive politics” expand individual political power and property rights as widely as possible, and this is their growth engine. By contrast, if power is held by a small elite, wealth either fails to grow for long or gradually falls into debt crisis after a brief economic expansion.
We should take these lessons seriously when designing sovereign DAOs. From a development economics perspective, the network of decentralized political and economic power fits well with the design of blockchain. The value of a blockchain network is largely determined by the “resource endowment” and the national demand for goods and services, which we call block space and Gas. At this point, the similarities in power structure between DAO and the state are obvious.
Start from the proof of physical work
One of the most powerful features of DAOs is their ability to create colonial-like social incentive structures that allow anyone in the world to contribute to a set of governance goals without permission, and that can be frictionless and fine-tuned to facilitate large-scale inter-state coordination. These innovations link the digital and physical worlds through the token economy, known as “proof of physical work.” Projects that conform to this theory motivate people to perform verifiable physical work to build the infrastructure of the physical world. One of the most notable projects is Helium and STEPN.
Taking the Russia-Ukraine War as an example, the biggest feature of this war lies in the asymmetric game between the two sides’ intelligence systems. The Ukrainian government directly introduced the proof of physical work mode into intelligence warfare, and realised the real decentralized dimensionality reduction. Mykhailo** **Fedorov, who heads the digital transformation ministry of Ukraine, has proposed a project called “Smartphone Nation.” Using social media as its main front, Ukraine’s digital authorities have developed an intelligence App that combines technology, hacking, cryptocurrencies and the power of public opinion to provide a “find the enemy” feature — every resident using the App can photograph and upload information about the enemy and provide a location whenever and wherever they want.
Sourced ideas for crowdsourced apps can hardly be attributed to DAO. The intelligence information collected by residents is sent to soldiers on the front line through another App, which constitutes a clear “battle order”. Ukrainian soldiers who receive these “battle orders” can quickly complete their missions. This governance thinking, which explicitly uses decentralized products and distributed concepts in the state apparatus, approaches the government as one of many DAOs for producing goods and services.
Source: Messari
Maybe you will refute me and think that UkraineDAO is the real DAO organisation. But you cannot deny that DAO can be an option for a nation’s digital transformation, even during wartime. Physical work proves that citizens have direct control over the machinery of violence. If the government that controls violence were in ideal shape, it would not take protection money. But in reality, the organisation of commercial activities that charge “protection money” is not controlled by both producers and consumers, so it will not serve consumers by maximising the quality of service and reducing the price charged to the greatest extent. For them, scalability is more important than maximising profit.
Think of most governments as sort of hybrid organisations; the payments that citizens make to these governments are the prices they have to pay to avoid more serious losses. If the DAO charges significantly less protection money than the government, and can provide all the public services you need without even charging protection money, how will you choose?
In the world of cryptocurrency, cyber citizenship is almost defined by decentralized tokens, meaning that the cost of digital migration for users is almost zero. As long as you hold the token, you are a citizen of the protocol. That’s why we’re seeing Web3 reputation systems like Station and social graph protocols like Lens grow in popularity, because it’s easier to get onto a new DAO than it is to get into the U.S. One person may be an active citizen of dozens of DAOs, which will greatly contribute to thriving international trade among DAOs and even solve the impossible triangle in international trade, which you can read more about here.
Where should we go?
First, a successful sovereign DAO should have the following three components:
1. Network incentive model (liquidity source);
2.Community engagement (value interaction);
3. Adequate decentralization (governance capacity);
As proof of physical work mechanisms are refined, many components of DAO activities, including frictional costs and computational rules in production and trading activities, will be replaced by hardware machines and smart contracts. This is why DeFi is the first application direction for sovereign DAOs to break out.
In summary, the primary goal of DAOs is to attract and retain high quality digital citizens, thereby attracting sustainable demand and adding value to the network. Of course, the success of a country is more complex than the token economy and DAO governance design. But there is no doubt that DAOs provide builders with a much richer toolbox than traditional states. Anything in a legal document or monetary policy can run on the blockchain.
StepN is a move-to-earn application built on Solana. Its success lies in building rich economic models, vibrant in-app activities and vibrant cross-chain interactions. I think they could try new governance models that not only reward token holders for ownership, but also think about rewarding people for participation and contribution. If there is a major innovation in their governance paradigm, I believe this model based on economic governance can be extended to outer space colonies.
Nation3 had a more specific goal, creating a community designed to provide services similar to nation-state services, such as money, education, health care, and so on. The project hopes to build a fair nation of encryption on the cloud. Their unique “union + proposal + Dework + community members” model is working, and it is still cash flow issues that affect the development of the project. Because building a Web3 country often seems like a grand narrative rather than a clear source of cash flow for Web3 apps. Therefore, such projects should still prioritise the operation of Treasury assets and the value interaction with DeFi assets.
The construction of national DAO should start from the following points;
- Territory is not necessary for a cloud state, but it must have the ability to protect its citizens, which means it can skip the territory and run the machine of violence, but there is no new exploration mode for this track;
- Government is the institution that keeps society functioning. DAO amounts to suggesting an efficient and equitable governance mechanism and a functioning social system, which is very difficult to balance;
- Physical proof of work mechanisms that meet the interface needs of digital citizens and the real world. These interfaces need to include currency exchange interface, physical authentication interface and physical transaction interface.
This is an era of confusion and injustice, but it is also an era of reflection and reset. On a longer timescale, the order of magnitude and opportunities for Web3 countries will be much greater than they are today. DAOs can structure any current economy and governance pattern through programmable currencies, code-based laws, and composability. Of course, there are plenty of problems, including decentralized decisions that tend to be inefficient, code errors that lead to money being stolen, and so on. But when we stop focusing on dysfunctional, centralized government and talk directly to DAO members, we are already transforming ourselves and society.