True meaning of DAOs — Bitcoin as Business

True Meaning of DAOs — Bitcoin as Business

Introduction

I have seen some articles lately, typically posted by profiles from shady investment companies who make the ridiculous claim that Bitcoin is too old-fashioned, volatile, environmentally unfriendly, and just plain boring, to keep up with upcoming metaverse — a new way of life in the digital realm.

The “metaverse-will-take-over-bitcoin” theory is easy to dismiss. First of all, at this point in time, the metaverse is a pure fantasy constructed and promoted by Big Tech. More than anything else, I can’t help but see the metaverse as a distraction technique applied by Meta to divert the consumer’s attention away from bigger problems with their platforms like privacy issues and pronounced mental health issues among their users.

However, the online space is indeed evolving, and new developments including Web 3.0 applications and DAOs are certainly gaining ground. A question worth posing is whether Bitcoin with its limited functionality can continue to stay relevant while dApps, NFTs, Defi, and DAOs are increasingly developed and used on more advanced smart contract platforms like Ethereum and Solana.

Based on the research I have done for this post; the answer should unanimously be yes. Those who claim that Bitcoin is the most “outdated” and “useless” blockchain have missed an important point. Bitcoin is not just a blockchain but a DAO that evolves along with the user’s needs in an ever-changing world.

Bitcoin as a DAO

The first and most successful example of a DAO is Bitcoin. As critics would point out, Bitcoin may be a bit primitive for a DAO, since it does not “do much”, but merely exists as a store of value or a medium of exchange, depending on how you use it. However, Bitcoin is operating by pre-encoded rules independent of any single individual or central authority. By definition, Bitcoin is thereby decentralized, and at least semi-autonomous because human users are still needed to update the software and implement proposals. But that is not different from how many other DAOs operate today.

In a traditional joint-stock company the interplay between four main roles helps the company to realize its value: shareholders (owners), management, employees, and users.[1] In the Bitcoin network, we don’t see the same strict division of roles or internal hierarchy. Bitcoin is, like other DAOs, owned, managed, employed, and used by the community as a whole.

If we view Bitcoin through the lenses of traditional corporate structure, the owners would be the investors since they are the primary group to command price movements. [2] At the crossroads, the network develops in the direction where most value can be generated for all stakeholders. That direction is determined by the investors through supply and demand.

The Bitcoin network is governed by a headless management consisting of miners that expend large amounts of computing power to keep the network alive and well. They are responsible for the daily operation of Bitcoin along with nodes that broadcast and validate transactions on the network. The developers are also vitally important community members, and like miners and nodes, they typically wear all the four hats of the traditional roles in a joint-stock company.

Bitcoin would never have survived past its fragile infancy if it wasn’t for a strong community of devoted developers that worked tirelessly on a volunteer basis to make the project succeed. If bugs were somehow discovered and exploited early on, or if the network was overpowered by malicious nodes in its early make-it-or-break-it stage, Bitcoin would quickly have faded into oblivion as just another fad.

Another major concern that was apparent in Bitcoin’s early years was too much attention from the press which could lead to unwanted government interest. In late 2010, the scandal-stricken whistleblower website Wikileaks was considering using Bitcoin as means of funding after the US government had forced companies like Visa, Mastercard, and Paypal to blockade the organization.[3]

Exactly one week before Satoshi Nakamoto’s permanent disappearance, he replied to a forum member on bitcointalk.org who encouraged Wikileaks “to bring it on”:[4]

“No, don’t “bring it on”.

The project needs to grow gradually so the software can be strengthened along the way.

I make this appeal to WikiLeaks not to try to use Bitcoin. Bitcoin is a small beta community in its infancy. You would not stand to get more than pocket change, and the heat you would bring would likely destroy us at this stage.

Some days later, Satoshi’s posted his famous penultimate message:[5]

“(..) WikiLeaks has kicked the hornet’s nest, and the swarm is headed towards us.”

