The Inverted Organization

Noah Yeh - March 29th, 2024

March 29, 2024

DAO UTokyo was an exceptional event, bringing together a diverse group of brilliant individuals from various backgrounds to explore the potential of DAOs. The interactive sessions were particularly engaging, sparking numerous inspirations. We at da0 very much appreciate the opportunity to participate and are grateful for the enriching experience.

As we delve into various topics, it becomes increasingly apparent to me that the ambiguity surrounding the DAO space is a significant barrier preventing more in-depth discussions. This is primarily because there are no clear definitions of what DAOs entail, no consensus on how individuals should or should not be held accountable, and uncertainty about the role of blockchain in governance structures.

Click here for a DAO UTokyo Summary

Centralized vs Decentralized

I believe that all the aforementioned points are perfectly acceptable, considering our true aim is for this novel organizational structure to function effectively (or not) and demonstrate its potential. However, this raises several important questions: Why do we need such organizations? What can they accomplish that hasn’t already been achieved by traditional, centralized organizations? What role do they serve in today’s society? And what new opportunities do DAOs offer?

Only if the purpose of this new organizational structure is distinctly articulated can we grasp its potential and determine how responsibilities should be allocated. Moreover, it is not sensible to define an organizational model solely based on the technology it employs. Just as we do not define centralized entities by their use of centralized systems, we should not define DAOs merely as organizations that utilize blockchain technology. The definition should extend beyond the technological framework.

Centralized Triangle

A conventional objective for corporations is “Shareholder wealth maximization,” which guides employees to enhance their efficiency in pursuit of financial success. This often involves aligning the entire organization with a singular mission and strategy. However, one challenge observed during the DAO UTokyo discussions is the attempt to unify a DAO or decentralized organization under one mission and strategy (Financial success for investment DAOs, making of a successful DEX, maximize token holder benefits, etc). This effort might be misaligned with the natural advantages of DAOs, which could inherently differ from such organizational goals. It may still be feasible and has been demonstrated by the successful examples of decentralized exchanges (DEXs). However, aligning what DAOs are designed to do with what they excel at could significantly enhance their potential.

The graph above presents a simplified depiction of a centralized organization’s function. Typically, such organizations are driven by a singular vision or mission, with members working collectively to achieve this specific objective. In a capitalist society, this goal often revolves around profit generation. Without regulatory oversight or significant deterrents, it’s conceivable that many might pursue financial success at the expense of others, potentially leading to detrimental outcomes. Climate change serves as a pertinent example. Despite the Paris Agreement being signed by 196 parties in December 2015, research by predicts a 58% likelihood that 2024 will be the hottest or second-hottest year on record. This situation arises because the immediate benefits to an individual country or organization are often prioritized over the external consequences of their actions. Centralized systems have developed powerful incentives for individuals within their confines to prioritize the group over outsiders. I hope that decentralized systems could reveal different opportunities.

Decentralized Inverted Triangle

Decentralized organizations, with DAOs as one example, represent a fundamentally different concept. I personally believe that a key aspect of organizations is the creation of a unique incentive structure, DAOs are the same. Decentralized structure should aim to circumvent the pitfalls of excessively pursuing individual, organizational, or internal profits at the expense of causing negative externalities for others. Rather than adhering to the principle of “Shareholder wealth maximization,” decentralized organizations should ideally focus on “Common value creation” This approach necessitates defining and consistently integrating the value to be distributed, emphasizing exploration and proliferation over mere execution and efficiency. DAOs often encounter issues related to execution and accountability, leading to tensions between the core principles of decentralization and practical implementation. I argue this is because DAOs are not inherently designed for such purposes.

In managing a DAO, I envision it as an inverted triangle, a complete reversal of the centralized model. While centralized entities are unified towards a mission, often under the guidance of a centralized leadership, decentralized organizations should emanate from a collective inspiration. Similar to a mission, these shared inspirations require cultivation so that energy can be continuously injected into the decentralized community or organization.

