Loring Harkness - DAOs are dead! What comes next?

Thank you. Thank you.

Thank you. Thank you. No, no, that's too kind of you. Um,

wow. Augmented applause. That that is incredible. Uh thank you for the warm welcome. Uh as stated my name is Lauren Harkness and I am with Shutter Network.

Uh Shutter Network does a couple of things. It is leading the charge to encrypt the mempool on Ethereum mainet protecting users from malicious me and real time censorship. It also uh does private voting, shielded voting on snapshot which is the largest implementation of private voting in crypto. A little bit about um why we are here because I think it's always good to take a step back and remember. Um personally, I'm here because on February 1st, 2021, I was living in Yangan, Myamma, also known as Burma, a country in Southeast Asia.

And I woke up and there had been a military coup. And overnight the democratically elected government had been overthrown and imprisoned. And one of the things that the military dictatorship started to do almost immediately was to mine banking and telco data to identify pro-democracy actors and either steal their assets, seize their assets a and or imprison them. and I saw firsthand uh the impact that this could make in people's lives. Uh one of my friends is serving a life sentence in prison because he wrote a political cartoon which went viral.

Another friend of mine, he heard that he was going to be on an arrest list, and so he converted all of his savings into Bitcoin, memorized his seed phrase, and paid a human trafficker to take him across the border into Thailand, where he became a refugee. He then moved to the United States, reactivated his Bitcoin wallet, got all of his savings, went on to do a master's degree, and is now quite successful. So self-s sovereign money and is literally a matter of life and death for many people. But today I'm here to talk about Dows are dead and what comes next and a couple of caveats because I know that's a super snarky title. First of all, I am not dancing on the grave of Dows.

I love Dows. Uh I think they are incredibly innovative. Uh I think there is more to the DAO story. Um but I want to continue to innovate and not just rest on the work which we already have done and I am definitely standing on the shoulders of giants here. Um there has been so much wonderful work done in this space with regard to token dows like shutterd dow0x36 which I'm a member of the uh great number of moolok dows and nouns dows which have had their own approaches and more recent innovations like bread cooperative solidarity fund uh pix or it didn't happen which is ephemeral dows and the so so exciting the DAO security fund um which is the latest chapter in one of Ethereum's uh most dramatic stories uh a new chapter after 10 years and the last caveat is the stuff I'm talking about is really boring intentionally boring I'm not going to show you anything new or terribly innov innovative.

In fact, I'm going to be talking about bringing an old institution from Tradfi on chain. And I think that there's the opportunity for us to create institutions which live on Ethereum for decades or even centuries because Ethereum is designed to be credibly neutral infrastructure which lives forever. So, shouldn't we be building credibly neutral institutions which also live forever and do it on Ethereum? And building institutions is one way to build power over the long term. And so, if we do the boring stuff day in and day out, we'll all be laughing like these guys.

Okay. So, why are Dows dead? Well, Dows uh originally were thought of as this opportunity to do regulatory arbitrage and uh issue securities without actually issuing securities. And so we kind of uh forced uh startups into this DAO framework. But what we did was we actually designed organizations which are prone to reflective reflexive collapse.

And then when they collapse, we're all surprised, but we shouldn't be because this is exactly how they're designed. So every DAO token looks like this. And just looking at the chart, you all know which DAO this is, right? I'm not even going to say the name because you know which one this is. It's every Dow like literally every token is down 98 95% and it looks like this and it's painful.

Part of the reason is because we tokenized everything. We did hyper financialization. But part of the reason is we design systems which are designed to collapse. And specifically what that means is that every member who leaves the DAO makes the DAO worse for everyone else. And the most simple way to think about this is if someone sells a token, a governance token in a DAO, the price drops and other people start looking around and thinking, "Oh no, if others are going to sell, the price is going to drop even further.

Maybe I should sell now before the price drops and that creates this vicious downward spiral where everyone is rushing towards the exit." The same thing is true with other types of Dows like Moolak Dows. I love the concept of rage quitting where you can give back your governance tokens and receive a prata share of the DAO treasury but ultimately it leads to this same downward spiral because the DAO has less assets and therefore less uh ability to execute on its mission. So the common DAO failures which I see over and over and over again are finite runways. Dows spend their treasuries and at some point they're going to run out of funds.

The only question is sooner or later spent well or spent poorly. Next, governance fatigue. We all know that when people receive a token, sometimes they delegate their voting power and they never redelegate it. even if their delegate isn't doing a good job, even if their delegate has stopped voting. And many delegates in many Dows don't vote at all unless they're paid to.

And then the third is speculation, which I already touched on earlier. But a lot of Dows, the members have nothing in common except for a vague desire for the token price to go up. And if the token price doesn't go up, everyone rushes towards the exits. So what I am here to do is introduce a new model called the perpetual endowment network. Perpetual meaning everlasting.

endowment, a type of uh fund where the principle is always invested, never spent and only the yield is distributed and network like network state a decentralized organization of people that collaborate on how to make uh funding decisions. So this is a missiondriven membergoed onchain endowment and the key features are it has an infinite runway and if managed properly it will live forever. Number two it has manageable governance so that people don't get fatigued and check out. And number three, there is absolutely no speculation, meaning that people are there for the mission, not basically to pump their own bags. Infinite runways, let's talk about that.