The fact that Satoshi Nakamoto upheld his anonymity and left the project without a trace cements Bitcoin’s status as a community-driven organization without a CEO, board of directors, executives, or identifiable founder. The community as a whole is responsible for the direction that Bitcoin takes.

As NY Times wrote in an article from January 2016 before DAOs became a thing:[6]

Bitcoin, like many other open-source projects, was a sort of leaderless democracy — a new way of governing human behavior online. One computer, one vote, with anyone able to propose new laws.

Bitcoin resembles a participatory democracy as every participant in the network has the ability to vote in a narrow sense of the word. Since the software is open-source, anyone can propose changes, and run any version of the software that they see fit. Technically, proposals and feedback on proposals are managed, discussed, and implemented via software-based BIPs (Bitcoin Improvement Proposals).[7]

Bitcoin’s Taproot upgrade which was implemented in November 2021, exemplifies how nodes, developers, and miners can successfully work together and agree on protocol changes. Bitcoin’s incentive structure ensures that the community acts in the network’s best interest at all times, since contributing to the network is more profitable than trying to damage it.

Now that we have concluded that Bitcoin is a DAO, let’s take a closer look at Bitcoin’s role in the Web 3.0 space.

DAOs on Bitcoin

People get involved in the Web 3.0 space for various reasons (a side remark: I believe that the “Web 3.0 space” is probably a better term than “crypto space” or “blockchain space” since it has a broader meaning than the former and is more relatable, less technical-sounding than the latter.)

The vast majority of developers and users join the Web 3.0 space to seek new opportunities and have fun. One could argue that few regular users are turned on by studying Bitcoin’s source code, or like me by reading and writing lengthy articles about Bitcoin’s potential. So, let’s rephrase and ask the same question from the introduction: if Web 3.0 is fun and exciting, how can Bitcoin as a relatively old and slow technology continue to stay relevant?

What binds Web 3.0 users together are that they typically subscribe to the importance of Bitcoin’s philosophy. Just as the internet has revolutionized the world by digitizing traditional businesses, blockchain technology which was born with Bitcoin has the potential to revolutionize the internet by decentralizing it.

Analogue Business → Digital Business → Decentralized Business.

I note that technically speaking “decentralization” is a misnomer since central entities will necessarily still be a big part of “the decentralized web”. In alignment with the first academic definition of Web 3.0, a more befitting adjective to describe Web 3.0 would be “verifiable” because users can attest to the correctness of code execution or the authenticity of data feeds.[8] The development of Web 3.0 can eventually turn the internet into a truly public good, instead of a private good dominated by a short list of monopolistic, profit-seeking intermediary businesses.

What some casual “altcoiners” have still not caught on to is that Bitcoin will most likely be a key institution in the Web 3.0 space. Not just as a grandfather of new innovation in blockchain. In the future, Bitcoin’s infrastructure could provide the security for a much larger ecosystem of decentralized applications (“dapps”) and DAOs.

Bitcoin in the Web 3.0 space

The classical blockchain trilemma[9] concerns the inevitable tradeoff between decentralization, security, and scalability. A traditional blockchain can only have two of the three properties. For example, Bitcoin is highly decentralized with no trusted intermediary or central point of control, highly secure as transactions are validated and broadcasted to all nodes in the network, but Bitcoin is also unable to scale due to the rigorous, slow verification process.

Layer 2 solutions such as the Lightning Network are built on top of Bitcoin to scale the network — potentially into a worldwide payment system like VISA — by processing transactions off the main blockchain. Layer 2 uses the base protocol (Layer 1) as a secure settlement layer to validate bundles of smaller transactions at once. Layer 3 will be the application layer that uses Layer 2 to provide interfaces and software that millions of users can access. [10]Besides, Layer 3 is prospected to introduce cross-chain functionality so different blockchains can communicate and interact with each other.[11]

In other words, Layer 2 and Layer 3 on Bitcoin and other well-established blockchains could very possibly be where Web 3.0 happens in the future. The multi-layered approach resembles how the internet is built, not as one, but as multiple protocols designed on top of each other, each leveraging the one below. [12]

Trust Machine is one example of a company that has raised $150M in funding to expand Bitcoin to a Web 3.0 platform by utilizing this layered approach. CEO and co-founder, Muneeb Ali, previously co-founded Stacks which Trust Machines will be built upon. Stacks is a programming layer on Bitcoin that enables DeFi, NFTs, apps, and smart contracts while relying on Bitcoin’s consensus mechanism for security. Read more about it here.

