Making DAOs Legal with Aaron Wright from OpenLawJun 02, 2021
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Host: Hey everybody. Welcome back to another episode of the Unstoppable podcast. I'm Diana Chen, your host, and I'm here today with our guest, Aaron Wright. He's a co-founder of OpenLaw, the LAO Flamingo DAO, and he's also a law professor at Cardozo University. So, we've got lots to talk about today. Welcome Aaron. Thank you so much for being here.
Aaron Wright: Thanks so much for having me, Diana. It's really great to be here.
Host: So before we dive into all of the things that you're involved in, I want to hear a little bit more about your background. So how did you initially get into crypto, and then how did you get super involved into DAOs and NFTs?
Aaron Wright: Yeah, sure. So as you noted when you kicked things off, I'm a professor of Cardozo law school, and also had done quite a bit in technology. So before joining Cardozo's Faculty, I had the pleasure of working closely with folks in the Wikipedia ecosystem. I started a company which was sold to the for-profit sister project to Wikipedia called, Wikia. And we helped grow that to be one of the top properties on the internet. As part of that process, just to hang around with folks in the Wikipedia ecosystem, I fell deeply in love with open source technology. I have a background in Law, History and Economics, so not surprisingly, Bitcoin hit my radar very early on. So starting in about 2011, I just began to fall down that Bitcoin rabbit hole. And I really began to think about Bitcoin as a protocol for money, which at the time was a really interesting concept. Now, I think folks have increasingly accepted, that is one of its destinies. And when Ethereum launched, I was also thinking about using blockchain technology or creating a protocol for Law. And that's, you know, in part what Ethereum was aiming to do. Because of that I began to get very interested in the Ethereum project, the Ethereum ecosystem, and was fortunate to play a small role helping to launch Ethereum. And from that I got to work closely with Joe Lubin, Vitalik, and other folks that were part of the initial Ethereum team, and wrote a book on blockchain Law and policy. Took some of the research related to the book that I wrote and began to apply that into a project called OpenLaw, and a big part of the Ethereum ecosystem off the bet. And also, the work that I've done is been thinking about new forms of organizations, including DAOs and different ways in which blockchains can be used for IP, which covers NFTs. So, I've just been really thinking deeply about this space and different applications, and how this entire new ecosystem can emerge, you know, pretty much for the past decade.
Host: Wow. So, you were one of the OGs for sure. And so, since we're going to be talking a lot about DAOs in this episode, can you briefly just talk about like, what is a DAO for people that aren't super familiar with it just so they have some background and context for what we're about to talk about.
Aaron Wright: Yeah, sure. So DAOs are a concept that really began in the Bitcoin ecosystem. Dan Larimer, who happened to also start a number of projects including EOS back in 2013 wrote an article on Bitcoin magazine, thinking about how a blockchain could be used to manage a corporation. He called it a decentralized autonomous corporation or DAC. That concept got generalized by Vitalik and the Ethereum white paper, and lots of folks inside the Ethereum ecosystem began to think about; well, can we create new structures using a blockchain that are not necessarily corporations to top-Down hierarchical structures, can we make more open-ended, more permissionless flatter organizations, and not only run by humans, but also run by algorithms. And so this concept of a DAO kind of took root in the Ethereum ecosystem. It's a little bit of a heady concept, but one way I like to think about it, or one way to, kind of, wrap your head around it is that they're a headless organizations, they don't have any leader. It's either entirely run by members, or over the long run, we may see DAOs that are increasingly run entirely by algorithms. So, some folks have—-they have characterized Bitcoin as a DAO. It's entirely run by the minors, and a handful of core developers. But the algorithm kind of sits in the center and it's coordinating everybody's activity. And not just the algorithm, but, you know, the core, Bitcoin core software and nodes and all the other things that are put together in order to run Bitcoin. And what we're seeing on Ethereum is the ability to begin to set up, not once for an entire protocol, but for smaller groups of people. So another analogy that may take root, if you're unfamiliar with DAOs, is thinking about a DAO almost like a subreddit with a bank account, and a bit more rules. And those rules are rules that are embodied in smart contracts or potentially embodied in, in other documents, like legal documents, - -. So hopefully, that was helpful.
Host: Yeah. For sure. So there's definitely a lot of legal and regulatory considerations when forming a DAO, and we'll dive into all of that. I want to dive into all of the projects that you're working on. So, let's start with OpenLaw. Like you mentioned, it's basically an online protocol for creating smart contracts, like legal agreements, that aren't written by an attorney, but rather by a computer. And so tell me a little bit more about OpenLaw, like how did you get the idea for it, how did you start it, when did all of this happen, I think all of this is still super cutting-edge? So, how were you able to get traction for it, and how has it been going?
