Article by JakeAndStake Cover Art by Ornella

In 1602, the Dutch East India Company (in Dutch, Vereenigde Oost Indische Compagnie or VOC) received a state-sponsored monopoly to be the sole firm to trade with Mughal-era India. The company was scoped to be a 21-year venture, have limited liability, and was subsequently traded on the Dutch stock exchange founded in 1611. This company would eventually become the model for chartered firms (state-sponsored monopolies) everywhere.

This was quite a departure from the way business had typically been done. Up until that point, and for some time after, most firms were small, family enterprises; not large, joint-stock companies. 

These new firms allowed large sums of money and labor to be concentrated and they could amass more resources than any individual or government could.

The result was an entity that could weather risk. The VOC had a more reliable supply chain and could control the pricing of goods it brought back to Europe, effectively forming a cartel. These chartered companies created information networks that were impossible for an individual actor or family enterprise to create, and their access to capital made them resilient to losses in the event of piracy, shipwrecks, misconduct, or mismanagement.

The VOC became a global superpower in its own right and by 1669, was the richest private company the world had ever seen. It employed armies, built military bases, and made trade agreements with nations until it began to decline (1730) and was repatriated in 1796.

Note the importance of “limited liability” for joint-stock companies. Formalized in France in 1807, limited liability joint-stock businesses were allowed, such that partnerships could be made with transferable shares. These shares granted ownership in the company, but limited the liability of inactive partners (shareholders). This meant that the state could not jail or confiscate the property of inactive business owners in the event of bankruptcy. If the active owners mismanaged or misbehaved, all the inactive shareholders could lose was their investment.

While this is common today, at the time, it was a radical new innovation that allowed strangers to pool money together for long-term enterprises. Limited liability joint-stock companies democratized business ownership, allowed money to more easily circulate, improved liquidity, and created robust organizations.

Then along came the steam locomotive.

The paradigm-defining technologies of the 1800s were the steam locomotive and the railroad. When one town was connected to another via railroad, the economic activity of both municipalities multiplied. Investment in railroads came primarily from local business owners and governments. Why? The cheap transport costs expanded markets, increasing both profits and taxes while setting the stage for industrial manufacturing.

The problem was the expense. Railroads needed large, up-front investments to fund construction, and the profitability of railroad operators would not be seen until years after they had been established. Companies were the answer. Companies allowed for the quick formation of capital and they were the entities that would eventually see those profits.

Previously, these chartered companies were rare and the process to obtain a state-sponsored monopoly was time-consuming, but the demand for railroad charters outpaced the rate at which governments could issue them. As demand for these charters increased, governments were more lenient when awarding them.

In 1844 in Britain, the Joint Stock Companies Act allowed companies to be incorporated by simply registering — without the need for a special charter. Meanwhile, in the U.S., states were in fierce competition with each other to attract businesses, progressively loosening the requirements for incorporation.

The gradual permissionlessness of incorporation combined with the limited liability of joint-stock companies allowed more people to invest, leading to the concentration of capital, fractionalized ownership, and numerous resilient organizations.

These railroad companies also served to develop financial markets. From The Company (John Micklethwait, Adrian Wooldridge):

"Meanwhile, the railways’ voracious requirement for capital did more than anything else to create the modern New York Stock Exchange. In the 1830s, a good day on the Exchange might have seen a few hundred shares changing hands (on March 6, 1830, the worst day in its history, only thirty-one shares were traded). By the 1850s, with the railways booming, that figure ballooned to hundreds of thousands. In 1886, it had its first million-share day.”

The evolution of the modern company was a crucial driver of economic development. As governments continued to reduce the requirements for creation, companies distributed ownership and concentrated both liquidity and labor. This was a coordination mechanism that ushered in the democratization of business, developing financial markets and strengthening national economies.

As Peter Drucker said, “It was the first autonomous institution in hundreds of years, the first to create a power center that was within society, yet independent of the central government of the national state.”

Fast-forward to the present, and we’re seeing a similar pattern in cryptoassets.

