DAOs and BORGs: blending the best trust-minimization techniques of the onchain and o... | Devcon SEA

[Music] [Music] this way to do this probably like that okay cool so uh this is going to be very informationally dense um the talk was labeled as intermediate but I am going to kind of like speedrun through the basics like super speedrun through them so don't get mad that I'm going fast um basically yeah it's to get to the good stuff faster right and then I'll slow down and take my time on the on the detailed interesting stuff um yeah I will as I go through I will be saying some very opinionated and potentially controversial things as if they are fairly simple uh obvious trisms the reason why I'm doing that is just because it makes for better talk uh not because I'm like a fascist who who doesn't understand all the Nu nuances so you can always feel free to like challenge me later on these various assertions but it just kind of simplifies simplifies the discussion simplifies the presentation Etc so with all that being said uh I'm Gabriel Shapiro uh I am what they call a crypto lawyer uh I'm also more recently a founder of a company called metalex that researches and develops uh certain uh what we call cybernetic law solutions that include uh governance issues for Dows um covered that so first question is is like what is a Dao I'm sure you guys have heard this question ad nauseum today um I will just say that like basically no one agrees so the da that can be defined is not the true Dao uh thus spake uh Dau um there are kind of like two basic answers you can give to this question right oh and let me start my timer here so I don't uh take too long um one is like basically if you just looked at everything that is called a DA and try to honor that nominal Essence so to speak that everyone uh gives it's it's just way too many things right um it's like Venture Capital funds that use Smart contracts it's uh art collectives um it's uh protocol protocol Dows things that are governing you know defi defi protocol parameters um just like some people even call like Bitcoin itself a dow as a network just many many many things and about the best you could say is that like it's some type of group of people who use um blockchain for at least some of their governance or like storing their assets or something right um that's not a very satisfactory or precise thing uh just to give like an example there yeah like like metac cartel Ventures da which which I actually helped found and I'll be mentioning throughout you know it's really a venture capital fund it's an LLC uh but it uses um like tokenized voting right and and uses smart contracts to hold the assets but you know at the end of the day it's just a venture capital fund right um so so that's an example of like how diverse these these things called Dow can be right my answer is like I have a much more opinionated answer uh which is I go for like a purist definition of dows right and I I just look at the word right the acronym Dao right so at a minimum Dows must be decentralized and autonomous and some kind of organization right what does decentralized mean it means that whatever like the human discretion is in running this thing um like it's it's dispersed over a large agile and potentially anonymous group of incentive aligned persons and we prefer that it's like a permissionless or relatively uh lightly permissioned um like entry into that group so that it can be very Broad and so that there are no like unfair hoardings of power so to speak and autonomous to me means that it's self-governing self-governing trust minimized and resistant to extrinsic exercises of power so the intrinsic power is decentralized and the extrinsic power is hopefully close to eliminated um and and you can actually go back to the original thing that inspired Dows which is an article by Stan larer not Dan larer although I think they might be cousins uh arguing that Bitcoin is an decentralized autonomous Corporation and he had three rules uh for for what he called Dax what we now called Dow um that they basically have three laws of robotics or what I we call Three Laws of dowb botics law number one is that a dow must run under the control of an Incorruptible set of rules that are implemented as publicly auditable open source software law number two a dow must not be able to change its rules without the consent of its stakeholders and such consent must not violate law number one and law number three a dow must seek to protect its own existence as long as that does not violate law number one or law number two um now what is a borg you may have heard this term U maybe not all of you have heard of it but it is a cybernetic organization hence Borg and what that means is it's some kind of uh like real legal entity could be incorporated or unincorporated could be a partnership but most likely is going to be incorporated um where the rules of that entity the legal rules of that entity mandate the use of certain smart contract or blockchain systems right so this represents a blend of legal and onchain Technology right um there are two main varieties one is Dow adjacent right so if you've ever heard of any type of um multisig that can freeze a defi protocol or some type of Grants uh multi- that is funded by a dow that's basically a dow adjacent Borg um an example would be like curves emergency multisig it can freeze pools that are uh younger than that are 30 days or younger and it can stop curve rewards to a pool and it can't really do anything else um and the other would be like bisorgo this would be like something like metac cartel Ventures D which I mentioned earlier or like a corporation that like tokenizes