Video Length: 1:11:09
Chris Lennox: All right, that's us. Kia ora koutou and welcome everyone to another Web3 Learning series event. Thank you all for joining us today. My name is Chris Lennox, and today I'm joined by Jerome Kelsey. I'm sure there'll be a number of you who will know him on the call today. Jerome is a Web3 founder - he is the founder of FREEOS. He has a background in game development. More recently he's branched out into some machine learning game elements. He's going to be running us through today's topic, which is an intro to governance and tokenomics within decentralized autonomous organizations. But before I pass over to Jerome, just a bit of housekeeping.
So the session will be recorded today and it will be made available later on, on the Web3 Knowledge Hub, our YouTube channel, as well as on the Circle community. If you have a question feel free to pop those into the chat function in Zoom during the course of the presentation. But we'll circle back to questions at the end of the presentation.
So we're expecting the formal presentation to be between 45 and 60 minutes. Following that, I'll put up a QR code link for a survey. If you could please just take the two minutes to fill that in. That just really helps provide valuable feedback and align any future events that you might wanna see in the series.
And then finally, we will move into the q and a section, which we'll have roughly 30 minutes allocated towards that. And judging by the size of the call, we'll probably need all of that time. And with that, I will pass over to Jerome. Thank you.
Jerome Kelsey: Yeah, thanks Chris. Lemme just share my screen.
Okay, great. Kia ora koutou. My name is Jerome Kelsey, and I'm very grateful that all of you sounds like there's many people here have showed up for this talk about tokenomics and governance in decentralized autonomous organizations, commonly known as DAOs. This field has become a very strong passion of mine.
I see immense potential in, in these technologies and concepts to supercharge human capabilities, manage the world better, and be more efficient, and provide more opportunities for cooperation and freedom. As we go through this presentation, I'll be talking a bit about the massive potential in this space.
While providing a high level overview and some of the nuts and bolts behind these technologies and systems, this is a very deep field of study and we only have the capacity and time to go through a very general overview. I'm in no way an expert in this field. I'm not even sure if there are any true experts in this field as it is very new and constantly and rapidly evolving.
But I do have over three years of direct professional experience in these fields and I'm grateful to share what I can.
So my background, the top row represents companies and products I've worked with in the traditional world, mostly in video games with some experience in educational, virtual reality. Often this realm is called Web two. The bottom row are brands and companies I've worked with in the Web3 realm. Most of that time has been spent building DAOs.
But in addition, I've been fortunate to be involved with some exciting projects that intersect machine learning with Web3.
Jerome Kelsey: The very first DAO that I worked on was a Freeos economic DAO, which allows participants to earn income through voting on monetary policy decisions with aligned incentives that help the individual and the group equally and ensure that people actively engage. It's a supplementary income earned with dignity through regular participation to steward the economy and community.
And we look as we look at this as money as a digital commons, and this point about the commons, I'll be digging into deeper, further along in the presentation.
And the very reason that this tool came about was through a series of insights that came to me through my career as a game designer in my work with game economies. All of these game economies were designed to incentivize particular behaviors, behaviors that were often exploited to rake in hundreds of millions of dollars for the game publishers.
And I often suspected that these same incentives could drive behaviors that would be good for everyone. And I was sure that blockchain and smart contracts and decentralized networks could allow this to happen. So one morning I woke up with the idea of Freeos firmly in mind, quickly jotted a bunch of notes in my notebook beside my bed, and started talking about it within my network.
After a while, a team formed around this idea. Prototypes were made. Investments gathered, and grants through Callaghan Innovation and others helped us build actual working solutions that have now attracted hundreds or even thousands actually, of active participants, and led us on a journey to build DAOs and DAO tooling for other groups to use.
Jerome Kelsey: Now let, let me give you a little breakdown of what we'll be covering in the presentation. So part one is going to cover DAOs. It's gonna cover what our DAOS, digital Cooperative Commons. Why might we need DAOs? Why might we want DAOs? What DAOs have proven. How DAOs can mitigate things like job disruption. Some examples of DAO applications. The power of community in DAOs. DAO governance. Some exotic governance models. How DAOs can work. Legal jurisdictions for DAOs. Some decisions centered around DAOs. And we'll look a little bit into the future of DAOs.
Part two, we'll cover tokenomics and we'll cover some principles and key primitives. The different types of tokens that there are. Use of tokens in DAOs, supply demand and value creation. Regulatory implications of tokenomics. So the fun stuff. Power of tokenomics in DAOs, where to find out a bit more. And then we'll wrap it up and go into the q and a. So that's quite a bit to cover. So let's dive into it.
Jerome Kelsey: So for part one, DAOs. So what are DAOs?
Now this little phrase was borrowed from two people who were describing DAOs and I fuse them together. You can think of DAOs as a flash mob, a group bank account, and a WhatsApp group combined. And basically this means that people are connected and operating in unison through a digital organization that exists on a public permissionless blockchain that is transparent and available for anyone to tap into.
It usually has a shared treasury that is typically in crypto assets.
But there's another way I like to often think about DAOs. And that is that they are digital cooperative commons. And so what does that mean? This kind of compares DAOs to a digital version of a community garden, one that can be launched and is just there. It's not dependent on a company or government or individual to maintain.