Take, for instance, the continuous inspiration derived from a study group. Although it might appear insignificant, da0 related study group (Web3 for All & da0 Learning) has evolved into a formidable collective, inspiring even for prominent figures like Vitalik. Last year, this communal space within the DAO gave rise to over 20 projects, ranging from products and events to podcasts and university courses, all stemming from shared core values such as Plurality, d/acc, the significance of digital public goods, and certain utopian philosophies. This, I believe, illustrates the power of such inspiration.

In my view, a common challenge faced by all DAOs is the attempt to achieve centralized objectives within a decentralized framework, whether it concerns delegation, accountability, or any other aspect.

Decisions, Resources, Liabilities

Clarifying the relationship between DAOs and decentralized organizations may enhance our understanding. In this article, we treat DAOs as a subset of decentralized organizations, focusing more on the latter. However, the principles we discuss are applicable to both categories.

Florence G’sell from Stanford Cyber Policy Center, during her presentation at DAO UTokyo, mentioned the current legal structure could potentially hold developers accountable for hacks and security breaches, such as those affecting decentralized exchanges. In reality, individual developers are unlikely to willingly accept such liabilities, which could stifle the progress of any decentralized organization adopting this principle.

In many discussions on DAOs, there’s a focus on decentralizing power—specifically, decision-making and resource allocation—without adequately addressing the associated responsibilities and liabilities. Centralized leadership not only directs resources but also assumes the risk of failures. A misalignment occurs when power is decentralized without a corresponding distribution of responsibilities, potentially leading to adverse outcomes for the organization.

Decentralization should extend to accountability, preventing decentralized organizations from becoming vehicles for evading legal and moral obligations. Unfortunately, this is a trait observed in many current DAOs. Today, most DAOs operate similarly to centralized organizations but with inclusive policies that facilitate global onboarding and greater participation for token holders. While these objectives are achievable within centralized frameworks, decentralized organizations could serve broader purposes beyond mere structural inclusivity.

Centralized organizations Decentralized organizations
Companies, organizations, foundations, etc…
DAOs, communities, social activism
Shareholder/stakeholder wealth maximization
Common value creation
Efficient execution
Widespread exploration
Towards a mission/vision
Starts from an inspiration/value

Key Drivers for Organizational Sustainability

I was once informed that the primary motivators at a civic organization like g0v are rooted in anger. With a significant history in Taiwan, g0v started about a decade ago, initially focusing on hacking and making government data accessible. The community’s widespread dissatisfaction with the government fueled both
individual and collective efforts, positioning g0v as a pivotal movement that reimagines the potential of democracy and the role of open-source communities in society.

In recent years, g0v’s activity has somewhat quieted, sustained by bi-monthly hackathons that facilitate collaboration and support among individuals and teams. Despite maintaining its foundational principles of Centralized organizations Decentralized organizations Examples Companies, organizations, foundations, etc… DAOs, communities, social activism Purpose Shareholder/stakeholder wealth maximization Common value creation Advantage Efficient execution Widespread exploration Convergence/divergence Towards a mission/vision Starts from an inspiration/value openness and proactive action, g0v’s growth momentum has notably declined, largely due to a decrease in the members’ sense of anger. Nonetheless, g0v remains active and healthy, though its expansion has slowed in response to changing societal contexts.

Another noteworthy example involves a panel I moderated, featuring Aya Miyaguchi from the Ethereum Foundation. When asked about the essence of leadership within a decentralized organization, her response was truly enlightening. She emphasized the importance of adhering to chosen long-term values, highlighting that initiatives like the Ecosystem Support Program (ESP) are designed to reinforce and exhibit these values.

In each of these instances—whether driven by anger, principles, or values—inspiration is channeled into the organization in various forms, such as speeches, governmental missteps, sponsored actions or study groups, propelling the organization forward through diverse experiments and initiatives, rather than directives from a central leader. Decentralized organizations thrive on such inspirations. 

Unlike centralized organizations, which rely on a clear mission for cohesion and direction, decentralized organizations are propelled by inspiration. A mission statement is crucial for any new company or corporation, as its absence can lead to disarray. For decentralized entities, the cessation of inspiration would mean the end of their endeavors. 