Crypto enables scarce, permissionless, digital assets to exist. Let’s break this down:

Scarce. The scarcity of cryptocurrencies is determined by the code running the protocol. This can be implemented through mechanisms like Bitcoin’s 21 million supply cap & proof of work algorithm or Ethereum’s gas market & fee burn. Scarcity is born out of the blockchain, the digital ledger. Scarcity (plus demand) is what gives crypto value.

Permissionless. The permissionless nature of crypto defines access to this scarce asset — access to the ledger. Everyone has read/write/execute access to this public database, but each user can only manipulate the value they own. There’s no tampering with other people’s funds and there is no gatekeeper telling you how to use your assets. This characteristic gives people agency to move value through the network. This is what enables self-sovereignty.

Digital. Several characteristics flow from the digital property of crypto, but the one I want to focus on here is low distribution costs. This is how these scarce, permissionless assets flow.

On the internet, the costs of replication and the costs of distribution (of media) trend towards zero. This is because there is no paper, no truck, and no distribution center needed to send an email (or a meme). If everyone has a computing device, the cost of distribution is equivalent to the cost of electricity used.

Pre-internet, supply is constrained by geography, making the creation and distribution of supply the most important problem to solve. Post-internet, digital distribution is effectively zero, supply is commoditized, and the aggregation of demand becomes the new “hardest problem”.

Pre-internet, distribution was the bottleneck. Post-internet, distribution is free.

Image: Stratechery

Right now, the cost to send cryptoassets is much more than zero, but the costs should decrease and tend towards zero due to scaling developments (modular blockchain design and scaling roadmap, zk-rollups, sharding, etc).

Combine these three properties and you get the rapid velocity of capital. Now people can permissionlessly send their capital in whatever way they wish, as quickly as a new block is created.

How do these factors play out in the current environment? Alongside the impact of traditional money markets and the growth of the creator economy enabled by NFTs, it’s worth noting the development of new vehicles for like-minded people to allocate their funds and find community: DAOs.

There are many kinds of DAOs: social DAOs, investment DAOs, media DAOs; the list goes on. Each has its own focus, but they all have similar characteristics. Given that crypto allows for the rapid transfer of assets, DAOs can serve as a vehicle for that capital. But not just financial capital. DAOs allow for the rapid concentration of:

• Human capital (labor)

• Financial capital (money)

• Social capital (culture)

DAOs create a Schelling Point (a natural focal point) for these different types of capital to flow towards. Be it labor, money, or culture, strangers will converge upon DAOs to spend this capital based on alignment with their interests. These new coordination points are magnets for time, money, and energy.

If we take all these characteristics together, the properties of the modern company and the properties of DAOs are undeniably similar. Both distribute ownership, both improve the velocity of capital concentration, and both are robust organizations.

The difference is that DAOs are supercharged by the internet, increasing permissionlessness and liquidity by an order of magnitude. Where companies are power centers instantiated in the nation state, DAOs are power centers instantiated in the internet.

Take ConstitutionDAO: a DAO organized to purchase a copy of the United States Constitution when it was auctioned at Sotheby’s on November 18th, 2021.

This DAO, helmed by a small core of contributors, garnered over $40 million USD of donated Ether in under 7 days and set Twitter alight with “#wagbtc” posts (“we’re all gonna buy the Constitution”). The rapidity of capital concentration was astonishing and the memes, chef’s kiss, were 🔥:

https://twitter.com/avvisi_/status/1460373522233139206

https://twitter.com/avvisi_/status/1460366771769290753

https://twitter.com/StratiClear/status/1461067267626598408

• Labor: a small team put together the legal structure, tech stack, and partnerships (to name a few components) while memesters did the marketing and advertising.

• Capital: With 17,437 donors and the median donor (address) allocating $206.26, this was nothing short of a social movement.

• Culture: Nicholas Cage memes and “#wagbtc” going viral on Twitter.

Did I mention much of the core infrastructure was put together in three days?

ConstitutionDAO went on to lose the auction — a transparent accounting system means rival bidders can see your max offer — but this is an impressive example of what DAOs, and crypto, can achieve.