Instead, the users of the application or system are the ones who maintain it and can reap the benefits. Imagine an online game as a DAO where the game just is. There's no company centered around it. No server, no infrastructure that might be shut down or wound up. No team that might be laid off. It's just there.
All of the logic, the art and the access is available on an unstoppable public network. People can freely join and play. Some members help maintain and update the game and can be rewarded maybe from a shared treasury or maybe from shared revenue streams coming through the logic of the game, or maybe through native token incentives created from the game, or unique rewards intrinsic to the game, like a shiny new sword or unique VIP Access to special events and locations.
And smart contracts make sure that this all occurs simply according to the unstoppable rules of the DAO. And that's the power and potential of this technology. It's just there. Like the rain or sunshine or the air we breathe. Anywhere we go around the globe, the power of DAOs or that digital democratic services are just there, ready to tap into.
At any time, any place, no matter who you are. And there's great power in that idea. There's something in it that feels a bit like the foundations and essence of freedom, and this is why I've become very passionate about the potential of this new paradigm.
Jerome Kelsey: So why might we need DAOs? Well, DAOs move beyond traditional centralized models. They bring transparency, accountability, and decentralization. DAOs eliminate geographic limitations, opening opportunities for global collaboration. Sometimes decentralization is simply the best tool for the job. There are advantages in centralization too, but decentralization is often seen in the web of life, the scattering of galaxies and other natural phenomenon.
There's a reason why the original internet was founded with a decentralized model to be resilient enough to survive a potential nuclear war. So DAOs can be more resilient, more inclusive, and can make a very good model for an antifragile commons that is universally accessible and not reliant on a single point of failure.
So why might we want DAOs, again, DAOs move beyond traditional hierarchy that most corporate or government models utilize? And that might be something that we want for certain cases. If you want a more democratic inclusive structure, you might want a DAO versus a traditional organization. If you want something that can span the globe and have people joining and contributing with little friction or barriers, you might want a DAO.
If you want something that is resilient and lasts and can sustainably self-organize, you also might want a DAO. DAOs have unique qualities that were not even considered to be put on the table before because we simply didn't have a realistic way to enable these structures before smart contracts and public blockchains became more common.
So what have DAOs proven? Although a bit under the radar compared to crypto, NFTs and Defi, the success stories of DAOs have proven incredible value and impact. Think of Uniswap's staggering 1 trillion trade volume and 6 billion market cap. Or alien world's 1 million active users. With countless diverse DAOs they're already transforming how we unite people and capital towards shared causes and goals. DAOs are uniquely a 21st century organization, and I firmly believe that our shared future looks increasingly DAO driven.
One of the positive qualities of DAOs is the potential to mitigate things like job disruption. As we brace ourselves for the unstoppable forces of AI, automation, pandemics, financial crisises, and climate change, DAOs can be a great tool to mitigate job disruption. As jobs vanish and the economy waivers DAOs can emerge as saviors with growth in lucrative DAO Jobs soaring 10,000 fold in just the last two years, and this means that DAOs have the potential to be lifeboats. Leveraging network effects and empowering us to come together, unite, create, and manage value in a world of uncertainty.
Jerome Kelsey: So now we'll dig into some of the examples of some of the categories of DAO applications. So starting with number one, protocol DAOs. Maker DAO is a well-known example of a protocol DAO, which governs the maker protocol in the DAI stablecoin. Token holders can vote on various changes and proposals related to the protocol.
Number two, collector DAOs. Constitution DAO is a fairly well-known example of a DAO that raised money to bid for a copy of the US Constitution. It ultimately lost the bid to a private seller, but made the news. Another one is Flamingo DAO, which is a more modest but still successful example of a collector DAO. It's a DAO that collects curates and produces NFTs or non fungible tokens.
Number three is charitable DAOs. Ukraine DAO is an example of a DAO that raised money for the people of Ukraine, and there are many other examples of DAO centered on social impact and giving.
Number four is investment DAOs. Orange DAO is an example of an investment DAO. It's a group of investors that come from Y Combinator who pool their resources and knowledge and decide collectively on investment opportunities in the blockchain and crypto space.
Number five, we have Grant DAOs. Gitcoin grants is a platform where developers can receive funding for open source projects. The distribution of funds is governed by the community, following a quadratic funding model.
Number six is service DAOs. dOrg is a blockchain development collective that operates as a DAO. It's a group of developers who offer their services and are governed by the rules of the DAO with project decisions being made collectively.
Social DAO. So an example here is a DAO called Friends with Benefits, which is not quite what it sounds. It's a community of creators, crypto enthusiasts, and others that use tokens for membership. The DAOs enable social interactions, networking and collaboration on projects.
And then finally we have Media DAOs. Mirror DAO is an example of a media DAO. It allows users to vote, curate, and support decentralized publishing, like a decentralized version of Medium.
Jerome Kelsey: Okay, now we'll talk about the power of community in DAOs, and I'll bring it back to a bit more of a personal example. So our own projects Freeos and the DAOscape have already experienced the power of DAOs in action ourselves, showing us that community can be our unfair advantage. By building DAOs as a DAO, we've harnessed a thriving community of participants.