Aaron Wright: Yeah. Sure. So, the concept around OpenLaw is really our attempt at building a recording contracting system. So there has been lots of technology that's come out of the cypherpunk movement, which was a movement of cryptographers and technologists that really took root starting in the late 1980s. Bitcoin in many ways was one of the first projects or mainstream projects that came out of that movement. And those cypherpunks were talking about digital currencies, digital assets, digital gold, you know, for decades before we really saw root in Bitcoin. At the same time, those same cypherpunks were thinking about digital property, digital rights, and other ways to not just have digital assets, but digital assets with something that looks like property rights with rules around them. And in many ways that's a part of what Ethereum does. And the last leg in this kind of stool of the cypherpunks, and there was a couple others, but the last major leg was recording contracting system. The idea here was we can definitely create digital assets using technology, we can apply some rules related to it, but there's risks that are associated with transferring anything of value. And one idea to manage those risks was a system that use legal agreements, which we've used since the age of Mesopotamia to manage risk, and have legal agreements that are not trapped in word documents, or trapped in paper documents and file cabinets, but have legal agreements that can be understood, comprehended, and processed by computers, and secure cryptographically, presumably by a blockchain. And so that's what we built with OpenLaw, we built a functioning, you know, recording contracting system that enables us to take legal agreements, and enables us to turn them into computer readable objects. And interact with blockchain based smart contracts in particular, Ethereum based smart contracts. So we can begin to take advantage of the great things that we have in the traditional world when it comes to managing risk of legal contracts. And then there's speed, efficiency, and programmability of digital assets on Ethereum using smart contracts and other token based systems. We, kind of, marry those two worlds together. And we've been applying that in the context of DAOs, because it's a really great way to do that. When you get a group of people together, the risks increase, and also, the potential efficiencies increase. So, we can take the technology we use in OpenLaw site to manage those risks. And we can take the smart contracts that we've help built, and other folks have help built with us to begin to, you know, build these new forms of organizations.
Host: Got it. So for somebody that say he's wanting to form an LLC at, or an entity, or a DAO or anything like that, how would they go about using OpenLaw? Would they still need to hire an attorney to write up the contract for them and then OpenLaw simply puts it onto the Block Chain? Or can they go on open law, and there's already a template there for them, and they're sort of, just filling in the blanks?
Aaron Wright: Yeah. So, we're not taking, kind of, a web to turnkey based approach. It's not like a rocket lawyer-like service or some sort of turnkey legal technology service. Really, at this point, we've been focused on applying our technology to build that curated network of DAOs. That includes, includes the LAO. That includes Flamingo DAO, Neptune DAO, which we just launched. There's another one coming in two weeks, and then about three more coming after that. So it's at this point, a network of three DAOs. I imagine, at some point next week it will be—well, next year, it'll be more like 10 to 20 DAOs, that all are using kind of the same core technology, have, you know, in part overlapping membership, new members flowing in, and are kind of focused on different areas and opportunities in the Ethereum ecosystem, primarily.
Host: Gorgeous. So, this isn't something that—I think, sometimes when people think about smart contracts, they think of, you know, computers basically replacing attorneys in the future. This isn't something that's going to put lawyers out of their jobs, or completely take over, right?
Aaron Wright: Well, I think it could, yeah. And over time, we may start building some more turnkey Solutions, but at this point, it's such a nascent industry, we want to kind of nail the right approach, remote legal regulatory perspective, from a smart contract perspective. And the last part about DAOs which I think is underappreciated is you really need a kind of somebody to shepherd along the community. So it's not top-down control, but there's a lot of operational Support that's needed. Going back to that analogy about DAOs being a little bit like subreddits with a bank account and rules, but most subreddits have a mud. And many of those muds are a core reason why those subreddits are successful. Here, you know, what we do on our side is just make sure that we can clean up all the operational croft, you can know that you've got a DAO that's set up appropriately, you have all the operational piece—pieces handled. And then you can just have, kind of, fun working with others in a, you know, with a category or area or topic that you're interested in. So we think that that's the right structure, we think that's kind of what catalyzes really successful communities. And I think it make some intuitive sense if you've ever participate in any online communities that—you can't kind of just do it by yourself, you need a little bit of help along the way.
Host: Yeah, 100%. So, then looking farther into the future, maybe five years or even ten years Down the line, how do you see OpenLaw being used, did you see it being used in the same way? Or how do you see this ecosystem developing?
Aaron Wright: Yeah. I mean, I think, you know, as digital assets become more important, right now, there's like $2.X trillion worth of digital assets, which is pretty incredible. Especially if you think about it, even five years ago, when there was, you know, $10-plus billion worth of assets. I think this ecosystem will just continue to grow until people don't think; oh, there's a—-there is non-digital assets. I think at some point, every asset that can be digitized, will be digitized. It will be running and secured in some way by blockchain or some blockchain-like technology. And as that happens, and as the value of transaction goes up, the need for recording contracting systems like OpenLaw will continue to grow. Right now, you know, in the context of the rest of the commercial World, a lot of the deals, or transactions that occur in crypto land are comparatively small, you know, they'd be barely notice by somebody that's working in traditional finance or in Wall Street or you know, major law firms or lawyers that put together massive, massive deals on a daily basis. So there's a long ramp-up, I think, for digital assets, and as that happens, there'll be more and more use cases for recording contracting systems like OpenLaw.
Host: Yeah. And something that I'm always curious about too, is like the legal profession as a whole is probably one of the most behind in terms of being technologically advanced. And so now, we're talking—you know, like very cutting edge technology, like, at the forefront of all of that. Do you see law firms, like major law firms adopting this, do you see law firms catching up? Do you see law school is teaching this sort of thing, or maybe you teach this at Cardozo, I don't know?