The mechanism is really simple. You invest the principle and distribute the yield. In order to do that, every pen, perpetual endowment network, I'm just gonna say pen, uh, has two vaults. a principal vault which is funded by seat purchases and I'll talk about seats in just a moment. It's never spent and invested in DeFi yield strategies.

All of the yield is deposited into the yield vault and then the members of the pen, the seat holders decide on how to spend that yield. Speaking of deciding how to spend that yield, um manageable governance, you do need to decide which yield strategies you're going to deposit the principle into, but that's a decision which should happen very infrequently. Uh probably every 3 to 5 years ideally if things in DeFi are humming along in a boring manner. So the real question which comes up on a recurring basis is how do we spend the yield? Remember this is a missiondriven organization and so everyone is focused on uh roughly the same thing.

But what we're going to do is we're going to have slate voting one time per quarter. So for 90 days you don't have to think about the pen. You only have to make a decision one time every quarter. So governance is really simple. Plutoaucracy, one token, one vote.

No weighted voting, no quadratic uh voting. Uh number two, voting at predictable intervals so that you can check out most of the time. And number three, if you don't participate, if you go one year completely inactive, the pen can actually uh trigger a smart contract which will reach into your address and revoke the tokens and send them back to the pen and you lose your voting power permanently. So, we're going to make it really easy for people to participate, but if they don't participate, they're not in the pen anymore. And one thing which is kind of unique is no delegation.

Your voting power is personal to you and you either use it or lose it. Slate voting is super cool. And slave voting is basically um instead of uh analyzing and voting on individual proposals, what you get is a slate. And a slate is, say you have $10,000 to distribute that quarter, it's a list of organizations and funding amounts which add up to no more than $10,000. And um when you have a funding slate, it's either fully funded or not funded at all.

So it's not like quadratic voting or quadratic funding where you get these weird amounts. Maybe you need uh $10,000 for a project, but you get 2.57364, right? Um to do your project, and it's it just doesn't make any sense. And then we use ranked choice voting to ensure that the winning slate is uh a reflection of broad community consensus.

So here we have easy decisions for the seat holders to make uh coherent funding outcomes which are the result of community consensus. And one of the cool cipher punk things about pens is that there's no operations. So anyone can contribute to a pen, but no one can speak or act on behalf of the pen. they can only observe what the pen does. And if they uh contribute to the pen, the pen can recognize the best contributions through retroactive funding, including it as part of a slate.

And what this does is it prevents uh entrenched managers and rent seekers, which is so important if you're building an organization which is designed to last for decades or centuries. And last but not least, no speculation. And this is where we really get into the meat of things. Um, we're going to start off with soulbound seats. And you can only buy seats from one source, which is the bonding tunch contract.

I'll get into that uh more often uh in just a bit. There is no DEX pools. Uh there is no secondary markets. Uh, you can only buy from that one bonding tunch contract. You can also get a refund.

If you want to rage quit because the pen isn't aligning with your values anymore, put up your hand, ask for a refund, but it's going to be painful. It's going to be a small percentage of what you paid the original price. So, you're never going to make money off of your seat. Uh, and as I mentioned before, it's reclaimable. So, if you have been inactive for 12 months, then uh the pen can reach into your address, pull your seat tokens out, and you lose your governance power.

So, just to be clear, with seats in a pen, there are no sales and no transfers, and you will never be able to make money off holding a seat. Bonding tunch contracts are very similar to bonding curve contracts. Um, but because humans are lazy and somewhat stupid, um, we break it down into tranches rather than having every seat be a different price. That way it's easy for the meat in our heads to make these calculations about how much a seat purchase is going to cost. So this is just an example of what a bonding tunch uh contract looks like.

You have the buy price and here we have uh five different tanches of 2 million seats each. And you notice that the first trunch from the first token to the 2 millionth token, all of those tokens uh can be purchased for $1. Uh for the 2 million1st token, the price jumps up to $1.25 and stays that way for the next 2 million tokens. And you can see that the price increases exponentially all the way up to $3.

50. 50 cents for the last 2 million tokens in Trunch 5. Notice also the blue line, the refund is fixed at 50. Okay, so if you do put up your hand and ask for a refund, you will get your money back, but only a portion of it. And one other thing to notice about bonding tunches is the price is floating.

So if enough tokens are refunded or reclaimed, the price can actually go back down to a lower trunch and people can purchase at a lower price in the future. But in general, um, we give lower prices to people who purchase seats first because the pen is newer. It doesn't have a lot of principle under management. um maybe it doesn't have an established track record and then as the organization grows and more people uh have seats and are participating in membership uh the price increases. Of course, if people are rushing towards the exits, the price swings back down and it becomes cheaper to buy in.