The concentration of these resources was enabled by the internet and the evolution of DAOs will be shaped by the internet as well. Some factors worth thinking about are culture and size.

Culture is born of humans and, consequently, emerges in wildly different ways. Culture, no matter how it unfolds, will affect the way DAOs operate and affect each community’s goals. This, though, is somewhat unpredictable and will not be explored in this piece.

A more predictable consideration is size. On the internet, scale is part and parcel of success. When distribution is free, the companies that survive will be the ones that can scale their services and beat the competition. Network effects (and businesses) create natural monopolies.

My prediction here is that DAOs will follow similar trends as the internet: there will be a few very large DAOs and there will be a long-tail of smaller DAOs (imagine group chats with a shared bank account). Each becoming its own internet society with its own culture, money, mission, and governance structure. Each becoming its own “capitol of capital”.

A big factor is the fluidity of labor. When people can easily move in and out of internet communities, they will spend the most time with the communities that resonate most deeply. I suspect DAO size will follow a power law distribution, much like large internet companies or crypto protocols. (Think BanklessHQ’s Protocol Sink Thesis or Ben Thompson’s Aggregation Theory).

And yet, the very large DAOs will have problems that smaller DAOs will not. It’s easy to manage a group chat of 3–5 people. It’s much harder to coordinate large crowds of crypto natives. Larger DAOs must find ways to scale up their operations without collapsing under the gravity of their success. As DAOs get bigger, they attract more attention and, subsequently, more members.

On the surface this looks great. More token demand means it’s easier to bootstrap funds, but more members also means more coordination friction. DAOs will have to lean on their strengths (decentralization and culture) to scale up governance in conjunction with their size. Thus, larger DAOs will have to move governance on chain to deal with these problems via permissionless methods — zk-rollups and more DAO tooling are helpful here.

One strategy is to reconstruct how DAOs are organized. I like frogmonkee’s brain dump here. The idea is to create a network of working groups to handle particular projects and talent pools (guilds) to source human capital.

If there’s a Dunbar’s number equivalent for online communities, eventually, some of these working groups/guilds must become their own DAOs (or subDAOs), further moving on chain. This raises some questions on governance/ tokenomic design, but these are solvable problems. (Orca, Colony, and Aragon are a few projects aiming to solve big-DAO problems).

Keep in mind, size can be measured in human, financial, and social capital. Not all DAOs should have many members. Membership will be determined by the alignment of DAO goals and the capital members can provide, whether that is skills, money, or memes.

Ultimately, I suspect that the growth of the DAO ecosystem will depend on problems that need the rapidity of capital concentration that DAOs facilitate, just as the modern company grew and proliferated in tandem with the railroad. Could some future catalysts be sustainable energy & electrification, artificial intelligence, 3D printing, AR/VR, or vaccine research and manufacturing?

New approaches to human organization, like the modern company, do not immediately come to mind when we think about technological innovations. And yet, the company shaped the last two centuries, catalyzing the development of railroads, financial markets, and other technologies too numerous to name. Now humanity has unlocked a new coordination tool: DAOs. This technological shift will reorganize the world around us and usher in a new era of financial sovereignty and social collaboration. This shift will shake the earth and transform the world around us.

This article was first released in BanklessDAO’s State of the DAOs newsletter on December 15, 2021.

Jake and Stake is a writer and editor at BanklessDAO. He is the Writers Guild’s Governance Coordinator and runs the State of the DAOs newsletter, with a background in software engineering and cybersecurity.

BanklessDAO is an education and media engine dedicated to helping individuals achieve financial independence.

This post does not contain financial advice, only educational information. By reading this article, you agree and affirm the above, as well as that you are not being solicited to make a financial decision, and that you in no way are receiving any fiduciary projection, promise, or tacit inference of your ability to achieve financial gains.

Bankless Publishing is always accepting submissions for publication. We’d love to read your work, so please submit your article here!

