Organizations are typically made up of hierarchical stacks of written agreements between people. A company is just a collection of contracts: shareholder agreements, deeds, leases, service provider agreements, employment contracts, customer terms & services, etc. These are bound by a senior set of shared contracts called laws, which are governed by another set of contracts that form the State. The “economy” as a whole is made of networks of stacks contracts. And all of these contracts are enforced by hard jurisdictional courts.
Smart contracts are digital agreements written in code and enforced by blockchain networks instead of courts. They’re better than paper contracts for the same reasons email beat letters: they’re much faster, cheaper, and scalable. They collapse the cost of coordinating and enforcing agreements much like the Internet cut the marginal cost of communication to near-zero. And just as we can use paper contracts to create organizations, from businesses to governments, we can use smart contracts to create digital organizations called DAOs.
DAOs inherit the properties of their underlying infrastructure, meaning they are open, cheap, fast, and globally scalable like blockchain and internet networks. They are also more efficient than paper-contract organizations because they automate expensive management functions with autonomous software, collapsing management costs by automating key functions with self-enforced software agreements. This is especially powerful when combined with programmable digital assets like cryptocurrencies.
Aragon provides a suite of tools and services for creating and managing digital organizations on the Ethereum blockchain. The Aragon Client abstracts the complexity of DAO smart contracts under a friendly interface. Anyone in the world with an Ethereum wallet can click their way to “incorporating” an Aragon DAO in minutes for less than $10 in ETH.
Today, you have six customizable governance templates to choose from for both commercial and non-profit purposes. Templates are like the different incorporation types in the paper-court system: for example, organizations in the United States can be LLCs, LPs, corporations, foundations, churches, charities, etc. Each type of organization provides a general framework of operation with degrees of customization. Similarly in Aragon, you can tweak things like membership governance, how assets are managed, or how voting works in your particular DAO. There’s value in standardization: just as terms like “Delaware C-Corp” or “Cayman Limited Company” communicate specific information about where an organization is established and how it operates, an “Aragon _____ DAO” communicates a certain standard within the Aragon universe.
Each template serves a different function, but they’re built on the same three governance primitives around voting, money, and transparency. Every Aragon DAO uses its own tokens to track membership and voting power, a vault to securely store and manage the group’s digital assets, and the blockchain to record all votes and transactions. What changes from one to another is how these elements are configured. For example, you can decide whether membership tokens are transferable or not, require users to “stake” tokens to submit proposals or set the rules for vault management. Once a DAO is created, all of its smart contracts and transactions live on a public blockchain so anybody can inspect its code and audit the ledger.
Everything is open source and Aragon provides a full developer framework complete with user interface tools. Web3 developers can create entirely custom DAOs, plug-ins for the Aragon Client (e.g. invoicing, payroll, tax, or accounting tools), and even invent new governance templates for others to use. Aragon provides a standard user interface out of the box, but since all the data and all the contracts run in an open blockchain, developers can develop their own apps and use Aragon’s contracts in the background with no lock-in.
The most ambitious layer of the stack is the Aragon Network: an opt-in digital jurisdiction complete with a disputes court and token-based economic system. The court enables subjective smart contract agreements between participants when it is impossible to represent an agreement entirely in computer code. The basic idea is that the parties in a subjective agreement – people or DAOs – stake a negotiated value in crypto behind it. If one side escalates a dispute to the court, each stands to lose their stake if the court rules against them. The risk of losing their stake encourages both parties to behave honestly and settle any dispute in goodwill, but the court is there as a fallback if they don’t. But the goal is to encourage users to honor their private agreements by encouraging collaboration over litigation.
The goal is to find the majority’s view on a case. People who want to be covered by the court pay court fees. If there’s a dispute, each party submits evidence and argues their case. Jurors are people who stake the Aragon Network Juror (ANJ) token for the right to participate in the court and are chosen at random. Upon reviewing the case, each juror votes and the majority wins. “Good jurors” earn fees for voting along with consensus, while “bad jurors” lose their stake if they vote against consensus. Anyone can appeal a decision, in which case another (larger) jury pool is selected.
Aragon is an ambitious endeavor: a first-of-its-kind sovereign digital state running on a public blockchain, where Code is Law, developers are lawyers, and computers enforce the judgment of your peers. Since the milestone v0.8 mainnet release in September 2019, people have created close to 1,400 Aragon DAOs on mainnet, with over 5,700 members across all organizations and over $7 million in digital assets held in their token vaults. Over the past 90 days, we’ve seen ~15,000 user interactions (votes, transactions, etc.) with Aragon DAOs. Early adopters are bootstrapping the court following a phased launch and a “precedence campaign” and so far, 275 people have staked over $850,000 in ANJ to become founding jurors. It’s a confident start to an important experiment in a huge market and it will be interesting to see the kinds of cases brought up and the specialization of the juror pool over time.