Aaron Wright: Yeah, we definitely do. I mean lawyers, lawyers are great in many ways, and have a bad rap in many ways too. So, they're smart, engaged, interested people. They are not graded technology yet, I think that's in part, because that folks that run the legal industry tend to be even older than other industries. You kind of hit the nadir of your career as a lawyer, not in your 40s or 50s, but really in your 60s and 70s. So, a lot of the folks that run major legal institutions just tend to be a little bit older. They also tend to be a bit more conservative and cautious, which has some benefits to it. But I do think the legal industry, at some point will change, what that looks like is unclear. You can imagine, you know, smart contract based systems and more standardized agreements beginning to take root particularly in the blockchain ecosystem. You're starting to see certain transactions, or certain DeFi protocols that are just entire deals; deals that lawyers would otherwise negotiate. That may limit the amount of legal work that's required in some areas that may increase the go work as complexity increases as well. So, it's always a mixed bag. I think, just like anything else, just like we're seeing in finance, just like we're seeing with central banks, just like we're seeing, you know, frankly right now with NFT as a media, the game is changing. The reason the game is changing is because we have this powerful new technology that can secure digital assets, apply rules around this digital assets, and move them really fast. And lawyers, in many ways, are the architects of commercial transactions, right, they're the ones that put them together, they make sure that things are in order. So if more commercial activity moves on to a blockchain, I imagine crafty lawyers that have existed pretty much since then, the beginning of time, or beginning of civilization will figure out a way to make sure that they're in the center of that world too.
Host: Yeah, for sure. All right. So, I want to talk about the DAOs that you're involved in, the LAO was sort of the original one, and then from that has also spawned Flamingo DAO. And then you mentioned Neptune DAO as well. Tell me a little bit more about each one, how they're different. And why was each one started?
Aaron Wright: Sure. So, you know, the—we've been fascinated particularly in Ethereum Community with DAOs from the beginning, right, it was in the white paper. We saw early DAO experiments like the DAO itself, which caused a lot of drama in the Ethereum community. And for folks that are not familiar with the DAO, it was trying to do a lot of what we're seeing today, pull together capital, support projects that are in need of capital through more democratically managed process. Unfortunately, both due to technical and legal reasons, the DAO was a spectacular failure. They collected a tremendous amount of ether, and then a hacker attacker insider, still not fully known, drain the DAO itself of assets. And, kind of, this really interesting experiment that really geeked out a number of folks in the Ethereum ecosystem, kind of, ended, because the half-work of the Ethereum ecosystem, a lot of farther for Bitcoin maximalist to begin to scream at the Ethereum folks. But this idea of DAOs never really dulled. So, once people, kind of, pushed beyond PTS DAO, or after a couple years past, after we learned a little more about how to develop smart contracts, how to write them in a more secure manner, we began to see an increase in uptake in the number of projects experimenting with DAOs, including a really great project called moledao which seemed to solve, at least in part, some of the technical challenges with the DAO itself in a really simple elegant way. And then me and James Young and other folks that worked on that really deserve a lot of credit for the work that they did there. And it occurred to us, when we were looking at moledao that we should rebuild the doubt, we should be rebuild the DAO in a way that works with US law, and so we can begin to experiment with these data structures here in the US. The thought was, if we can figure out how to do it in the US, in a way that worked with the existing regulatory structure and scheme, we'll be able to generalize this even further, and hopefully generalize this across the globe. And the last example that we saw that kind of merit this was centralized exchanges. There was a number of early centralized exchanges before Coinbase and Kraken, and the handful that we have in—here in the US. And they were really wild-westy, right, there was security issues, there was hacks, famous ones like - -. And then Coinbase, and the folks at Kraken, and number of other exchanges like Gemini, they said, look, we have this rule set here in the US, let's follow it, let's try to dot I's and cross T's when it came to a regulatory perspective, and we can bring digital assets in masses. And that's what they did, right, that's why we're talking about it, that's why there's $2 trillion in assets that are floating around at different blockchains, it's because of the work of these centralized exchanges. We feel like the vision of DAOs are really important. They are going to become the native organizational structure on the internet, and we need to figure out ways to push that forward. So we rebooted the DAOs itself with the LAO, and the concept was similar, we pulled together capital. At this point, there's been about a little over $50 million that's been pulled into the LAO, and we back projects. So it launched just over a year ago. It has a little over 65 members, so it's a strong but not too large group of people. And we've supported a number of great projects. This hive mind is kind of sifted through the noise and clutter, and distractions of the internet, and various different crypto projects. And we've seen it move really quick, we were, you know, early supporters of projects, like tornado cash, we were the first check into NFT marketplaces like SuperRare. We even found that we were beating out, you know, more savage venture capital funds and crypto funds, because we had 60-plus people coming through, you know, all the information on the internet to find the best projects. And collectively we could see if those projects were good by leaning on this collective group of folks. The projects that the LAO has backed has ranged beyond, you know, just the ones that I mentioned, they're really focused on lots of NFT opportunities, DeFi opportunities. And since number of the members of the LAO have been around the Ethereum ecosystem from the beginning, or are building, you know, significant protocols or have built significant protocols in space. We've also focused a lot on infrastructure, decentralized file storage, DAO infrastructure, personal tokens. There's different categories that we've been really focused on. And, kind of, rooted in that, we got really excited about NFTs, and we began to think about actually acquiring NFTs directly into the LAO itself, we realized that wasn't a good fit. So, we decided, and the members decided to incubate a new DAO, and that's called Flamingo DAO, and we took the same hive mind approached and began to collect NFTs, that launched in October of last year. So before all the NFT hype occurred, we were fortunate enough to take the same hive mind approach, begin to find great artists, begin to find great NFT opportunities. And we've collected at this point, I think about 1500 NFTs, which is pretty fast, and pretty cool as well.