all of its shares and and lets them vote on chain and distributes funds on chain why is a borg not a DA well it lacks autonomy and it lacks decentralization um basically it violates those rules I mentioned earlier right um I won't dwell on that but it's there in the slides if you want to see exactly why uh also side note why borgs and not subd Dows you may have heard of the subd Dow model well subd Dows are usually not Dows they are usually small groups of multisig holders again that for some reason people call subd Dows so again they violate those rules they're not decentralized they're not autonomous uh from a legal perspective you really don't want um if these things are like small group of people who may incur liabilities or do bad things you don't really want them to be subd Dows because then the Dow may have legal liability for them you want them to be more separate and autonomous Securities laws also um you know if like the Dow token holders are basically like electing like just fully electing these people and and it's more of an agency type relationship you might be turning your Dow tokens into into shares into Securities um so these things these like we have various trust problem s with Dows and with multisig um and the ethos of crypto is verified don't trust right so the point of this talk the point of this entire track is coordination right how to solve these problems and borgs are basically a technique for doing this um the First Trust problem that is faced uh by these like these like multi sigs in relation to Dows is member management right often times uh when when a multisig is a dow adjacent multisig is proposed it's with like a very very specific membership set it might be people who are doxed it might be people who are pseudonyms like like the um well-known bantag who's like very high reputation as a Nim right but nonetheless it is a specific set but how do you accommodate over time membership changes who decides that and the default is that these things are just a standard safe and therefore those people decide the membership changes but but the Dow seems to care who the members are um yet the the people who were appointed they can change their membership willy-nilly and never have to go back to the Dow that's a problem right particularly a problem if there is no other recourse against these people as is typically the case other than quote unquote reputation slashing right if they do something bad they will lose their reputation and they will never be appointed to one of these things again okay but that's great for the initial set of potentially High reputation people who are appointed but what if it changes over time to like lower reputation people or what if the people who like claim to be on it like immediately actually just like assign the keys to someone else or something thing and and you could never know right um the other trust problem is asset management right often these things I mean I think like arbitrum recently approved like a 100 over 100 million to some like like gaming gaming grants Borg type of thing right and they they're putting in place trust mitigation measures but this thing happens all the time right these these multisig uh get these Dow adjacent entities get large amounts of money from a dow right um and this presents various issues um number one uh like transparency of asset management right um and like one thing to notice is that if you just like you may think that the fact that these funds initially go to a multisig means oh it will be transparent but actually in the default case uh the multisig can just immediately send them to a centralized exchange or to a custodian uh or sell them for Fiat and put it into a bank account and all that transparency would be lost and there's typically no nothing that can be done about that there's no legal rule against it um there's also no onchain mechanism uh that typically prevents it um so so the transparency isn't really there actually um and uh Asset Management accountability they're supposed to do specific things with these assets uh but there's often no way to enforce that either again other than this this sort of idea of reputation slashing um the other issue is permissions management right so I mentioned curve emergency Dow uh curve emergency Borg earlier that has certain um specific permissions over the curve smart contract system but but it's only supposed to use them for specific reasons right um like basically if there's some sort of Security emergency so it would be like very bad if um someone is on that multisig and uh let's just say um well let's just say it's someone from curve and let's just say like Unis swap Community tried to do like a uni stable coin pool on curve um and just because they're compe competing protocols the curve people didn't like it and they they shut off curve rewards to that pool or they killed that pool right um that would be bad because it's not for a security reason right but actually there's like uh no way to really um like enforce that or even make clear that that is an actual rule um an example here from real life is that kujira um basically the the devs had a highly levered position themselves in their own uh borrowing protocol and they use their multisig authorities to like change the parameters in their favor and just like Kick the Can down the road over and over again and eventually resulted in a protocol insolvency um that could have lost people a lot of money if they were not bailed out by uh thorchain people um the other thing is that like you can actually have bad mitigations to all the problems I mentioned right one is that you um like basically you just put the Dow in