The sustainability of decentralized organizations hinges on their ability to consistently foster and infuse inspiration within the community or organization, a task that may be more challenging than establishing a mission. For da0, focusing study groups on envisioning a democratic future is one approach; for the Ethereum Foundation, it involves supporting and showcasing projects; for g0v, it’s about adhering to established rules enriched with historical narratives and credibility.

Resource Distribution in Centralized & Decentralized Structures

Resources are limited, and those entrusted with them are expected to deliver results—an expectation that likely won’t change, web3 or not. Centralized authorities have the ability to hold individuals accountable, a feat that proves challenging for decentralized organizations, where enforcing consequences is even more difficult.

Retroactive funding has shed light on these issues. In situations where accountability is impractical due to high costs or foundational principles, decentralized organizations might find it more effective to reward actual outcomes rather than expected contributions.

The effectiveness of retroactive funding is well exemplified by organizations such as Protocol Labs, Gitcoin, Optimism, Ethereum, and others, with tools like hypercerts being actively explored by da0 for this purpose.

Furthermore, the critical role of impact evaluation in resource distribution is evident. Without a clear definition of success, fair distribution of retroactive funding is unattainable. In centralized entities, leadership defines success to align with corporate goals and shareholder interests. However, this power can lead to corruption and bias. Decentralized organizations, on the other hand, should base resource allocation on collective decisions about what actions were beneficial and impactful, using combined mechanisms among hypercerts, quadratic funding,
quadratic voting and many more. Despite the risk of collusion, a values-driven organization is theoretically more likely to make beneficial decisions to more than just individuals inside the organization (given the value shared across the organization is altruistic), as collusion is more complex and time-consuming than individual corruption.

Resource injection varies across scenarios. Blockchain protocols may secure funds through mechanisms like MEV or other sources, whereas decentralized entities without a “decentralized central bank” must seek external funding, which often comes with strings attached and lacks the promise of execution. This dilemma highlights the challenge of maintaining a self-sustaining business model without centralized control.

The issue persists, with several potential solutions. Government subsidies could offer a less demanding alternative to private funding. Alternatively, projects could independently raise funds without a centralized treasury, a strategy I believe to be more viable. Decentralized organizations still need funding to maintain infrastructure, which could be sourced from donations by related-projects that understand and share the organization’s values. While legally enforcing these contributions is challenging, exploring more strategies to facilitate this process is essential.

Challenges of Centralized & Decentralized Structures

Centralized and decentralized organizations face distinct challenges. Centralized entities are vulnerable to corruption and the potential centralization of power, which can lead to autocratic governance. Conversely, decentralized organizations risk losing focus and momentum, along with the threat of collusion. 

Centralized organizations, which have been the norm for many years, can mitigate the risk of power concentration through regulation, including company policies, laws, and third-party audits. 

The challenges of maintaining focus and avoiding collusion in decentralized organizations are less straightforward. Projects within these organizations may diverge, pursuing their own goals without considering their alignment with the broader decentralized system. Given the inherent autonomy in decentralized organizations, it seems improbable to enforce connections between projects and the overarching entity or DAOs. A more effective approach may be to foster mutual value creation.

Creating a cohesive community where members share resources, opportunities, and support each other’s projects is one such value. Inspiring the community by sharing ideas and visions that everyone contributes to is another. Additionally, encouraging projects to seek out and collaborate with like-minded participants can strengthen the bonds within a decentralized organization.

Leaderships in Centralized & Decentralized Structures

In design thinking, the process of diverging and converging ideas is crucial. This cycle of exploration and refinement often leads to superior solutions. Similarly, the blend of exploration and implementation is beneficial for organizations. 

I believe that centralized and decentralized organizations fulfill distinct roles. Experimenting with various approaches at low cost can enhance our understanding of organizational dynamics, while implementing strategies based on validated assumptions can improve success rates. In my view, decentralized organizations
are not replacements but rather complementary to traditional organizational structures.