Host: Wow, very cool. And then Neptune DAO, which is the most recent one, can you talk a little about that as well?
Aaron Wright: Yeah. So Neptune is kind of the next DAO that we launched. Again, this came from members of the LAO itself. So, we saw with a number of great projects during DeFi summer, that we're doing fair launches, that we're trying to kind of avoid traditional venture capital style project investment that there would be a demand for some projects, maybe an increasing number, maybe just a handful, to not just have some sort of support that was more venture style in nature, but actual support through the provision of liquidity. And, that really is what the core of Neptune is. It has about $30 million—I guess $35 million worth of ether that's collected. And it can support projects that exist already with liquidity if they need it, you know, and/or can help support projects that are trying to do fair launches or other, you know, other types of novel ways to launch her project into an ecosystem. And that same high mind approaches is working there, we've already started to deploy capital, even though it launched just a couple weeks ago. And there's more that are coming. So, there's going to be an internet museum that's coming, that was incubated by the members of flamingo. There's going to be an internet stable that's collecting NFT base horses that's coming called Dark Horse. We're going to likely launch something related to both social tokens in the metaverse. And you may see some of our NFTs itself in Flamingo have their own DAO. So there's a lot cooking, and it's growing really fast.
Host: Wow. Okay. So when it comes to DAOs, I guess there are two areas where I'm particularly interested in. And the first is how do you structure a DAO to make it successful, and then the second is more of the legal ramifications around that. So talking about structure, when you have a DAO, you said the LAO has I think 60 or 65 members, is what you said right now, is that sort of where you guys are capping it at or is, is there a cap for a DAO, and should DAO have a cap for the number of members?
Aaron Wright: Yes. So should, I think the answer is no, I mean, I think everybody would like to see very large DAOs that have tens of thousands, if not hundreds of thousands of people participating in them. I don't think we're ready for that yet, both for technical reasons, and also, for legal reasons. So in the US, and the abundance of caution, we've capped the number of members that can be in the LAO Flamingo and Neptune at 99 members. When you go beyond that, you start to run into areas that may require the organization to go public, to file public, you know, public documents, so that everybody understands what's going on because you're touching poor people, so the government at least, here in the US naturally wants to—want you to disclose more information related to how you operate. So that's why we have a 99 member cap and that works pretty well. In order to manage the legal risks, we've wrapped the DAO and the underlying smart contracts in a legal entity, a limited liability company, and we initially did this in Delaware. I think increasingly we'll - - do that in Wyoming, because Wyoming has recently passed some legislation that recognizes DAOs' entities, which is great. And then in terms of other structuring, there's a lot of on-chain and also off-chain coordination. So everybody congregates in a discord channel, it's very lively. People will identify opportunities if it's in the LAO side it'd be new projects that are coming out, if it's on the NFT side, it could be either up-new NFTs from great artists or strategies or ideas, or concepts that they—they've been thinking around. And then we also do, you know, in person coronation for some folks, they like that better. So we'll have weekly calls, where people can check in and chat through things. And as COVID has begun to recede at least here in the US, we even started with to get folks together in person. So it's kind of a mix of on-chain/off-chain, a mix of—just hitting up different channels like discord servers, and/or channels and, you know, and/or calls. And, kind of, that, that mix works, you know, some people like to just, you know, clank away on discord, some people only join the calls, some people are just lurkers. It's a lot like a message board. And we—well, we're surprised how many people do lurk. So even people that are quiet, they'll ask for information periodically, or chime in with opportunities. So people definitely, are paying attention. And I think the reason they're paying attention in the DAOs that we set up is because they're staked, you know, they've contributed significant amount of their capital to these projects. Everybody has their interests aligned because of that, and, you know, it's a nice group of folks. Everybody's kind of, tied together, financially, and also thematically with the general topic for the DAO itself.
Host: That's another question I had too is, with regards to the buy-in, do you have equal buy-in for all members or are there different levels of buy-in, and then how does that then correlate with how much voting power you have?
Aaron Wright: Yeah. I mean like, there's a million ways in which we structure it. We just wanted to take a step forward, and so, the way we structure the LAO at least initially, you could contribute 120 ether and receive 100,000 units in the—in the DAO itself. There was initially 10 million units that were available, so if you contribute 120 ether, you'd receive 1% of the voting weight in the DAO, and 1% of the DAOs potential profits or losses. And you know, things are looking pretty good on the outside, but only time will tell once we go through a bear market, you know, how well this collective decision-making was. And it was the same general concept with the flamingo, and it was slightly different when it came to Neptune. The members are in complete control of how the DAO operates, so you see in a LAO, we've seen the members delete themselves effectively. So they've decided to make available to the public additional units, which other folks can purchase, that happened a couple months back, and new members were able to join. They could purchase 100,000 units in the LAO, and they were paying 310 ether. On the flamingo side, a similar model emerged, where new members have been let in. They could purchase 100,000 units, but they were paying 330 either. So everything is in ether, it's not in US dollars or Dei or some other stable coin. We're kind of, OGs, we like ether, and we like to productively use it. If we can't productively use our ether, we might as well just hold it or stake it or do something else like that.