complete control of everything and again that laps us into the sub down model and then it also May really result in like an adverse selection effect in terms of who the who can contribute to the community so to speak right because um if like you can get rugged at any time by a dow well really valuable serious people are not going to operate under that they want either employment law protections or they want some kind of deal where like if I produce X you will pay me Y and if you don't pay me y I can come and sue you right and that is not really possible with that type of just make the dowo Supreme type of mitigation so it will lead to adverse selection and in fact I know of quality teams that just have a a rule of um you know we will not we will not work with Dows we will not do projects for Dows uh and it concrete example here is Juno Dow uh had set up a very complicated and I thought somewhat promising looking subow structure uh earlier this year and I I think it took like months I don't know all the details and and the Dow just kind of changed its mind and rugged all those people before it even really got wrong now maybe they were doing some stuff wrong I don't know but you know it it shows how things could be bad right and how people could be reluctant to do these um there also are trust issues faced by like extrinsic counterparties right um like I many law firms will not will not represent Dows cannot represent Dows right because they're not legal entities um basically some of the things that I mentioned like during the last slide like third parties can get screwed and and will often not not want to do deals with those um so to address these with borgs there are basically two sets of techniques one is onchain techniques and one is offchain techniques and we try to blend the best of both right I often say like a lot of onchain stuff currently that's like decentralized in name only is actually the worst of Both Worlds right it has none of the protections of Law and it actually has like none of the protections of true decentralization either and so we actually try to do the opposite we try to do the Best of Both Worlds with borks um some of the onchain techniques is like okay so almost all multisig are what's called a safe it's a very standard very battle tested very trusted set of smart contracts originally by the nosis team now it's an independent team and the genius thing that they did is they built hook into these uh hooks for guards and hooks for modules so without ever altering the core code you can come in and you can modify the way that a safe functions and we actually use this right we use this to limit the discretion uh of the safe um and also to enable third parties to do things to the safe um and this results in a can't be evil philosophy instead of a don't be evil philosophy so um guards basically constrain safes right um like they basic can check can you know they could literally limit it to like only sending money to a certain account or something like that um and then modules expand safes like they could allow a dow to uh come in and send money out of the safe somewhere um without the multisig signer signing that transaction right um so we call both these things implants keeping with the cybernetic law type of theme right it's like cyborgs um so like basically we can like at a very high level the guards can make the Borg a wh style a blacklist style or a um or a Freestyle right Whit list means everything is prohibited by default except what we specifically allow right so this could be like let's just say it's a borg that is only supposed to move liquidity among specific Unis swap pools you could just Whit list those pools and nothing and they can't do anything else they could just Shuffle liquidity between these certain pools right um so it it tends to be good for thing borgs that have a lot of money in them um you could also do we'll talk about Grant borgs but you can like rate limit the the at the the the speed at which money comes out or like add transaction size thresholds or things like this right um Blacklist is like everything is permitted except certain things right so an example of this would be like a borg let's just say it's a token that retains a minable function so it doesn't have a Cap supply and there's a trust issue there right because the people don't want to get infinitely diluted for no reason so you could Blacklist this Borg you could give the the permission to do to sort of um basically it could like partially own the mint mint function right so the in order to exercise the mint function you would need the approval both of this safe or this Borg and the Dow for example right and that would be an example of a blacklist um and then free is like basically the safe can do anything but maybe you want some of the other functions that we're going to talk about like member management functions um so how do we address like the asset management trust issues I mentioned right so um basically let's just take like a grants Borg as an example um we can add like rate limitations right so let's just say the idea that the Dow approved is like this should be a fire starter Borg um like it should give out lots and lots of 50k to 100K grants and no bigger right um and it should do this like like several times a quarter for three years or something like that well we can actually program that in to the to the safe right um and then they they have to do that they can't do anything different right right um and you still want to retain flexibility so the nice thing is you can either allow like the the caps and the rate limits to be crossed uh if the Dow co- approves that along with the safe uh or