Coase in the 21st Century: Building A Contributor DAO
October 13th, 2022

Written by Shreyas Hariharan

In the 1930s, an economist Ronald Coase asked a simple question: why does the firm exist? Why don’t the employees of Ford Motor Company - the mechanical engineers, designers, assembly line workers, and executives - contract out their services in the free market for Ford? Why instead do they come together as employees of one firm to sell their services?

The reason is that firms reduce transaction costs. There are significant costs associated with coordinating work and a firm is designed to reduce those costs.

There are three types of transaction costs: triangulation, transfer, and trust.

Triangulation is the cost of finding and measuring the quality of a service. It is difficult to constantly search for engineering talent and evaluate the quality of an engineer’s work. If Google had to contract new engineers for each of its product updates, it would be costly and cumbersome. Instead, it is much easier for Google to recruit full-time engineers who are competent and can be allocated to projects as needed.

Transfer is the cost of bargaining and negotiating a contract for the good or service. Deciding the scope of a particular project, agreeing on terms of services, and negotiating fair prices for the work involved is costly. For many types of work, it is easier to do this once an employee is hired and re-evaluate whether salaries are fair every year, rather than do it every time a new project comes up.

Trust is the cost of evaluating whether the counterparty is trustworthy or whether you have sufficient recourse if they aren’t. Trust increases as the frequency and duration of interactions between people increases. Short-term contractual relationships involve less trust. The legal system exists for recourse when trust is broken but engaging with the legal system should be a last resort as it involves significant costs.

The internet has reduced transaction costs.

The internet has reduced communication costs between people. It is significantly easier today to find and communicate with people around the world than it was a few decades back.

Uber, Airbnb, Fiverr, Thumbtack, and Craigslist help individual drivers, home owners, designers, and other workers sell their services to firms and individuals who demand them. The internet has dis-intermediated various firms, unions, and taxi medallions who, in the past, provided a valuable service to reduce the transaction costs between the supply and demand for labor.

But transaction costs are still high for specialized work on the internet.

Driving from A to B via Uber is a well-scoped task, with a clear measure of success (reaching the destination), and low variance in output. However, complex coordination is still costly on the internet. A firm is better positioned to build a well-designed software product; a group of part-time contractors on the internet would find it much harder to do that. Building, maintaining, and upgrading a software protocol requires complex coordination. Scaling a database requires complex coordination.

Though our ability to communicate in the digital world has improved significantly, our tools to coordinate in a digitally-native way haven't evolved at the same pace. Blockchains and DAOs are defining coordination mechanisms. They champion values of decentralization, programmability, and community ownership.

Blockchains are computers that can make commitments.

“Blockchains are virtual computers that run on top of a network of physical computers that trade off performance (overhead of the consensus mechanism) for the novel property that you can make credible long-term commitments to users and developers.” - Chris Dixon

Blockchains are slow and expensive computers. But they enable something new: the ability to run programs that can make commitments that people can actually trust. They enable hardness, the capacity of a system to make something very likely to be true in the future. Blockchains have nation-state-like characteristics like contract enforcement and internet-native property rights.

DAOs are organizations that can make commitments.

A DAO is an internet native organization that has its critical rules governed by smart contracts rather than legal contracts. These smart contracts encode important things like membership, ownership, key assets or property that the community owns on-chain. At the edges, you have humans that govern over critical parts of the DAO like the treasury, upgrades to the protocol, and changes to the constitution of the DAO.

A DAO inherits some of the properties of the blockchains that they are built on. Aave, Uniswap, and Nouns can make long-term commitments that let developers build on their protocols without fear of being rugged or having platform lock-in.

The DAO economy: open-source software, permissionless capital formation, and liquid labor.

The fact that open-source is the default in crypto is revolutionary. You just need to solve a problem once, after which someone else can build on top of your code. The openness extends beyond software to communications and transparency in DAOs. Protocol DAOs like Aave and Lido have open governance forums and Discord servers where anyone can follow discussions and contribute. Governor contracts are easily accessible, treasury assets can be viewed in real-time, books of accounts are transparent, and tokenholders can decide how the treasury is allocated.