Our collective efforts have saved over probably around a hundred thousand dollars in value. Demonstrating the unfair advantage that any DAOs can leverage for startups or any team centered around a community. We are able to leverage our community to vote on an online Web3 community contest to become victorious as the winner.
And that shows how you can have people move in a unified direction. Another example, we talked about this a little bit already, is constitution DAO, and it showed how a large number of people came together to fulfill a mission and raised 45 million US dollars in a single week.
Now, here we'll cover the most common types of DAO governance systems. So the first one is token based membership, and this is probably the most common model. It's a permissionless model, which anyone can, anyone who holds a certain token can vote on proposals. Maker DAO is a very famous example of token based membership where anyone can buy the voting power in the maker protocols future.
And then we have share-based membership. Now, this is a more permission model where prospective members can submit a proposal to join a DAO, usually offering a tribute of some value in the form of tokens or work. Shares represent direct voting power and ownership in the DAO. Members can exit any time with a proportionate share of the treasury.
Moloch DAO is focused on funding Ethereum projects and is an example of share-based memberships. Here the membership requires a proposal to assess expertise and capital to judge potential members.
And then we move on to number three, reputation based memberships. And this is a model which reputation presents proof of participation and grants voting power in the DAO. Reputation can't be bought or transferred or delegated. DAO members must earn reputation through their participation. Dx DAO is a reputation based governance model. Here, consensus is leveraged to manage and coordinate funds. There's no way a potential member can buy their way into the organization.
And the final model is personhood based membership. It's another model that is just starting to become possible in a decentralized way. So we don't see very many DAOs with this model just yet.
Now here members are verified to be individuals to allow truly democratic DAOs to exist. So the DAOs that we're building Freeos and the DAO scape tools are personhood based membership DAOs, where participants can freely join provided they undergo proof of personhood. Once verified, they're free to vote and participate as much or as little as possible with their earnings tied directly to their participation.
And we're also, we're already starting to see more exotic governance models appear on the horizon. Holacracy is, is the distribution of power amongst self-organizing groups. Think of circles, interlocking and overlapping circles or DAOs within DAOs. Each having their own self-organizing team and relative autonomy.
And then we have fractal democracy, which has randomized groups vote to move leaders up into higher levels until final candidates are chosen in a type of playoff system. I like to call it a playup system where potential leaders move up until the final leadership is chosen. And then we have sortition, which randomly selects leaders from the general public or members, also known as citizens, citizens assemblies.
This type of governance was part of the Athenian democracy and has been recently experiencing a revival becoming more popular in the real world. Random selection makes representatives. Sorry. Random selection makes it representative of demographics, highly resistant to corruption and highly efficient, foregoing political campaigning to select candidates.
Now, DAOs can more quickly iterate and experiment further on these governance models to create new models that combine elements like maybe fractal holocracy, or even come up with completely new systems of governance we've not yet seen. The reason digital technologies can often be so disruptive is that they offer ways to iterate and innovate on old paradigms and systems. Through DAOs, previously glacially evolving governance systems are now beginning to be innovated upon and disrupted, but in ways that lend itself to be people driven from first principles. Critics of Blockchain and Web3 often claim this technology has no fundamental value. But I counter this by saying old economics and governance have been so slow to innovate and experiment with, previously, and Web three has changed this.
So I highly suspect that the innovations it brings to this previously difficult to change realm has incredible value that we've only seen a fraction of.
Jerome Kelsey: Now let's get into the nuts and bolts of DAOs. How do DAOs work? DAOs typically operate via smart contracts, which automatically execute code when certain conditions are met. They make DAO rules immutable and protect things like the treasury or permissions of whom is allowed to operate in the DAO and how much voice and power they, they have.
All actions and transactions are recorded on the blockchain, ensuring transparency and security. So with the DAO, common actions are things like joining, proposing and voting. With most discussions happening using social media apps like Telegram, slack, or Discord, we're starting to see some social media apps appear in a truly decentralized blockchain way. But this is a pretty new area, so it's not quite there yet.
Now here's the fun stuff. Law. Originally, DAO started being purely on chain entities with no particular jurisdiction, but the problem has been that the people in DAOs still live in countries and those countries have laws. So that those people are bound by a legal framework, and if the DAOs are not bound by a legal framework, the individuals might be potentially liable.
And we're starting to see some rulings applied to DAOs and members of DAOs, particularly in the United States. This has also created the need for legal framework for DAOs, which some countries or states have already developed to provide DAOs with limited liability. This helps de-risk DAOs and can also allow DAOs to own and manage real world assets. We're already starting to see legal frameworks appear in other areas of the globe with more in the works.
Now, this is an interesting flow chart that I found that breaks down two of the most important decisions a DAO can make. Decentralized versus centralized, and for-profit versus nonprofit. One thing of note is that we're seeing the Marshall Islands appear commonly in, in recent lists about DAO jurisdiction.
And this is because their legal framework is probably one of the most tailored fit and progressive for the reality that most DAOs face, especially if they're very decentralized.
Jerome Kelsey: Now, let's peer into the future of DAOs a bit and do some speculation. Because this is a very fast changing landscape it's very hard to predict, but let's take out our crystal ball and let the creative juices flow a bit. So I see DAOs personally as being an entity that we're gonna start seeing exist on their own with people commonly working for them.