Host: Yeah, for sure. And so, when a DAO is formed, I assume the LAO or any other DAO that's formed, there is a certain set of values that it's formed around, or that the founders have and want the DAO to hold as well. And so when you keep growing the DAO and right now, you know, they're limited for legal reasons to 99. In the future, if you have 10,000 people on a DAO, how do you—I guess from the way that you think about it, like what would be the best way to think about membership, and letting in new members, is it really just like, if you have the 120 ether buy-in then you're in, or is there like another process that you have to go through to join a DAO?
Aaron Wright: Yeah. So again, this is the way we constructed it. It was first come first serve when we launched it, right, we just kind of opened it up, and if people are interested, they were able to join once all the initial units in the DAO were accounted for, then it became completely up to the members to decide how they want to let new people in. So, I don't think it needs to be based on the amount of ether you have, it could be based on other factors as well. But what we've seen With the membership of both the LAO and Flamingo, if you're going to be deluding yourself, it's reasonable to kind of have a say in who is coming in, like who is taking a little bit of yours, are they growing the pie. And I think they're—that's reasonable. I imagine that we'll see lots of different models and ways that people bootstrapped DAOs. What we like about what's occurring inside the LAO network, is you've got all these folks at this point amongst the three DAOs, it's about 150 people. They're able to battle test ideas. They're able to say, hey, is this a good idea, you're able to do, you know, a little bit of like product testing around a concept to see if there's enough interest internally before you kind of announce it to the world. And it branches out in a lot of really interesting ways, like—as an example, I don't think anybody, two months ago, let alone six months ago, would imagine that members of flamingo would want to pull together a DAO that's focused on building and breeding internet based horses, Zed Run. But that's what's happening this week. So, you know, like the internet, like a message board, like a subreddit, if things just, kind of, move in different directions, and the members are really in control, so they can express themselves, they can begin to do product planning if they're interested in something or, you know, bounce around ideas with others and see if there is a germ of an idea that can grow into something bigger. And that, I think, is really powerful. I think it's great that we've been able to get together online and, like, talk about issues sometimes that turns a little bit dark and we just take down people on Twitter, or you know, publicly, politicians, or corporations, like—things like—or hedge funds, in the case of Wall Street bets. Here, I think it's a little bit more positive, we can get together. We can have a little bit of capital that's at people's disposal. And then we can build things that are a bit more productive. Santiago is a venture capitalist at ParaFi capital and also something - -. He had a really nice analogy that I'm going to take, and credit him for it. But he said, you know, blockchains are in many ways, the rails and DAOs are the trains, and this is how we kind of move things forward, this is how we move things around. This is how we do things more productively. And so that's probably, what's the most exciting thing about being in this little pocket of the blockchain world.
Host: Yeah, for sure. And then for the LAO, and Flamingo, and Neptune, did you guys have an option like a rage-quit option if it grows too big, and people are no longer aligned with the culture and the values, they can withdraw their money and get out.
Aaron Wright: Yes. So that was an innovation that the initial developers of the Moloch V1 smart contracts had. So their thought was, you know, how do we get people to come to a consensus about something, and, you know, and how do we make sure that if you're not aligned anymore, you can leave easily. So, one idea and one way to get consensus is to have a quorum, you have to have enough people that vote, and has to be over—usually like a 50% threshold. And then the organization can move forward. I think one of them is the innovations of Moloch, and something that's not as appreciated, they change that, they got rid of a quorum requirement, instead they said, let's make decision making a little bit like the internet, if at the point in time when something's up for vote, there's more people that are saying yes, then no, we're going to move forward, right, we don't need to have 50% of all the members to vote in order to move forward. Just those folks that are paying attention at that point in time, if they say yes to doing something, and there's more yeses than nos, then we're going to, you know, have a grant, we're going to make an investment, we're going to purchase an NFT, etcetera. And that works really well, because not everybody can pay attention at all times, right, It's not—-its things move a little bit too quick, people are kind of pulled in too many different directions, and that works. But at the same time, if you go in that direction, and you don't agree with the will of the group, well, you should be able to leave. And so, this notion of Rage quitting or being able to kind of pull your capital, if you no longer feel like you're in alignment is a very strong right that all members have. And what we see now is that, if people do want to leave, and we've had a handful of folks that have, there's such a demand to be part of some of the DAOs we put together, they tend to just sell their interest to another member, or transfer their interest to another member. So, there's also those opportunities as well. And to the extent that there's like a robust secondary market for joining these DAOs, or some categories of DAOs, the need for rage-quitting kind of goes down. So there's some interesting dynamic that's emerging there as well.
Host: Got you, got you. So going back to the legal side of things, you mentioned that the LAO is formed as an LLC in Delaware. Now with—you know, states like Wyoming in which I—is Wyoming the only state right now, or are there other states that recognize DAOs as legal entities?
Aaron Wright: Yeah. Wyoming I'd say, has the most robust law, so you can actually set up in Wyoming, starting in July this year a DAO. So if you wanted to call it Dei and DAO, you could, right, you could go fill out some paperwork, you know, have that recognized as a DAO, refer to yourself as a DAO, contract as a DAO, and That's settled. But I think important, and the goal there is to begin to streamline the creation of DAOs, make it a little bit easier and hopefully get to some of the standardization like we were talking about before around DAOs, so that we can turnkey Solutions. The bill's not perfect, it went through the legislative process, like all legislative processes, things get moved around. So, some where's got grumpy, about some of the language that was included, because lawyers like to be grumpy, but I imagine that we'll continue to see some evolution there. Outside of Wyoming, in Fremont, you can also set up a BBLLC; a blockchain based LLC, which is pretty close to a DAO. But outside of those two jurisdictions, I'm not quite aware of any others that enable you to do it. So, Wyoming is, you know, the wild-west, they're trail blazers, they invented the LLC back in the 70s and they're really leaning in heavily into DAOs as well. If it's successful, and if it looks like a smart move for the state, and there's a lot of productive activity, you know, really productive trains that are moving on the rails, then I imagine other states in the US will probably follow suit. We saw a kind of the same Trend with LCs from 1970, into the 80s and 90s. So it's a pretty exciting time.
