DAOs as the future? Hard pass, thanks

It seems like just yesterday that exchanges like Coinbase opened the eyes of the traditional economy to the benefits that cryptocurrencies offer as an asset class.

Cryptocurrencies and other decentralized technologies have created applications that promise to create real social value by offering an automated way to establish trust, but at a much lower cost than traditional intermediaries (banks and governments) that have monopolized trust as a service.

Building on the decentralized revolution, forward thinkers are already talking about the next big breakthrough — the decentralized autonomous organization, or DAO — that can guarantee trust at the organizational level. But while the problems DAOs might solve are real, DAO proponents misunderstand the nature of these problems and offer a tool that creates more harm than benefit.

Decentralized applications are built on smart contracts — algorithms that run when predetermined conditions are met and, by doing so, automate common decisions. Smart contracts create trust by guaranteeing predictability; when a predetermined set of actions occur, you will get paid in tokens.

Enthusiasts look at DAOs as the next logical step to this trust-building process by bundling a series of smart contracts to create what they describe as a smart “organization” — where business decisions like inventory control, cash management, pricing and even hiring are made based on predetermined inputs.

For an extreme example, think about an Amazon third-party reseller. This business operates on a number of simple inputs — the level of interest in its various products, the cost of raw materials and production at different facilities, shipping costs and so on. Based on these predetermined inputs, the value for an investor of the business should be pretty simple to determine, and a DAO would eliminate managers making bad — or self-interested — decisions.

Business owners are constantly making decisions that may be suboptimal from an investor perspective for reasons that are at best opaque and far too often made for personal benefit. For example, the decision to switch to a higher-cost manufacturer could be a hedge against product returns based on poor quality, or it could be because the new manufacturer is the owner’s cousin.

With a DAO, the entire business could be run with no humans at all, with all decisions made by a series of smart contracts. If a certain line of products is not selling, production decreases automatically, and price may also decrease until inventory is reduced. As sales increase, production increases. As production costs increase, price increases and so on. And profits would accrue to DAO investors that had, in turn, made investment decisions made based on preset (and preapproved) smart contracts.

But this very reliance on smart contracts solving small problems remains subject to what proponents misleadingly call the edge cases. What if there is a strike or a fire at a manufacturer? It is hard to imagine a smart contract anticipating better than a human manager when it is safe to resume placing orders with them.

This is why businesses use traditional contracts in addition to smart contracts — the reality is that the world of business relationships is far more messy and multivalent than can be predicted by a series of smart contracts. DAOs, of course, could continue to retain humans (as employees or as consultants) to solve these kinds of edge cases, but I question whether humans would want to get called in to clean up smart contract messes.

Decentralized finance has created value by more effectively validating quantifiable economic decisions. This has been successful because an automated trust mechanism for simple (or even complex) transactions has a simple metric (economic value) to measure the benefit of the decision.

But there is a profound difference between solving for trust in transactions and creating trust in relationships, let alone in organizations or communities. People gain economic value from transactions, but they gain other, different kinds of value from being a part of relationships and organizations. From being a part of an organization, we derive a sense of place, and from this sense of place, ultimately a sense of self.

This sense of place is derived from the web of reciprocal relationships that are constantly being renegotiated between one another and within a group. And in an organizational relationship, we constantly have to weigh between competing values in making a decision — should I do something that doesn’t make economic sense, but makes it more likely that someone will help me in the future?

Pierre Bourdieu described the totality of these values as a field and stressed that each person’s field is constituted differently based on their accumulated historical and cultural circumstances. According to Bourdieu, to master these relationships, one needs not an all-purpose algorithm, but an intuition that he called a “sense of the game.”

This sense of the game is what separates a visionary from a good businessman. And, more importantly, it is what separates a good person from a good manager. For me, the ultimate proof that a DAO can replace our existing flawed business organizations is when a smart contract can decide that it is a good time to give an employee the day off. If you are a DeFi enthusiast, that should be your challenge.