More Like This

DAOs v. Corps Is the Trial of the Century by Teleroo

A Normie’s Intro to DAOs by Saf

DAOs Unlock How We’re Made to Work by Zero Mass

Article by JakeAndStake Cover Art by Ornella

In 1602, the Dutch East India Company (in Dutch, Vereenigde Oost Indische Compagnie or VOC) received a state-sponsored monopoly to be the sole firm to trade with Mughal-era India. The company was scoped to be a 21-year venture, have limited liability, and was subsequently traded on the Dutch stock exchange founded in 1611. This company would eventually become the model for chartered firms (state-sponsored monopolies) everywhere.

This was quite a departure from the way business had typically been done. Up until that point, and for some time after, most firms were small, family enterprises; not large, joint-stock companies. 

These new firms allowed large sums of money and labor to be concentrated and they could amass more resources than any individual or government could.

The result was an entity that could weather risk. The VOC had a more reliable supply chain and could control the pricing of goods it brought back to Europe, effectively forming a cartel. These chartered companies created information networks that were impossible for an individual actor or family enterprise to create, and their access to capital made them resilient to losses in the event of piracy, shipwrecks, misconduct, or mismanagement.

The VOC became a global superpower in its own right and by 1669, was the richest private company the world had ever seen. It employed armies, built military bases, and made trade agreements with nations until it began to decline (1730) and was repatriated in 1796.

Note the importance of “limited liability” for joint-stock companies. Formalized in France in 1807, limited liability joint-stock businesses were allowed, such that partnerships could be made with transferable shares. These shares granted ownership in the company, but limited the liability of inactive partners (shareholders). This meant that the state could not jail or confiscate the property of inactive business owners in the event of bankruptcy. If the active owners mismanaged or misbehaved, all the inactive shareholders could lose was their investment.

While this is common today, at the time, it was a radical new innovation that allowed strangers to pool money together for long-term enterprises. Limited liability joint-stock companies democratized business ownership, allowed money to more easily circulate, improved liquidity, and created robust organizations.

Then along came the steam locomotive.

The paradigm-defining technologies of the 1800s were the steam locomotive and the railroad. When one town was connected to another via railroad, the economic activity of both municipalities multiplied. Investment in railroads came primarily from local business owners and governments. Why? The cheap transport costs expanded markets, increasing both profits and taxes while setting the stage for industrial manufacturing.

The problem was the expense. Railroads needed large, up-front investments to fund construction, and the profitability of railroad operators would not be seen until years after they had been established. Companies were the answer. Companies allowed for the quick formation of capital and they were the entities that would eventually see those profits.

Previously, these chartered companies were rare and the process to obtain a state-sponsored monopoly was time-consuming, but the demand for railroad charters outpaced the rate at which governments could issue them. As demand for these charters increased, governments were more lenient when awarding them.

In 1844 in Britain, the Joint Stock Companies Act allowed companies to be incorporated by simply registering — without the need for a special charter. Meanwhile, in the U.S., states were in fierce competition with each other to attract businesses, progressively loosening the requirements for incorporation.

The gradual permissionlessness of incorporation combined with the limited liability of joint-stock companies allowed more people to invest, leading to the concentration of capital, fractionalized ownership, and numerous resilient organizations.

These railroad companies also served to develop financial markets. From The Company (John Micklethwait, Adrian Wooldridge):

"Meanwhile, the railways’ voracious requirement for capital did more than anything else to create the modern New York Stock Exchange. In the 1830s, a good day on the Exchange might have seen a few hundred shares changing hands (on March 6, 1830, the worst day in its history, only thirty-one shares were traded). By the 1850s, with the railways booming, that figure ballooned to hundreds of thousands. In 1886, it had its first million-share day.”

The evolution of the modern company was a crucial driver of economic development. As governments continued to reduce the requirements for creation, companies distributed ownership and concentrated both liquidity and labor. This was a coordination mechanism that ushered in the democratization of business, developing financial markets and strengthening national economies.

As Peter Drucker said, “It was the first autonomous institution in hundreds of years, the first to create a power center that was within society, yet independent of the central government of the national state.”

Fast-forward to the present, and we’re seeing a similar pattern in cryptoassets.