Host: I mean, I definitely need to go read the bill in Wyoming. But just to summarize for us, how is the way that DAOs will be set up in Wyoming for instance or even BBLLCs are set up in Vermont, how is that different from, say, like how an LLC is structure right now?
Aaron Wright: Yeah. So it's similar, right, so LLCs are super flexible. If you're a developer, you know, an LLC is pretty much like a free range, you can—you can do anything with them. So as a lawyer, you can construct an LLC to be structured in lots and lots of different ways, you get a lot of flexibility. It's kind of a nice thing if you are a corporate lawyer to think about, and LLCs for that purpose. And that's their big advantage; they're hyper flexible. They can be run by managers, they can be run by members, they can have hierarchy, they cannot have hierarchy, you can play around with the distribution of value through an LC, and you can change all the rules. So the thing that we did with the Wyoming DAO bill, was we changed the default rules, like the rules that come out of the box, and that's ossified in a statue. So the way, you know, an LLC tends to work is when you join an LLC, you owe the other members that are participants in the LLC fiduciary duties, it's a very fancy legal word, but it basically means you have to treat them better than that other folks. And that works really well for the context of a partnership, and also for the context of an LLC. But if you could imagine having heightened duties, when you're participating in some subreddit-like organization, to folks that are also participating, it make—-it starts to make a lot less sense. Like imagine if you had a provide trolls on a subreddit the same duties that you would provide, like a sophisticated business partner, it would be insane. So, we flip some of the default rules, so that fiduciary duties are relaxed. They're not waived, you still have to treat people with respect, it's called—-lawyers call that a duty of good faith and fair dealing. I like to say, you can't be a bastard, like that's another way to think about it. And so, you can't be mean to each other, you have to treat each other with respect. But at the same time, you're not—-you're not required to provide some sort of heightened duty. The other thing that we modified was, and really thought about is, what's going to govern, is it going to be the underlying support contract code or is it going to be the legal agreements. So we created a hierarchy through the bill in the case that there was a dispute, to know that, you know, people are really leaning into smart contracts when they're entering into a DAO. So if the smart contract or vote, you know, or some other activity that occurred via the smart contracts, you know, resulted in one, in one direction and the legal documents said something else. But we know that we're going to follow the decision or the activity or whatever happened with the smart contracts themselves. So these are very basic things and subtle things, but they're important. These are the types of things that become more important when something goes sideways, when something falls apart, when people are hurt, they're going to look back into these legal documents, and start to figure out what rights and obligations emerged. So look, if you want to play around with a DAO today, you want to do an MVP DAO, you probably don't need some sort of data that has a legal wrapper of some sort. But, if you want to build a more substantive organization over time, it's going to become increasingly important to do that. You're going to need protections, you're going to get more folks that have the potential to be heard, and more problems come up, and then we've seen this, even with MakerDAO. MakerDAO foundation got sued, right, I don't think when they were starting that back in 20—you know, I think it was 2013 or 20—no, after that, 2017 or whatever, right after Ethereum launched. Yeah, I don't think anybody would have thought two things about, you know, thought about setting up some sort of organization around MakerDAO, but now that they're getting sued, now that the total value of the project is increasing, these types of questions come into focus.
Host: For sure. All right. So you mentioned earlier, that you really believe in the long-term future of DAOs, and you sort of see it seeping into like almost every aspect of our lives, or at least our digital lives. So can you explain, like more of what your long-term vision is for DAOs, like let's say, in 10 years, how do you see DAOs playing a role in our society?
Aaron Wright: Yeah. It's a great question. I think what we're seeing across the blockchain ecosystem is just a modernization of the commercial stack, right, we had gold, and now we have Bitcoin, we have fiat currencies. Now, we have stable coins and we have corporations and LLCs, and I think that they're increasingly going to be replaced by DAOs, you know, will gold go away, probably not, right, will Fiat currencies go away? Probably not, will corporations and LLCs go away? Probably not. But these new digital organizations, these things that are more digitally native, will just increasingly become important or increasingly become competitive with these legacy commodities or legacy organizations, and/or institutions. I think that DAOs are the native structure of the internet. If you think about how the internet operates, it's not hierarchical, it's much more like a swarm, or like a mob, or these unstructured groups that are beginning to congregate and form. And we see that today on social media, right, just go on Twitter, you can see mobs forming, literally by the moment. The problem is that, these organization are in structured, and sometimes, you need a little bit of meat, a little bit of skeletal weight as part of these organizations, so that they don't fall apart, so that they can actually make a difference. And that's why I think DAOs ultimately will succeed. I think that all these groups that are forming online, as the tooling gets better, as the regulatory clarity gets better. And as more and more people become comfortable with digital assets, they'll increasingly look to form their community, their organizations, their ecosystem as DAOs. And then some of those will become absolutely massive and I think that that will mean that, you know, we'll start to see a flywheel where people look at these massive DAOs and then they want to start their own and then, you know, they increasingly become competitive.