You know, there's a, a reasonable chance I would say that many of You know, your children or grandchildren might be working for a DAO in the future perhaps even yourself. I can also imagine there'd be lots of combinations of traditional entities in DAOs. Instead of operating, say, a new government department, a DAO might be formed and more suitable instead, especially if it wishes to be managed and operated by the public, with people able to come in and out contributing freely.
Or maybe a corporation has a large active community and the company wishes to engage more deeply with this community and have the community involved in decisions and move in unified directions to accomplish specific goals. But one of the more interesting future avenues for DAOs that I think are on the horizon incorporate artificial intelligence.
We're already starting to see that artificial intelligence can take natural language, process it and create actions. So imagine an invisible DAO that's language controlled, and it's always accessible like Siri or Alexa, but it's also connected with other people who also have a say. The AI could brief you on problems and you could dictate proposals.
You can vote with your voice, maybe some other biometric markers, for added security. It provides visuals only when needed, and mostly to only convey critical information. You can converse with the DAO as if it was an entity on a global scale wherever you are in the world. And this isn't entirely unrealistic.
We have many of, many of the pieces to assemble such a vision. And the other idea for the future of DAOs is to govern things that have been difficult to govern, like policies around artificial intelligence, as well as equitable ownership and access to AI. Since a DAO can govern a decentralized network, it could also govern a decentralized AI computing network.
Therefore, it might not just be large, centralized corporations or nation states that would have exclusive ownership of AI. There could also be an alternative, decentralized AI network that provides access and the power of AI to the people and accountable to those very same people.
Jerome Kelsey: Now we're in the second section tokens where we go deeper into the rabbit hole. So let's go first into an overview of tokens, principles, and primitives. Now, this is a very rapidly changing field also, and there's new models of tokenomics appearing constantly. But the most basic tokenomics principles are supply and demand. Which is the most fundamental aspect that affects a token's price and viability.
Many tokenomics protocols utilize a treasury, often used in stablecoin protocols as collateral. Another common principle is the tokens utility. What can it be used for in the network? Network fees like gas are a good example of utility. The next two principles are related to supply. Burning tokens permanently removes tokens from circulation, while token sinks temporarily take tokens out of circulation through things like fees, staking, vesting, and other means.
Incentives are often required to ensure that working the system is fairly rewarded, although incentives also need to be balanced to ensure that they don't adversely affect supply without enough demand in the system. Distribution is related to which groups have what kind of shares in the total supply.
Having a more diverse distribution often means a healthier system without too many high worth whales being able to crash or price crash the price too readily. Scarcity is another concept that started with Bitcoin and has been used to affect the price of digital assets ever since. The idea is that the more scarce the digital asset is, the more likely it will have high demand and potential to be sought over.
Liquidity has a strong effect on tokenomics as it has a strong effect on the vol volatility of the token. When markets have deep liquidity, it takes more effort to move them, whereas shallow liquidity is more easy to make very wide volatile movements. And of all of these, I would say that supply, demand and liquidity are often the most fundamental key aspects to focus on when regards to influencing a token's value.
Now there are several types of tokens and they all have particular qualities. We have security tokens, which are digital assets that fall under the umbrella of securities as defined by financial regulators. They represent ownership in an internal, external asset or enterprise and have specific rights such as dividends, profit sharing, voting rights, or interest payments.
Utility tokens. These provide access to networks, service, or products. For instance, file coins tokens can be used to buy and sell storage space on its network. These tokens are not intended as investments in the traditional sense.
Transactional tokens. These are tokens that are primarily used to facilitate transactions on a particular network. They're typically used to pay for transaction fees and computational services within the network. For example, ether or Eth is used to pay for transactions in computational services on the Ethereum network.
Governance tokens, these allow token holders to vote on decisions that affect the network, such as protocol upgrades or changes to governance parameters. An example is a COMP token of compound, which allows token holers to vote on changes to the compound protocol.
Commodity tokens. These tokens represent a commodity like oil or gold. For example, PAX Gold is a digital token. Each token represents a fine Troy ounce of gold stored in Brink's vaults.
And then we have liquidity protocol tokens. These tokens are often used in decentralized finance or defi protocols to represent a user's share in a liquidity pool. For example, Uniswaps LP tokens represent liquidity a liquidity provider stake in a specific Uniswap liquidity pool. And then finally, we have non fungible tokens or NFTs, and these are probably one of the most well-known token types. NFTs represent unique assets with unique characteristics.
They're often used to create verifiable digital scarcity as well as digital ownership. An example would be tokens used in Bored apes, where each token represents a unique artwork of virtual apes. Besides art, NFT can have great utility. For instance, we've pioneered a type of financial NFT that provides founders and investors with a dividend like revenue from the activities of our DAOs as a way to fund digital commons while having a return that doesn't compromise the commons.
Jerome Kelsey: So the use of tokens in DAOs. In DAOs, tokens can be used in multiple ways that are pretty common across most DAOs. So we often see DAOs using tokens for voting rights to vote on decisions within the DAO. The more tokens you hold, the more voting power you have. DAOs also typically manage a shared treasury consisting of tokens and other crypto assets.