Decentralized organizations could evolve in one of two primary ways:

1. Through extensive exploration, participants may discover a unified goal, such as profit maximization, and align towards this single mission. This scenario could lead to a more centralized team focusing on delivering results for shareholders or token holders.

2. Alternatively, a myriad of experiments, both large and small, may emerge from the decentralized setting. Each may establish a centralized team to achieve specific outcomes. These projects would then share their findings and opportunities with the community, fostering mutual support.

Of course, many variations between these two extremes are possible. However, when activities converge towards a singular mission, a centralized approach is often preferred due to its efficiency in meeting goals.

The g0v initiative exemplifies a “playground” model, where projects unite around shared values. Projects consistently return to its bi-monthly hackathons, attracting new contributors and seeking adoption and recognition for their efforts. This decade-long tradition relies on continuous centralized fundraising efforts to inspire, connect, and share opportunities among participating projects.

Challenges of Centralized & Decentralized Structures

A critical aspect that deserves more attention within decentralized organizations is the concept of leadership.

In centralized organizations, the role of a leader is clear-cut: they focus their team members, rigorously evaluate deliverables to maintain quality, and ensure that everyone is positioned where they can contribute most effectively. In the conventional corporate structure, these roles are typically known as directors and managers.

However, leadership in decentralized organizations operates under a different paradigm. Here, the primary aim of leaders isn’t to oversee execution directly. Rather than managing and directing, I propose that the essence of decentralized leadership should be to inspire and support. Furthermore, cultivating connections within the
organization is crucial for addressing the challenges inherent in decentralized setups.

Inspiration: Leaders in decentralized organizations should continually infuse the community with inspiration and uphold long-term values, as Aya suggests. This can be achieved through various means such as providing funding, organizing study groups, or delivering motivational speeches. The key is that inspiration should not be
the responsibility of a single individual but can emanate from many sources within the organization.

Support: My experience over the past year has underscored the importance of supporting proactive initiatives. It’s the linchpin for progress and the foundation for meaningful experimentation. Support can take the form of
bolstering contributors’ confidence, guiding them to necessary resources, or offering pertinent advice. Essentially, it involves championing projects and the people behind them.

Connection: For contributors and projects to truly feel part of a larger organization, genuine relationships and a shared culture are vital. It’s not just about linking contributors with the right contacts; it’s also about consistently backing their endeavors. Fostering these connections ensures a cohesive and collaborative environment that aligns with the overarching goals of the decentralized organization.

Humanity Remains the Greatest Challenge

Humanity remains the greatest challenge, regardless of whether organizations are centralized or decentralized. The issues of envy, a thirst for power, shirking personal responsibility while wanting to stay involved in decisionmaking, selectively applying theories and knowledge while ignoring the realities and the individuals involved, are significant hurdles for decentralized organizations.

I believe that achieving a truly trustless environment is nearly impossible. The costs and risks associated with collaborating with strangers are almost always higher than those with known associates. As a result, in every Decentralized Autonomous Organization (DAO) I’m familiar with, there’s a tendency to work within a small, trusted group based on successful past experiences.

In centralized organizations, trust is often compromised for power or profit. Decentralized organizations face similar issues. Although power may manifest differently, the struggle for it persists.

However, decentralized organizations offer a better opportunity to escape the power struggle because actions tend to be driven by shared values, making it easier to form genuine connections rather than merely pragmatic ones.

While missions can reduce individuals to mere tools or machines, embracing positive values/inspirations encourages us to recognize humanity in our endeavors. I hope that decentralized organizations will promote much needed values worldwide.

Support Friends, Encourage Actions, Inject Inspirations

While decentralized organizations (including DAOs) face distinct challenges compared to centralized entities, including the risk of losing focus and the difficulty of maintaining cohesion without traditional leadership roles, they offer a complementary approach to organization and governance. Through exploration, support, and community-building, DAOs can navigate these challenges, evolving in ways that leverage their decentralized nature for innovation and collective value creation.

Ultimately, I believe this presents an opportunity for us to embrace our humanity more fully under a organizational context. By supporting our friends, motivating contributors to act, and consistently providing inspiration, we will undoubtedly thrive.