I think the second reason—and looking forward into the future, why DAOs will succeed is they have a good shot at being more efficient than traditional organizations. They can sift through the noise and barrage of information that we see online a bit better and so I think, and this is still a hypothesis—I think they are going to start to make better decisions than these top down organizations. I think we're seeing - - inside of LAO. I think we're seeing that also, inside of Flamingo where they were able to acquire a whole bunch of great NFTs, which look like they are really solid in terms of the total collection, better than, you know, just two general partners inside venture fund or an individual collector. And so if the decision making is better, if the organization is more efficient and if it hits the right timber and tone for the internet, I just don't see how there's not, at some point, hundreds of thousands if not millions, if not more of these organizations. And I think the last piece is; they are globally native off the bat, right. They are kind of assuming where lots of folks are, and particularly folks that are heavy into the crypto space or just on the internet itself, they are global in nature, right. They are not assuming that there's arbitrary geographic lines that divide people. They are assuming that people will want to interact with people across the country and across the globe and I think that that also is right. If you're setting up a startup now, you probably have workers in the US, in Europe and parts of Asia, South America possibly, you know, Australia and Africa too, right, all continents, it doesn't really matter to you, you're just trying to find like-minded people to, to, you know, build something or push things forward. And I think that's going to be no different if you're setting up something for investment purposes, if you're setting up something to work together and provide services, to create something. These geographic borders just don't matter as much, and DAOs will hopefully provide you a way to coordinate your activity even though you may just talk to people over Zoom or whatever future version of Zoom they may be or you're just, you know, texting somebody or messaging somebody in Discord, it really doesn't matter. So bright future for DAOs, it's coming.
Host: For sure. So as DAOs start to grow and if you were to, you know, sort of like try and predict the future as much as you can, which types of traditional organizations do you see being replaced by DAOs the soonest? So like one thing, I guess, that comes to my mind is VCs, you know, we're seeing that already with a lot of Web3 companies. Like, instead of going the traditional VC route, they'll try to—they'll go to a DAO or try to get their own funding elsewhere. So what do you see, I guess like, for the future of VCs or for other types of companies maybe that I'm not thinking about, that you think will be mostly or very much replaced by DAOs?
Aaron Wright: Yeah, I think Silicon Valley will be completely virtualized. There's no reason in my mind at least—at least theoretically for lots of capital to support early stage companies should come from a small sliver of one country in the US, right. California is a wonderful state. Silicon Valley is an amazing engine of innovation. The notion that you have to be physically located in a small band of land in order to start a company just makes little sense in my mind and I think that DAOs will be the engine, they will be the trains that open up Silicon Valley and virtualize it into the cloud, right, into this Web3 computer that we are all building on Ethereum. But I think that that's like the tip of the iceberg, people in the crypto space are obsessed with VCs, but VCs in a category of investment funds are like a very small sliver, right? Major Law firms in New York don't even do work for VCs because it's not worth their time because they're focused on hedge funds and private equity funds and much larger vehicles. And I think that those are going to be ripe for disruption too. You know, I think we're seeing kind of these, you know, internet-based investment vehicles like—or early prototypes of them like WallStreetBets, that I think will mature over time and gravitate to the DAO ecosystem as well. So even if you want to do something that's not really venture based but more investment based and you want to have a more structured version of WallStreetBets, which I think folks are seeing some demand for, even the WallStreetBets folks are playing around with this. They are going to probably gravitate to DAOs over time. And then I think the last area is worker, you know, workers are folks that provide services. We're starting to see clambers of this in the NFT space, where a bunch of digital artists are coming together to make something new. You know, sometimes you can create some great work by yourself, lots of creative endeavors require the work of a bunch of different people. So all these services-based DAOs, I think are also going to come together as well. You know, you maybe provide services like design work or web development services or you know, some other type of service, you can do a little bit yourself but you can do a lot more banding together. You know, maybe seed some sort of Meta DAO that emerges that does that. We've seen some early examples of that with great projects like - - Guild. We've seen some, you know, other examples of, of that also emerging, so I think that, that's another broad category.
And then the last are just—you know, protocol DAOs. We've seen a whole bunch of them. So if we're building this open source, open financial infrastructure that we are seeing in DeFi and you want to have the community govern and manage it in different ways, well you're going to need a little bit of structure around that, right? It can't just be this amorphous blob. It can't become that important unless people have a vehicle or means to begin to organize their affairs. People are doing that now with some sort of snapshot style voting, but some of these projects are becoming really big, right, niswap is really big. Compound is really big. They have huge treasuries and once you become that big, you're going to have to bridge into the real world, that's when these recording contracting systems become more important. You know, in order for you to really make the full difference that you want, the experimentation phase is over, now you kind of have to upgrade to, you know, something a little bit more mature. And I think we'll start to see these projects increasingly play around with DAOs and, you know, possibly some of the stuff that happened in Wyoming can be useful for those projects as well.
Host: Yeah, for sure. Another thing that I want to get your sort of like future pulse on is NFTs, since I know you're pretty deep into that as well. So right now, the main use case we're seeing for NFTs is just NFT art. Looking forward to—maybe the next year, the next five, ten years, what do you see as being the next big use case for NFTs or how do you see NFTs developing and being used in the long term?