And then we have incentives. DAOs often provide incentives, whether it's reputation points, passive income, revenue sharing, or simply income for work via payroll.
Now this slide unveils our own particular insights into sustainable tokens sorry, a sustainable tokens model that I like to share in case it might be useful for others. So number one. It begins with systems that reduce the supply of tokens when the economy is vulnerable and can increase the supply when the economy heats up.
Number two, our systems are capital in the treasury that can incentivize creators, builders, and promoters through the means of grants, bounties and contests to generate value creation such as goods and services that use the main token.
Then number three, more valuable goods and services created can spark genuine demand. The genuine demand in number four increases the token price, which heats up the economy, which may then release more tokens. It frees up more capital and attracts more users and from these users, this can draw more creators, builders, and promoters to the ecosystem.
Additionally, the increase in participants improves the network effects, which then increases the value of the network and often the token as well. Thus, attracting more participants and so on. This type of tokenomics model can build an entire ecosystem built for the greater benefit of everyone in it.
Now, one of the most important considerations is the regulatory implications of your tokenomics, especially whether or not your token could be considered an unlicensed security. This is where legal advisors need to be involved to understand these implications especially at a global scale. In the United States the SEC has been looking into various tokens and sees many as unlicensed securities. Many of these are high profile projects and you don't necessarily want to be in that situation, so be very careful with your tokenomics and seek legal advice.
It's a big reason that we've developed DAO tools that don't require governance tokens to start voting so that DAOs built with our tools don't need to consider issuing a token just to organize a group into a Democratic DAO. And they can take the time to consider whether or not the DAO needs to issue its own token at all. A DAO can always have a treasury using other tokens that already exist.
Jerome Kelsey: Now, there are plenty of great resources on DAOs and tokens, but I was hard pressed not to include these three gems. Token Engineering Commons is a fantastic resource and group. It's a DAO playing around with tokenomics principles, and their members are highly knowledgeable, passionate, and innovative. It is a bit of a deep dive and almost is a never ending quest, but if these subjects fascinate you, I can't imagine a more suitable bunch to explore with.
Just DAO it is a podcast hosted by Adam Miller from MI DAO, who initiated the legal framework in the Marshall Islands for DAOs. His podcast is full of great guests and he starts with news about DAOs, which keeps you up to date in this fast moving space. And for a peak into the future vision where DAOs could go, the freely available book, the network state touches upon the idea where DAOs might ultimately lead to, which is a group that doesn't have a jurisdiction but does have diplomatic recognition.
Now I'm gonna finish up with a return to this picture and this phrase because this is where I feel DAOs can have the greatest amount of potential to be a type of digital commons that is just there. A resource that we can tap into anywhere to access, utilize, and increase our power to cooperate at a global or even local scale to do more than we could do individually.
It's cooperation on tap as a given. I often like to say that I'm not a Bitcoin Maxi or an Ethereum Maxi or any other coin maxi. I'm a cooperation maxi, and working within a DAO makes it easy for that to be true. So thank you and I'm happy to address any questions now.
Chris Lennox: That's awesome. Thanks Jerome. Really interesting talk there. We might just pause it very briefly. I will just switch over to the QR code here. If you guys wouldn't mind just filling in the survey.
So if you scan that, yeah, as I said, as I mentioned earlier feedback's always very valuable. And in scanning this and going through and putting in your feedback, it just allows us helps provide us some insight into some of the topics that you might like to see in this space in the future. And don't forget to start populating your questions for Jerome into the chat or feel free to just come off mute and ask your question.
David Ding: Hey Jerome.
Jerome Kelsey: Hey, Dave.
David Ding: Just a, a question on the, you, you know, that book that you just showed us about, you know, how it can become a borderless kind of jurisdiction unto itself. Can, can you just talk to it, talk us through how, how is that possible that there can be a borderless entity and maybe share what the superpower of your platform and the uniqueness of that?
Jerome Kelsey: Well, I mean, DAOs are already borderless or they're, they usually are because they're on a borderless, decentralized blockchain network that is publicly available and accessible to anyone around the globe that has an internet connection. So the borderless nature of a DAO is pretty much intrinsic to its design, but where the network state is kind of you know, it's, it's actually not necessarily talking about DAOs.
It does talk about DAOs in the book. But it's making a case that at some point in the future a decentralized group will be able to have dip diplomatic recognition in of some sort. So you can imagine some sort of global group or consortium that can engage, say, with the United Nations or individual nation states, and have some sort of diplomatic recognition that this group of people that comes from the people can have a voice and a say in a meaningful way.
And it's something that we like. We're exploring a little bit down the road. We've got some articles, some pretty old articles now because it, you know, this was a concept that we had in the early, early days before we started developing Freeos and the DAO scape tools. And it was about, you know, creating a DAO, we call it the United Peoples. A sortition based DAO where you have people from the general public all around the world randomly selected into positions of power.
Potentially they're qualified, pre-qualified before they enter that pool. They're informed before they get to engage in the power of that organization. And they lobby and provide a voice from the people to large international organizations like WHO, world Trade Organization, United Nations.