you can um put like uh a potential violation of a cap or rate limit subject to a time lock and allow a dow veto uh within that time period right depends whether you want to be optimistic or pessimistic right so you know we can Implement that veto functionality and that co- approval functionality you can also throw in like anti-dos measures right if you're worried about that you could have like like like you're worried about the Borg will just like spam the Dow and like overwhelm its like monitoring capabilities you can impose cooldowns between proposals right um member management issues so this is the beauty of having a legal entity right uh which we'll talk about in a minute but like you can have one legal entity that owns this multisig forever and its assets and it doesn't matter how much turnover there is in the members right it still has the same rules and the same set of smart contracts and all these things right so but what we want to do is we may just not want to allow like infinite discretion to the safe members to change their own membership so you could for example require like a dow Co approval or subject it to a dow veto when a new member is added um you could potentially say hey these guys might all collude and there's no way to get them off so maybe you allow the Dow to like unilaterally remove members even though it can't unilaterally appoint members there's all kinds of things you can do right but the point is is to drisk and and and Trust minimize this member management function right this could be very important for an entity that owns IP for example right um if like let's just say the entity's rules say this particular safe everyone who's on it is a director of this entity and then the entity owns the IP well now the Dow basically has like permanent check and Balance style influence over the IP and there's like no no risk of disruption right um things like that uh you can also put in like safe measures so that if like too many like you can allow people to resign um that helps basically with like trust minimize it for the contributors right because like typically someone can resign from a company but you can't actually do that in a default safe you have to be voted off um you can also do like asset reversion measures like if too many people resign or whatever all the money goes back to the Dow whatever you want to do um and then there are offchain techniques for managing these issues right so the first thing is like have a legal rapper for your daa Jason Borg uh we could sit here debate whether to have a dow a legal rapper for your Dow itself I think this is very very debatable and there are significant cons to it but there are almost no cons to wrapping uh your multisig your Dow adjacent multisig in illegal entity it as far as I can tell it's like pure upside um uh uh other than maybe some added expense right so you know it gets limited liability for the workers it gets continuity for the Dow that we discussed and then like entities are much much like legal entities and corporate entities are much much better counterparties for third parties um than like a general partnership with unclear rules is right so there's all kinds of benefits um basically you say in the legal docs of the entity that the entity owns this particular safe and all the Assets in the safe um and you also can say something like everyone who's on this uh uh in the safe is Aigner in the safe is uh automatically a director of this entity um and and vice versa anyone who's a director needs to be on the safe things like that right um You need to choose the type of legal rapper wisely uh I'll kind of skip through this quickly because we're running at a time but like corporations are not very good legal rappers for Dow adjacent multi they have very rigid rules llc's are more flexible but they still have the problem that like they're Geared for like to be owned by people right and we we actually don't want these entities to be owned we want them to basically be as close as possible to like the idea of a legal smart contract right there's a set of rules and there's people who have to follow them but there's no owner there's no specific beneficiary Etc the best for that as far as I've ever been able to hell with all my research is Cayman Foundation it's the only one that kind of checks all the boxes some other foundations can work but they have like more rigid like founder structures or beneficiary structures or reporting things it just just came in as the best right um and so here's how we actually do this in like the legal documents right so one you really want to Define like the purposes of what this entity is supposed to do right if it's a security multisig its purpose is to defend against security threats right you want to say that in the documents therefore it cannot use the assets for anything else it cannot use the permissions for anything else right um so we literally spell that out we Define security threats in this case it means any actual or reasonably expected threatened IM impending or ongoing frauds THS misappropriations extortions abuses hacks attacks etc etc against these specific systems and those systems will also be defined with like specific contract addresses and things like that um like of course you could always debate these things and then of course like you may end up in court but it's still better than having like no standard or no role at all um you can also we already discussed like making your safe members the same as your board of directors um you can basically you can be much more parsimonious in your legal drafting than you could ordinarily because instead of like spelling out pages and pages of