Crypto enables scarce, permissionless, digital assets to exist. Let’s break this down:

Scarce. The scarcity of cryptocurrencies is determined by the code running the protocol. This can be implemented through mechanisms like Bitcoin’s 21 million supply cap & proof of work algorithm or Ethereum’s gas market & fee burn. Scarcity is born out of the blockchain, the digital ledger. Scarcity (plus demand) is what gives crypto value.

Permissionless. The permissionless nature of crypto defines access to this scarce asset — access to the ledger. Everyone has read/write/execute access to this public database, but each user can only manipulate the value they own. There’s no tampering with other people’s funds and there is no gatekeeper telling you how to use your assets. This characteristic gives people agency to move value through the network. This is what enables self-sovereignty.

Digital. Several characteristics flow from the digital property of crypto, but the one I want to focus on here is low distribution costs. This is how these scarce, permissionless assets flow.

On the internet, the costs of replication and the costs of distribution (of media) trend towards zero. This is because there is no paper, no truck, and no distribution center needed to send an email (or a meme). If everyone has a computing device, the cost of distribution is equivalent to the cost of electricity used.

Pre-internet, supply is constrained by geography, making the creation and distribution of supply the most important problem to solve. Post-internet, digital distribution is effectively zero, supply is commoditized, and the aggregation of demand becomes the new “hardest problem”.

Pre-internet, distribution was the bottleneck. Post-internet, distribution is free.

Image: Stratechery

Right now, the cost to send cryptoassets is much more than zero, but the costs should decrease and tend towards zero due to scaling developments (modular blockchain design and scaling roadmap, zk-rollups, sharding, etc).

Combine these three properties and you get the rapid velocity of capital. Now people can permissionlessly send their capital in whatever way they wish, as quickly as a new block is created.

How do these factors play out in the current environment? Alongside the impact of traditional money markets and the growth of the creator economy enabled by NFTs, it’s worth noting the development of new vehicles for like-minded people to allocate their funds and find community: DAOs.

There are many kinds of DAOs: social DAOs, investment DAOs, media DAOs; the list goes on. Each has its own focus, but they all have similar characteristics. Given that crypto allows for the rapid transfer of assets, DAOs can serve as a vehicle for that capital. But not just financial capital. DAOs allow for the rapid concentration of:

• Human capital (labor)

• Financial capital (money)

• Social capital (culture)

DAOs create a Schelling Point (a natural focal point) for these different types of capital to flow towards. Be it labor, money, or culture, strangers will converge upon DAOs to spend this capital based on alignment with their interests. These new coordination points are magnets for time, money, and energy.

If we take all these characteristics together, the properties of the modern company and the properties of DAOs are undeniably similar. Both distribute ownership, both improve the velocity of capital concentration, and both are robust organizations.

The difference is that DAOs are supercharged by the internet, increasing permissionlessness and liquidity by an order of magnitude. Where companies are power centers instantiated in the nation state, DAOs are power centers instantiated in the internet.

Take ConstitutionDAO: a DAO organized to purchase a copy of the United States Constitution when it was auctioned at Sotheby’s on November 18th, 2021.

This DAO, helmed by a small core of contributors, garnered over $40 million USD of donated Ether in under 7 days and set Twitter alight with “#wagbtc” posts (“we’re all gonna buy the Constitution”). The rapidity of capital concentration was astonishing and the memes, chef’s kiss, were 🔥:

https://twitter.com/avvisi_/status/1460373522233139206

https://twitter.com/avvisi_/status/1460366771769290753

https://twitter.com/StratiClear/status/1461067267626598408

• Labor: a small team put together the legal structure, tech stack, and partnerships (to name a few components) while memesters did the marketing and advertising.

• Capital: With 17,437 donors and the median donor (address) allocating $206.26, this was nothing short of a social movement.

• Culture: Nicholas Cage memes and “#wagbtc” going viral on Twitter.

Did I mention much of the core infrastructure was put together in three days?

ConstitutionDAO went on to lose the auction — a transparent accounting system means rival bidders can see your max offer — but this is an impressive example of what DAOs, and crypto, can achieve.