And they kind of represent a version of that from the people. And so we, you know, we have a lot of the tools that are almost there actually. So, you know, maybe give us another year and we might actually have the components that could create something like United Peoples and all it would take to become a network state is for one of these entities to give it diplomatic recognition.
David Ding: Interesting. So we're, we're engaging at the moment with the com Web3 community and looking at running an experiment to see if we can, you know, work together to create trust between a DAO and a government entity. And it's quite challenging. So, so to your mind, what, what, what would you say that to, to help create trust and what, what makes it totally trustless?
Jerome Kelsey: Well, I mean, trustless is a funny word. Like trustless is often used to talk about how code is law. And so that the smart contracts will just engage in the actions. And so you can trust in that code. The code can be audited. It's usually publicly available. It's open source. You can always check to see if the deployed code is the version that you see on the, you know, in the repository.
So that's typically what trustless means in a lot of blockchain networks. Now, trustless in when you involve humans, I would say that, you know, this is probably up for debate, but my vision for trustless is really accountability. Making sure that, you know, you've created a system in an organization that has checks and balances.
And there's methods for accountability in that system so that if you create a very robust, you know, worldwide borderless DAO people can feel confident that the members of those, you know, of that DAO who are making decisions, have some level of accountability. And I think if you can get to that state, then you might find that governments are more willing to trust it.
Probably this, you know, second part of that equation is at some point you know, I would imagine some government around the world will trust a DAO and that will get the ball rolling. If they trust that DAO and that DAO does well and it you know, it stands up to that trust, then I think we could probably see more DAOs appear that are interlinked with governments.
David Ding: Yeah. Yeah. I, I, you know, to your point about the, you know, how do we imbue accountability into it? I think part of that, this component is the DAO actually submitting their own structure of how they're going to govern the community, how they're going to reconcile conflicts. You know, we are seeing this in the, the technology getting so good that you can now avert regulation.
So what, what's the replacement for regulation in this kind of scenario? How does that work?
Jerome Kelsey: Well, I, I mean, again, it depends on your, your design of your DAO. If you have really good accountability systems, then it's potentially the people who are members of the DAO kind of checking each other. Now of, of course if you, you know, if you have legal frameworks for DAOs and those members are represented under a legal framework, say like in the Marshall Islands or, you know, some other jurisdictions like Utah, Wyoming, California's experimenting with some stuff here.
If you have a, a legal framework for your DAO that encapsulates, you know, all of your members, then they have to abide by those legal frameworks. And smart contract actions can hold them accountable for, you know, when they are out of line in terms of the rules of the DAO and whatever legal framework that is wrapped around that DAO.
David Ding: Very cool. Nice one, thanks mate.
Brendan McEnroe: You talk about legal framework and that's, that, that is one of the real blockers for us. We're, we're creating holocracy DAO. And it is, it's a real stumbling block is is the legal side. It kind of, the technology, you know, we've not gonna have any problems in solving it's just, it's just a problem to be solving technology that can be done.
But the legal side is really, we're finding really, really hard. And as you've shown in one of slides, there's the various domiciles that can can be used for, for them frameworks. But it's, it's a whole opportunity here for New Zealand as well. I, I caught up with Brian the other day and I've had a few discussions with him.
I think there's, there's a few of us actually looking at DAOs in, in New Zealand. We probably should look at how can we establish a framework that we can all use and maybe get Callaghan to actually help us with doing that so that we are not individually all trying to solve that same legal problem.
We've had to go down the path of just creating a limited company in New Zealand for the moment until the kind of which, which of the legal frameworks is, is gonna be the best for us to, to adopt. So I'd be keen, you know, to, to try and get a few people together to try and put something forward and see if we can get some support from Callaghan to try and establish that, that that framework get some legal input on that and maybe even lobby government around it.
Because I think it's a, a huge opportunity for New New Zealand under the Web3 to really, really embrace this and, and create opportunities for DAOs to be established here.
Jerome Kelsey: Yeah, I absolutely agree. I would you know, try to look at what the Marshall Islands has done. Yeah. I believe California is looking at extending their laws as well, using it as a base.
It sounds, you know, when I talk to other DAO, you know, experts like I said, there's not really an experts in a field that's so fast moving, so new. But when I talk to other ones around the world I get the indication from a lot of them that the Marshall Islands law is becoming the new gold standard for how to structure a legal framework for DAOs.
Brendan McEnroe: Yeah. There's probably a lot we could adopt there. Yeah.
Jon Lowther: I mentioned Ishmael in Singapore who sits right at the heart of the regulatory community over there a few days ago. And he's he said Singapore's looking at the Marshall Islands legislation at the moment very carefully.
So it's just a word from the inside. And just while I'm here, Jerome last night I was talking to a woman who's done very well in the sphere of insurance startups. She's looking at various technologies present time around us, and we talked about DAO. And I think you might have met her she was the wife of sorry.
And the thought crossed my mind. As you know, I, I was involved with the startup Toric where we spent a lot of time developing a new form of contract for the insurance industry. Now, if you think the central bank community is conservative, boy, you have to meet the insurance industry. And if you think the insurance industry are conservative, well, you've gotta meet the reinsurance industry.