rules you could just say whatever the rules are embedded in that smart contract we have we have agreed to them we've diligen these smart contracts and they embed our rules and we just accept their outcomes right um another one is uh this is very handy with the with the foundations you can have an emergency supervisor role so right you can basically say hey if the Dow the whole point here is that this Borg was set authorized by the Dow given some resources with a spe very specific set of rules who is going to enforce those rules right because remember there are no owners there are no beneficiaries there are only rules and people who follow them so what happens if they don't follow them right we try to make sure that they have to follow them with the onchain stuff as much as possible but it's not going to cover everything right for example it's not going to cover it's not going to prevent them from transferring IP right so we need legal rules for that well we could say hey if the Dow passes a proposal saying we think the board broke its own rules it can appoint an emergency supervisor and this person is authorized under both statute and contract to come in Sue in the name of the Dow investigate hold people responsible remove people who broke the rules that sort of thing it's kind of like a nuclear option on the offchain legal side uh amendments right this would be a way that everything could be rugged right if the board of directors is has the authority to amend the bylaws and the bylaws are the things that say Hey use the IP to the benefit of Lido doubt or whatever well that's a potential big end run right they could just amend it and expand it or whatever so you need a rule that says any Amendment also requires like a dow Vote or it could be the vote of some other multisig or some other Foundation entity or whatever right but the point is you you trust minimize it uh and kind of like the last technique is like uh people if these borgs are going to be entering into legal agreements with people the broader Community probably wants transparency on that so one thing we're doing is what we call ricardian triplers this has a technical definition which I don't have time to give you right now but the basic idea is like you can have a standard agreement and if if someone is signing up to the multisig well they would just sign this on chain and the variables are literally instantiated on chain right so anyone could look at the chain chain and reconstruct they could look at the chain plus the ipfs hash of this agreement which would have been in the function call and they can know exactly what agreements this has and who agreed to them and who signed it um so that's that's really it one kind of like big meme I will just give you guys that I wasn't able to like fit into this very short presentation is like think about the modular Trend in blockchains generally right you have these big highly decentralized highly autonomous l1s and then you have l2s that are more centralized but also sort of like more Expendable right um and they feedback they have feedback loops with the L1 what have we just described with borgs and Dows same thing right it's the same exact Trend we now have modular designs you can have a dow that's surrounded by a bunch of borgs just like you could have ethereum that's surrounded by a bunch of l2s right so there's this nice parallelism there and that's really it awesome Gabriel thank you so much we have time for one question so who wants to go and be the lucky person one question for Gabriel who here please at the microphone it's coming to you it's coming to you uh Gabriel thank you very much for the presentation I would love to have it because there is lots of available stuff um my question is that do you think if there will be a market for the borgs for instance like if the different organizations could like um uh shop for different borgs that uh provide certain functions to it yeah absolutely and I think there could be like even a market for like the implants right like you can just add and remove implants as you need them as your organization evolves and we talked about the Dow adjacent ones here but actually I think the same approach makes sense for any type of entity right your ordinary Corporation well the board of directors can be a safe the the stockholders can be like a tokenized dow with like tokenized shares that vote and everything could be much more transparent and in my opinion efficient right because right now if you do um like a like a board of directors resolution let's it's called an action by written consent in Delaware well that's saying something should be done or it's authorizing something to happen but it's not the it doesn't in one and the same moment actually cause the transaction to happen but if your written consents are safe signatures in one and the same and it's authorizing sending the money somewhere in one and the same action of approving it you're also doing it right so so it's just obvious to me that that it's much more efficient and much more powerful much more composable all those things and I think we will have yeah marketplaces that have these implants Market places that have borgs and once if they're all on the same standard it actually makes them much easier to do deals with each other like imagine a merger of two corpor two bored up corporations where the tokenized shares are on the same standard so that literally you could just call a function and one mer one set of shares merges into the other right on chain um so that's the kind of stuff we we're trying to build at my company metalex thank you so much please give me a great Applause I appreciate that Gabriel