But, why are DAOs important?
The DAO Thesis
DAOs collapse the cost of creating and managing organizations by replacing slow and expensive paper contracts with fast and cheap smart contracts. With lower costs and higher speeds, we unlock new levels of organizational scale. We can have a larger number of small organizations where setting up a legal entity is far too expensive to be worth it (think larger than a facebook group, but smaller than a company), and we can create mega-organizations that would also be too expensive, or just impossible to manage with paper. DAOs can serve both underserved markets and create completely new ones.
To put the costs into perspective, at a $0.15 average Ethereum transaction fee, it means the ~5,700 people who participate in the ~1,400 Aragon DAOs created to date have spent just ~$2,300 creating and running their organizations in the past 90 days. We know about 10% of Aragon DAOs are active on a quarterly basis, so that works out to an average running cost of ~$16 per DAO per month. These are rough numbers and averages aren’t great due to abnormal distribution. Still, for context, the largest vault balance holds over $3.5 million in cryptoassets and costs just ~$3/month to run.
In most of the world, creating and maintaining an incorporated entity costs thousands of dollars a year in operational and legal expenses just to maintain the organization. In the Dominican Republic, where I’m from, incorporating a charity can take a year with a process that ends with an actual presidential decree. But it took me and a group of people a few minutes and $5 in ETH to create a non-profit on Aragon, and not much more to keep it running. Plus, given the geographic nature of paper contracts, it’s difficult and expensive to scale with stakeholders across jurisdictions. By contrast, DAOs are always available wherever there is an Internet connection, and their global nature makes it easy to manage members from across the globe.
You can program a DAO to be anything. A digital organization can be a for-profit business, a non-profit foundation, a cooperative, or even a court as Aragon demonstrates. There’s a huge opportunity in introducing the efficiencies of smart contracts to existing frameworks. But I’m most excited about the new kinds of organizations we can create using smart contracts now that any developer can come up with new ideas. For example, you can imagine digital “user unions” in the face of Big Web platforms or maybe “data co-ops” that better distribute the value of user data.
The PieDAO is an example of the subtle kind of scale you can get out of digital organizations right now. It runs an asset allocation service by connecting Aragon to a Balancer pool to create weighted asset baskets governed by its stakeholders. Two months since launch, it holds ~$400,000 in funds contributed by over 120 members from around the world, and runs at a cost of just $40/month in ethereum fees, meaning the average member pays just ~$0.35/month to participate. PieDAO simply couldn’t exist if they weren’t a digital organization. You just can’t get this kind of cost/scale ratio in the paper realm. It’s not so much about the size or complexity of a DAO, it’s about how cheap it is to run one on-chain once it’s deployed.
You may be wondering about the legal boundaries of digital organizations. That conversation deserves its own essay. But fundamentally, a DAO is just a series of contracts between people just like paper organizations. So compliance should be up to the individual participants in a DAO and the laws of their particular jurisdictions. But in principle, given the “unstoppability” of smart contracts, digital organizations are best considered as unlimited-liability flow-through entities [1, 2] meaning authorities should disregard the entity itself and instead “look through” to its members when allocating responsibility. In the end, each state will have to decide for themselves how to treat citizens who participate in DAOs and we should see a healthy dose of jurisdictional competition. If the transition is inevitable, states who embrace digital organizations with friendly regulatory frameworks will benefit first.
For the most part, today’s DAOs are used by crypto projects, teams, and services as a governance system for their communities. For example, Decentraland, an Ethereum-based virtual-reality world, recently migrated governance over its network to an Aragon DAO. But we’ve also seen individuals set up single-member Aragon DAOs to manage their own assets in a secure vault, and companies using Aragon internally to keep transparent records. Blockchains are still an emerging technology and we shouldn’t expect DAOs to take over the world quickly. But they’re finding a fit in cases where the paper-court infrastructure does not scale up or down very well, like when creating more ephemeral or new kinds of organizations that manage hundreds or thousands of stakeholders across unknown jurisdictions. I think the opportunity space is larger than we realize.
It’s early days for Aragon and DAOs in general. But perhaps we can agree that we need better ways to organize cross-border human activity at scale over the Internet. A sovereign digital jurisdiction independent of any single state or government could be especially important in a post-pandemic, physically-distant society with less travel, more remote work, and more conflict. Blockchains, smart contracts, and digital assets provide the building blocks of such new infrastructure, and Aragon makes them accessible to everyone.