So these guys move granularly and monolithically typically. However, that doesn't mean that one can't examine other opportunities for, let's call it neo insurance, and whether there are any players right now in the DAO community, in the insurance sphere, and I'm talking about insurance works in a different kind of way, you know, whether you want to call that microinsurance or different forms of contracting against different kinds of impact.
Just, just interested in your thoughts.
Jerome Kelsey: Yeah, I haven't really dig dug into insurance DAOs, but I have heard them talked about in some of the podcasts I listened to, so I, I'm pretty sure that they're out there. There's some people tackling this problem at the moment. Yeah, I might might look into it.
Jon Lowther: Thank you, it's been a great presentation.
Jerome Kelsey: You, you, you, you'd be surprised by how many different areas that DAOs are already starting to, you know, make inroads into.
Jon Lowther: Yeah, yeah. I think it's, it's certainly on the rise, isn't it? It's, it's like a mushrooming part of of the, you know, of the digital community right now. And so yeah, super interesting.
Jerome Kelsey: Yeah. Well, they, you know, they, they can be quite powerful if if you set them up correctly, especially, you know, in, in certain areas they can be very, very useful. And that's why I think we're gonna see more DAOs. And as we get better legal frameworks for DAOs, that's just gonna, you know, open it up even further.
QS: Thank you very much Jerome for the presentation. I have a question if you don't mind, in regards to the governance. How decentralized is governance of the DAO? There was a, a diagram where it's more centralized and more decentralized that's going for profit and nonprofit and where it's adjusting locations of LLC.
So you mean by that those are fully regulating the DAO on those countries and we can also sign our own LLC.
Jerome Kelsey: Yeah, I can, I can do you want me to go back to that?
QS: If you want to. It's just the trying to understand is it that because we are able to like sign an LLC like as you guys mentioned at the moment, we're all doing the LLT as a limited liability company in New Zealand. And I have also unlimited liability company and try to register for financial service provider as we want to do on ramp, off ramp as well of crypto. But it seems a little bit difficult here. So yeah.
Jerome Kelsey: So are you talking about this slide here? I just put it back on the screen. Yeah, that's the one. Yeah. So I, I, I actually borrowed this slide from something I saw in my journey of making this presentation. And I thought it was interesting. So I, I decided to throw it up on the screen because I think it's a really, you know, it's, it just kind of indicates what kind of decisions you have to make often when you're starting to think about setting up a DAO. Because usually these decisions when you first start they kind of play with, you know, like they have a long road.
If you wanna try to move from one to the other, it's, it's quite tricky. So it's more decentralized versus more decentralized. And then also for-profit versus nonprofit. And then there are some recommendations that come from the article where I pulled this diagram and it's making some recommendations.
Now I would take this with a giant grain of salt. Because from my opinion, you would want to get legal advice before you decide which jurisdiction you want to go into. And also, I think you should do your own research. You know, look into the pros and cons of any foreign jurisdiction. I know that somebody mentioned Brian here and I'm assuming Brian from Minter Ellison.
I believe that they have been, you know, talking about some ways to create legal frameworks for DAOs in New Zealand. And, you know, why not explore that you're here in New Zealand. That might make sense.
QS: Yeah, that sounds good. Thank you very much.
Chris Lennox: Cool. If no one else has got one, I'll go. You mentioned proof of personhood during the course of your presentation there, and that's a sort of a methodology that some of the DAOs that you oversee are trying to implement. I'm just wondering how do you actually go about doing that, given that that's quite hard to do in an online environment.
What, what sort of...
Jerome Kelsey: It is very, very hard to do in a decentralized way. And we, you know, our system at the moment is not fully decentralized on that one component where we utilize two different blockchains. We build our DAO using a combination of two blockchains and one of those blockchains is the proton blockchain that has a KYC system almost kind of pseudo integrated into the entire network.
And so we can leverage that. You can find out whether any of the members have gone through the verification and you can get basically a proof that they've been verified through Proton's KYC network. And then we can leverage that to only allow KYC members to vote on any DAO that is, that we, you know, we want it to be one person, one vote.
Now we're looking ahead In the future, we've created hooks in our system for other peer-to-peer decentralized protocols. One of them is called Bright id. We've been in recent talks with the founder of Bright id. They've been around for a while and they've created a really unique proof of personhood that is peer to peer based.
And so you have validation parties and you get like things like reputation in the network and you have to kind of maintain that reputation and you kind of maybe have to revalidate every once in a while. That's one method. World Coin is a project founded by Sam Altman from OpenAI, and they've got a concept for proof of personhood that uses a decentralized network with a special biometric sensor that can scan your iris.
And it gives you a proof that your biometrics is secure without it revealing any information about you personally. It's a little bit of a dystopian type of feeling, but I think there's some promise in the idea behind it. And I think things like zero knowledge proofs as, as they become more ubiquitous, can pave the way for proof of personhood to be more decentralized.
So we're looking at things like a a protocol that can take a variety of zero knowledge proofs, and you can do things like, you know, traditional, you know, Google auth or passports or biometrics or peer to peer protocols like Bright id and build up a personhood score as an alternative to having a, you know, purely centralized solution.
QS: Actually, I have a question if you don't mind. Like as a feedback or as a suggestion or as what you think about it. Like we are now testing something called Web3 auth.io, which is giving the ability for web two to join the web three using the social log and or web mail, and that creates a pair of keys at the, at the MPC self custodial.