The concentration of these resources was enabled by the internet and the evolution of DAOs will be shaped by the internet as well. Some factors worth thinking about are culture and size.

Culture is born of humans and, consequently, emerges in wildly different ways. Culture, no matter how it unfolds, will affect the way DAOs operate and affect each community’s goals. This, though, is somewhat unpredictable and will not be explored in this piece.

A more predictable consideration is size. On the internet, scale is part and parcel of success. When distribution is free, the companies that survive will be the ones that can scale their services and beat the competition. Network effects (and businesses) create natural monopolies.

My prediction here is that DAOs will follow similar trends as the internet: there will be a few very large DAOs and there will be a long-tail of smaller DAOs (imagine group chats with a shared bank account). Each becoming its own internet society with its own culture, money, mission, and governance structure. Each becoming its own “capitol of capital”.

A big factor is the fluidity of labor. When people can easily move in and out of internet communities, they will spend the most time with the communities that resonate most deeply. I suspect DAO size will follow a power law distribution, much like large internet companies or crypto protocols. (Think BanklessHQ’s Protocol Sink Thesis or Ben Thompson’s Aggregation Theory).

And yet, the very large DAOs will have problems that smaller DAOs will not. It’s easy to manage a group chat of 3–5 people. It’s much harder to coordinate large crowds of crypto natives. Larger DAOs must find ways to scale up their operations without collapsing under the gravity of their success. As DAOs get bigger, they attract more attention and, subsequently, more members.

On the surface this looks great. More token demand means it’s easier to bootstrap funds, but more members also means more coordination friction. DAOs will have to lean on their strengths (decentralization and culture) to scale up governance in conjunction with their size. Thus, larger DAOs will have to move governance on chain to deal with these problems via permissionless methods — zk-rollups and more DAO tooling are helpful here.

One strategy is to reconstruct how DAOs are organized. I like frogmonkee’s brain dump here. The idea is to create a network of working groups to handle particular projects and talent pools (guilds) to source human capital.

If there’s a Dunbar’s number equivalent for online communities, eventually, some of these working groups/guilds must become their own DAOs (or subDAOs), further moving on chain. This raises some questions on governance/ tokenomic design, but these are solvable problems. (Orca, Colony, and Aragon are a few projects aiming to solve big-DAO problems).

Keep in mind, size can be measured in human, financial, and social capital. Not all DAOs should have many members. Membership will be determined by the alignment of DAO goals and the capital members can provide, whether that is skills, money, or memes.

Ultimately, I suspect that the growth of the DAO ecosystem will depend on problems that need the rapidity of capital concentration that DAOs facilitate, just as the modern company grew and proliferated in tandem with the railroad. Could some future catalysts be sustainable energy & electrification, artificial intelligence, 3D printing, AR/VR, or vaccine research and manufacturing?

New approaches to human organization, like the modern company, do not immediately come to mind when we think about technological innovations. And yet, the company shaped the last two centuries, catalyzing the development of railroads, financial markets, and other technologies too numerous to name. Now humanity has unlocked a new coordination tool: DAOs. This technological shift will reorganize the world around us and usher in a new era of financial sovereignty and social collaboration. This shift will shake the earth and transform the world around us.

This article was first released in BanklessDAO’s State of the DAOs newsletter on December 15, 2021.

Jake and Stake is a writer and editor at BanklessDAO. He is the Writers Guild’s Governance Coordinator and runs the State of the DAOs newsletter, with a background in software engineering and cybersecurity.

BanklessDAO is an education and media engine dedicated to helping individuals achieve financial independence.

This post does not contain financial advice, only educational information. By reading this article, you agree and affirm the above, as well as that you are not being solicited to make a financial decision, and that you in no way are receiving any fiduciary projection, promise, or tacit inference of your ability to achieve financial gains.

Bankless Publishing is always accepting submissions for publication. We’d love to read your work, so please submit your article here!

More Like This

DAOs v. Corps Is the Trial of the Century by Teleroo

A Normie’s Intro to DAOs by Saf

DAOs Unlock How We’re Made to Work by Zero Mass