Permissionless capital formation is the second piece of this new economy. Last year, Constitution DAO did a permissionless crowdfund to buy the US constitution. They raised $47 million in two weeks from thousands of people around the world and distributed ownership of the shared property to those people. Ethereum made it an order of magnitude easier to execute the global crowdfund and ownership distribution. While they didn’t end up winning the bid for the constitution, it was an amazing example of what’s possible when people can seamlessly crowdfund for a cause they care about.

The internet is the new America. ~ Balaji

The third and least-appreciated feature of the DAO economy is liquid labor. The internet is global by default, and so are blockchains. The internet has a global standard for domains; blockchains have a global standard for how assets are created, stored, and transferred. A blockchain like Ethereum treats every user and developer interacting with it as a first-class citizen, irrespective of whether they are from the US or Venezuela.

The internet, the cultural acceptance of remote work, and a global internet-native system for payments and identity help labor become more mobile. Your identity need not be tied to your nation-state identity; instead, you can have a pseudonymous identity or multiple identities that build a reputation and earn income. People don’t need to immigrate to another country and apply for a work visa. They can find work on the internet.

Contributing to protocols is a new type of internet-native work.

As the DAO economy grows, contributing to protocols will become an extremely important piece of the future of work.

Protocols start off as open-source code built by a few engineers and deployed on the blockchain. After the protocol has usage, it needs to be maintained, upgraded, and deployed on other chains. It also needs to incentivize development, growth, and integrations.

For example, Aave needs a long list of functions to be performed by the DAO that the core team is not working on. Aave’s core team focuses on building v1, v2, and v3 of the liquidity protocol and deploying the stablecoin GHO. Meanwhile, the DAO works on asset listings, cross-chain deployments, oracle updates, risk parameter changes, upgrades to the governance contracts, deployment of the treasury, and upgrades to and deployment of the safety module. There is a whole set of functions that aren’t being done by the full-time employees of Aave Companies. Instead, they will be done by community contributors, whether part-time or full-time.

Contributing directly to protocol DAOs as an individual is difficult.

I started off as an individual contributor to protocols like Aave and Uniswap and realized that it is quite difficult to contribute directly to protocol DAOs as an individual. Contribution requires complex coordination and governance influence to have an impact. For example, an asset listing requires risk analysis, smart contract engineering expertise, and governance coordination. It also requires governance power - 80k AAVE tokens in proposal power (worth $6.5 million today) - and credibility to implement a smart contract upgrade or a treasury strategy.

Contributor DAOs make contributing to protocols easier.

A contributor DAO is a collective of like-minded individuals who make contributions through a unified brand but preserve their independence and ownership.

It consists of part-time or full-time contributors that have specialized skill sets. In Llama’s case, our contributors include smart contract engineers, DeFi strategists, and analytics professionals, and we contribute specifically to the leading protocol DAOs.

Contributors aren’t employed full-time and instead dictate their own hours. They work on things like smart contract upgrades and treasury strategies for protocols like Uniswap and Compound through a contributor DAO. They get to work independently but with other collaborators; they work as freelancers but with some of the benefits of a full-time employee.

Income earned for the collective goes to a shared community treasury which is owned and governed by contributors. Contributors earn stablecoins, governance tokens in the underlying protocols, and, importantly, governance tokens in the contributor DAO.

As a contributor DAO does more work with a protocol DAO, it becomes embedded in and almost “becomes” the protocol DAO. It has high context on the needs of the protocol and can allocate resources and capital to best serve it. The boundaries of DAO-to-DAO relationships are fluid.

Contributors benefit from increased governance influence of the contributor DAO.

As an individual, it’s hard to have governance influence over a protocol. You need delegated governance power. An individual contributor who is specialized in one area (e.g. smart contract engineering) does not have time to deal with the governance and business development process of working with a protocol.