Aaron Wright: Yeah, so NFTs are super interesting. They are interesting because, in many ways, they are kind of the first non cryptocurrency-based digital property. And so in mind, I think that they are the tip of the sphere for the digitization of all forms of property, not just, you know, media objects and artifacts like what we're seeing with NFTs, but all forms of property. So I think the future of NFTs is just slowly eating its way through other forms of property. At some point, we will have land that is represented by a token that can interact with different blockchain-based protocols like DeFi and can hopefully be moved around more seamlessly than what we have today. We're not ready for that collectively as ecosystem; at the technical level, at the regulatory level or at the user-based level but at some point, we will be.
And so in my mind, what we're seeing with NFTs is similar to what we saw with ecommerce back in the 1990s. You know, Amazon figured out how to do ecommerce with books. Just pause and think about that for a second. They took a very simple object, a book, and figured out all of the difficulties of transporting that around the US, transporting that around different parts of the globe. And once they nailed that they generalized that so that you probably—if you are in the US receiving tens and hundreds of Amazon packages in a week or a month or how often you use Amazon, and the same types of mechanics are getting figured out now in digital property, but instead of books people are using art. And once people figure that out, it will expand into other types of assets maybe that's real into, you know, more robust intellectual property like we've seen with Top Shot, but I do think ultimately it will be the biggest asset class that hasn't really hit blockchains yet which is property, like land, real property—what lawyers would call real property. So I think that it's super bright for NFTs, there's a lot of mechanics that need to be figured out. The intersection between NFTs and DeFi is fascinating. It's something that we've been fascinated with inside the LAO and also inside of Flamingo. And I also think that NFTs will increasingly be used in areas like gaming which is kind of one in the Spectrum. So, you know, smaller NFTs, NFTs that are lower value. And then on the other hand, I think we're going to start to see NFTs used for more complex financial instruments. So it's way different than art, but an NFT is really like a digital property—digital right like Schema. So you can begin to embed into NFT's actual addresses or bank accounts, there are some interesting projects that are doing that and once you have that, you have pretty much a tradable contract itself. So you can model out very, very complex financial instruments using NFTs and I think we'll start to see more of that over the next 5 to 10 years.
Host: Yeah, I think that's still sort of hard for people to wrap their heads around, because we're still trying—most people are still trying understand what NFTs are at the core and then to sort of wrap NFTs in NFTs or other things is definitely going to be something that's interesting to see in the future. So—anyway, Aaron, thank you so much for being here today. This last, last quick segment before we close out I call "Explain your tweet". This is where I go through your Twitter, pull out some interesting or cryptic tweets—
Aaron Wright: All right.
Host: —and give you a chance to explain it. The funny thing is, you actually have already explained on your own most of the tweets that I pulled out. So this is going to be a quick one but one quick one from May 3rd that I found you said, "DAOs will productively capture collective intelligence. This hopefully will serve as a counterweight and complement to artificial intelligence." I don't think we've touched upon that yet, the intersection of DAOs and AI. So can you explain that?
Aaron Wright: Yes. So, you know, the longest term vision, and look we don't—we yet see this in earnest, is to have DAOs that are entirely run by an algorithm. So you can imagine DAOs, in some ways, being used to constrain an algorithm in some way. So we see this a little bit with DeFi, right, humans have to weigh in on certain parameters in certain DeFi protocols to kind of keep them on the rails. You can imagine more complex algorithms being embodied in smart contracts, and not in any blockchain or smart contract base system that we have today but I'm assuming, like all computing, it's just going to get better, faster and at some point they'll be able to handle, you know, more complex algorithms. I could be wrong about that but I just like that thought experiment. Let's imagine that blockchains actually scale. Let's imagine that they can handle more complex software and more complex code. And maybe that happens in 50 years, maybe that happens in 100 years but, at some point, I imagine the clever technologists will figure that out. The algorithms will be more complex. Now, AI is scary to lots of folks. They are worried about its emergent behavior. They are worried that it's going to go sideways. They are worried that it's going to go off the rails. Well, you could imagine embedding in, through a DAO structure, more human decision making to kind of cabin things in, to, to keep some control over those algorithms. And maybe that's not true but I think it's an interesting kind of concept. I think lots of folks that are fascinated with AI, it's hard not to be. They are worried about these things but they are not—assuming that you could actually and potentially have humans that are kind of there, you know, keeping them in check. So that was what that tweet was about.
Host: I love it.
Aaron Wright: Sorry to get theoretical. Yeah.
Host: I think it's—all of that is definitely possible for sure. All right. Aaron, well before you go, just tell people where they can find you if they want to connect with you personally and then also where they can learn more about OpenLaw and where—how they can join The LAO, Flamingo, Neptune and keep up with any future DAOs that they might be interested in.
Aaron Wright: Yeah, sure. So best place to find me is on Twitter, A-W-R-I-G-H-01. If you want to learn more about The LAO, it's thelao.io, Flamingo, it's flamingodao.xyz, Neptune, it's neptunedao.xyz. And, you know, Twitter is usually the best place to stay on top of things. If you go to any of sites, there's links to, you know, Discord, Telegram all these other channels. And then on OpenLaw, it's an open source project. You can go to openlaw.io just to check, check that out. If you're interested in helping out or making that better, please give us, you know, drop us a note.
Host: Perfect. Thank you so much Aaron. Thank you listeners for tuning in and we'll be back again soon with another episode of the Unstoppable Podcast.
Aaron Wright: All right. Thanks Diana.