Impervious is a Layer 3 solution built on the Lightning Network. Like Trust Machines and Stacks it works towards bringing Web 3.0 functionality to Bitcoin. Impervious has developed a web browser that was announced on April 7 2022 at the annual Bitcoin conference in Miami.[13]

The founder Chase Perkins neatly formulates what the purpose of the Impervious Browser will be[14]:

Zoom, without Zoom.

Google Docs, without Google.

Medium, without Medium.

WhatsApp, without WhatsApp.

Payments, without banks.

Identity, without the state.

All without centralized intermediaries and built into the Impervious Browser.

Impervious is also a programmatic layer that developers can write programs on with the security of Bitcoin, and the quickness of the Lightning Network for fast data transmissions. Read more about Impervious here.

Perhaps in the future, the unrivalled security of Bitcoin’s base protocol could serve as a breeding ground for the new internet of value — similar to how physical infrastructure like coax and fiber cables forms the backbone of the internet. [15]

Please join me in my next post, where we will learn more about practical use cases for DAOs.

[1] See “Is the Bitcoin community a DAO?” thread on bitcointalk.org: https://bitcointalk.org/index.php?topic=5349365.0 (29–04–2022).

[2] Daniel Krawisz (Feb 2015) -> Who Controls Bitcoin? -> https://nakamotoinstitute.org/mempool/who-controls-bitcoin/ (28–04–2022).

[3] Bitcoin History Part 19: Wikileaks and the Hornet’s Nest (Nov 2019) https://thebitcoinnews.com/bitcoin-history-part-19-wikileaks-and-the-hornets-nest/ (29–04–2022).

[4] Reply to thread on Bitcointalk “Wikileaks contact info?” -> https://bitcointalk.org/index.php?topic=1735.140

[5] Reply to thread on Bitcointalk “PC World Article on Bitcoin” -> https://bitcointalk.org/index.php?topic=2216.msg29280#msg29280

[6] Nathanial Popper (Jan 2016), A Bitcoin Believer’s Crisis of Faith -> https://www.nytimes.com/2016/01/17/business/dealbook/the-bitcoin-believer-who-gave-up.html (14–04–2022).

[7] See more: Archie Chaudhury (Oct 2021), Why the Bitcoin Network Is the Original DAO -> https://bitcoinmagazine.com/culture/why-bitcoin-network-is-original-dao (29–04–2022).

[8] Liu et. al (2021), Make Web 3.0 Connected A Perspective from Interoperability and Programmability across Blockchains, pg. 2.

[9] Vitalik Buterin (April 2021), Why sharding is great: demystifying the technical properties -> https://vitalik.ca/general/2021/04/07/sharding.html

[10] Tom Wilson (Marc 2022), Web 3.0, DeFi & dApps Soon On Bitcoin? And 3 High Potential Projects! -> https://medium.com/general_knowledge/web-3-0-defi-dapps-soon-on-bitcoin-and-3-high-potential-projects-ce696a88df47 (24–04–2022).

[11] See e.g., Evan Schwartz (Oct 2018), Layer 3 Is for Interoperability -> https://medium.com/xpring/layer-3-is-for-interoperability-ca387fa5f7e2.

[12] Ibid.

[13]Charles Jenkins (Jan 2022). Impervious Browser: Functionality Overview -> https://newsletter.impervious.ai/impervious-browser-functionality-overview/

[14] Ibid.

[15]AAX (Aug 2021), Layer 3 Solutions on Bitcoin & Blockchain -> AAX Academy https://academy.aax.com/en/layer-3-solutions-on-bitcoin-blockchain/.


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