For example, dydymoon was trying to contribute to Aave with thoughtful posts on DAO to DAO partnerships, tokenomics, and treasury strategy. Dydy has a strong financial mind, but he was pseudonymous, didn’t have smart contract experience, and had limited connections and governance influence. He designed thoughtful DeFi strategies but they did not get to a meaningful stage of execution. We reached out to him to contribute to Aave through Llama and he was excited. We could use dydy’s financial acumen and pair it with governance and smart contract experience, as well as significant proposal and voting power. Dydy has contributed to several Llama proposals that have actually been implemented on-chain including listing CVX on Aave, treasury strategies (1, 2), and deploying BAL to veBAL. We aim to maximize the impact that individual Llama contributors have on protocols.

Contributor DAOs resemble crypto-powered labor unions.

The contributor DAO accrues negotiating power and the contributors have ownership and can decide how the treasury is deployed, which DAOs to work with, and how decisions are made. The power and responsibility lies with the contributors rather than being mediated by a middleman.

Contributors can find collaborators for work that involves complex coordination. For example, a risk analyst can find a smart contract engineer and a data engineer to implement risk simulations and an asset listing.

Contributors can have recourse if there are issues with DAO customers.

Contributors get paid more easily and quickly through a contributor DAO than via a protocol DAO.

We have early signs of contributor-market fit.

Several contributors are making a full-time income contributing to Llama, even while they are working another full-time job or working on other projects. In some cases, contributors have a strong real world identity and reputation (e.g. senior engineer at a big tech company) and are looking to contribute to Llama to build their pseudonymous reputation.

A contributor DAO should build internal technology where relevant to help increase the productivity of contributors and scale contributions. Contributors should be able to take on more work in less time, find quality work more easily, get paid quicker, and build a sense of well-being. There’s as much focus on contributors as there is on the DAO.

Hundreds of people today - some pseudonymous - earn income contributing to open-source protocols, getting paid in open-source money, often gaining ownership over governance decisions in these protocols. This is still underrated.

Contributor DAOs reduce transaction costs for highly specialized work.

Corporations were unbundled, leading to individuals working directly for DAOs. Now, those individuals are getting rebundled into contributor DAOs because of the efficiencies they bring.

Contributor DAOs make it easier to find work (“triangulation”). DAOs are these abstract entities in the ether. There isn’t a CEO or executives that outline what needs to be done. A contributor DAO that has high context on the DAO’s needs. As an individual, it is difficult to find long-term and sustainable work in DAOs. But as you build a reputation in a contributor DAO, you can continue to get access to work. While quality of work is difficult to measure, reputation systems and incentive designs can help determine the quality of work in a bottoms up way.

It is easier to bargain and agree on a contract for a service via a contributor DAO (“transfer”). It is easier for the DAO to have an asset listing scoped out and done within a certain time frame with a contributor DAO than with an individual.

The counterparty is trustworthy and there is some sense of recourse in a contributor DAO (“trust”).

The last piece is an important one: well-being. The emotional well-being from working with your friends and collaborators rather than as an independent freelancer in the free market is significant.

Contributor DAOs help labor earn capital.

Over the past few decades, capital has significantly outperformed labor because:

  • Interest rates fell

  • Globalization increased

  • Corporate taxes fell

  • Labor bargaining power fell

  • Software reduced marginal costs

This trend will reverse, at least partially. Over the next 10 years, labor will likely outperform capital; specifically, growth in real wages will exceed asset returns in the US and global economy.

In crypto, there is more demand for contributors to protocols and DAOs than there is for capital. But crypto is also unique: contributing to protocols gives people ownership in these networks. Thus, labor will start earning more capital.

Open-source software, seamless global distribution of ownership, and liquid labor help individual contributors earn capital. Contributor DAOs take this to the next level.

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Artwork credit: 0xEFRA.

Original art: A Painter's Workshop by Phillip Galle, showing artists working in a collective.

Thanks to the following people for feedback and review: Austin, Daniel, Rajath, Sina, Julia, Joanna, Elad, Luke, and Avichal.

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