And this bonding tunch curve is actually the key to designing for permanence uh for making uh the pen uh anti-fragile uh not prone to reflexive collapse. Um but it starts at a more fundamental level with this idea that the people who are joining the pen are doing so out of a conviction. They believe in the mission of the pen and maybe they also want to participate as a way of acrewing and spending social uh uh capital, right? So if you are proposing slates in a pen, you might um you know get credit or notice for that. Um similarly, if you're voting in a pen, um you might be spending social capital in order to get your chosen slate passed.

But one thing which people are definitely not doing is speculating. So we're focused here on conviction and social capital. And as I mentioned, you cannot sell your uh seats. You cannot transfer your seats. There is no price appreciation and you will never receive uh dividends or other financial distributions.

Um as I mentioned, uh pens are anti-fragile by design. And the key here is that bonding tunch contract and the dynamics between the buy price and the refund price. Because when someone leaves the pen and gets a refund, let's say that they purchased in tranch one, um they paid $1 to buy that seat and they're getting a refund of 50 cents. So yes, when someone leaves um they the amount of principal under management does decrease slightly but the ratio of principal under management to the number of seats actually increases. And so what this means is that there are two anti-fragile properties at play here.

Um, as more and more people leave the pen, um, it actually makes it better for those who stay. Um, and this is kind of weird. You, as a member of the pen, you kind of want people to leave the pen because it gives you relatively more power over how to spend the uh, yield which is being distributed each month. The other reason is that as I mentioned the price of the bonding tunch contract is floating and so if enough people leave it swings back down to a lower tunch and people who maybe were disincentivized to join at a higher price point now have an opportunity to join. So that means as more people leave it's in the interest for people to stay and for new people to join.

But this is not just theory. I would like to ask your help in putting this into practice and there are three next steps. Uh number one, please give me feedback on the model. You can start during the question and answer session. Um but also we have a forum space where there is a very robust discussion.

Um you can actually deploy a pen. Um, and you can build tooling surrounding pens. So, as I mentioned, anyone can contribute to a pen. Um, so you can build things like UIs to help people buy and refund in and out of the bonding tunch contract. You can create dashboards so that people can see what's happening in the pen.

Uh, you can do social media accounts. Um you can uh go to conferences and shill your pen and encourage people uh to sign up as seat holders. Um all of those things you can do uh to build existing pens. Um I did not uh announce uh the pen model here today. Uh that actually happened a couple of weeks ago in a blog article.

So, if you scan this QR code, it'll take you to the Shutter blog where we have a detailed explanation of the PEN model. And if you go to the Shutter forum, there's a link in the blog post. Uh you can participate in the forum discussion about the PEN model. I'll give you just a minute to scan the QR code, everyone. Yep.

The other thing you can do is we created an open-source blueprint so that anyone can quickly and easily deploy a pen for any purpose with any parameters that you want. So you can choose uh the manifesto, you can choose the maximum number of seats, uh the prices of each trunch in the bonding curve, the refund price, um how many days um the slate voting uh takes place. All of those parameters uh are uh disclosed up front and you can easily configure them to suit your particular use case. If you scan this QR code, it will take you to a GitHub repo with all of the open- source code. Uh do note that um it'll show a dead link unless you have the GitHub application on your phone.

Um but we will be publishing a new blog post uh and this opensource repo on the Shutter blog in just a few days. So pay attention. I'll give you guys just a second to scan the QR code if you would like. And now I want to seed your uh seed some ideas in your mind. I want to inspire you about what types of pens could be created.

Remember these are missiondriven organizations and so they are always organized around a particular uh theme or a particular goal. And we could have a privacy pen. Um, and just as one example, um, our friends over at Web3 Privacy Now, uh, could, uh, deploy and, uh, build a privacy pen and every quarter funding would go to privacy organizations based on the votes of the privacy pens members. Um, also ETH Cluj is an amazing community conference, but I know community conferences struggle for funding and oftent times they need to take funding from alt L1s and other sources which are not necessarily aligned with their values. Maybe we could create a community conference pen um where every time you buy a ticket to a conference, you actually get a free seat or a few uh free seats and then you can vote on which conferences are most deserving of uh funding for that year or that quarter.

uh DeFi United recently we saw in just a couple of days hundreds of millions of dollars being either um lent at low interest or donated to some of the wealthiest and most profitable corporations in the space. Um there's a better way to do this. We can create a DeFi united pen and when a protocol gets hacked, people can vote whether or not to disperse funding to make the victims whole again. And uh Protocol Guild does a wonderful job of funding Ethereum's uh core developers and researchers. Um they should not be doing it alone.

We can create a protocol pen and uh that can be used to make funding decisions about uh not funding all 187 core developers and researchers um but specific uh protocol development projects which are currently un underfunded. So if you're interested in any of these ideas or you have your own idea, uh please share it with me or others uh and we would love to help you build it. So that is a brief introduction to perpetual endowment networks um missiondriven uh membergoverned organizations which uh endowments which can live on Ethereum forever. Thank you so much.