Because so many people still now struggle to maintain their wallets or maintain their passwords do you think that gonna be the future? Like people would be using it or people will go more into the seed phrase and connect wallet option to communicate to the web three.
Jerome Kelsey: Yeah, I think, I mean, I'm sure it's gonna be a combination of both.
It depends on how much people want responsibility versus convenience. I've tried a few of these systems that use you know, traditional web two logins, and then you've got access to basically a semi custodial wallet. I've seen ones where you can actually, if you want at any time, kinda rescue the custody and take it back into your own realm if you want to manage that some point in the future.
So it starts off as kinda like semi custodial and you have the option to make it non-custodial in the future as soon as you feel more comfortable. I think that's a really, really good model. It kind of, Lets people dive into Web3 without too much of the friction, but it allows them to still benefit from, you know, the power of Web3, which, you know, is a lot of, is very centered around personal responsibility.
And often, you know, when you give up responsibility, there's a reasonable chance that you're giving up a bit of your freedom. And, you know, I think Web three can kind of put that back into view again so that people realize that, okay, well, you know, I like my convenience, but I also like my freedom.
Okay, I'm gonna make a decision on where I want to sit with convenience versus freedom.
QS: Thank you
Jerome Hartigan: Jerome. I'd like to talk about a different theme closer to what David Ding was talking about. In terms of democracy and the potential for DAOs to enhance democracy within nations potentially to enhance democracy, where we have this tendency towards corporate ocracy where many corporates are bigger than nations, and then also democracy among nations.
Just wondering, have you got some thoughts that you'd like to share on that there?
Jerome Kelsey: Yeah, I do have some thoughts. We're, we're at the moment we're submitting a grant proposal to OpenAI. They've got a, a grant for Seeking Democratic solutions to very thorny, difficult questions around things like you know, AI policy.
And one of the, one of the aims of this grant from open AI's perspective is to take it kind of out of the corporate realm or government, government realm exclusively, and let people have a say and give that a legitimate, you know pathway to create some real policy that come from people represented, you know, potentially all over the world.
And so, yeah, I, I do see that DAOs could be used to sway things like policy decisions that go beyond the power of, you know, corporations or gover governments in particular areas, especially when people's future and livelihood is very, very clearly at stake. Which it seems like with the, you know, the rise of AI, there's a, a reasonable chance that this could affect and disrupt a lot of people around the globe.
And so, you know, there's a good case for saying that people should have a say in what happens there. But that's probably not the only area that, that's true. It's probably actually true for a number of different areas. And if something like this gets enacted just around AI, it might open the doors for this to be enacted or, you know, other realms as well.
Jerome Hartigan: Yeah. So that's, that's answering the among nations or the international democracy opportunity for DAOs. What about a number of elections, you know, recently in the States, for example, there's been a lot of debate about how fair those have been and you know, what the impact of various different external influences on the elections Is, are, are there ways, what are some ways that you would see that DAOs might be used to not just make the process more democratic, but also to demonstrate that the process is being democratic?
Jerome Kelsey: Yeah, so I'll, I'll, excuse me. I'll probably talk about zero knowledge proofs again which aren't really fully functional just yet. I mean, there's starting to be there, you know, public networks that use zero knowledge proofs. Are starting to appear, but they're not really mature or robust enough to fully rely on.
But I think in the next year or two that's drastically gonna change. And you want something like zero knowledge proofs when it comes to you know, national elections for, you know, things that, that are as important as a government. Because when you, when you bring zero knowledge proofs into things like elections, you can allow people to have you know, private voting that you know isn't compromised.
You know, nobody can see who they voted for, but they have a proof of yes, you know, they had the authority to vote, and yes, they voted for that particular candidate without tying it to the individual who voted for that candidate. And that's a really, really important part of democracy. You know, with, with DAOs you can kind of get away with it.
They're not usually at that realm where you absolutely would require that to make such, you know, high stakes decision, you know, as the leader of a government. But if you wanna take it into the realm of the real world, I would say you need zero knowledge proofs to make that happen. The other thing too is that zero knowledge proofs come with a proof that, you know, this actually did occur.
And you can verify that it's all verifiable via code. And you can see the moment that somebody tried to enact code that may have tried to compromise it. So it makes actually democratic elections more secure once we get to that stage.
Jerome Hartigan: Thank you. Any, any thoughts in terms of, now that we have a large, you know, a growing number of corporates that have influence greater than many nations and certainly budgets greater than nations, any thoughts on how DAOs could be a mitigating factor in enhancing democracy despite this growing trend of corporate-ocracy?
Jerome Kelsey: Yeah, that's a, that's a trickier one to solve because you almost have to.
Like, it sounds like we're solving all of the world's problems right now in this in this presentation, but I'll, I'll take a stab at it. Like it's, you know, it's trickier to say, okay, let's, you know, let's have corporate structures turn into DAOs and democracies. I mean, they already exist. They're already legal entities. They already have their own systems and structures and, you know, they have you know, grown into positions of power with large treasuries and capabilities on, you know, to enact things on a global scale.
That's tricky to just pull away from. And I'm not sure if you know, if we're talking about freedom, maybe you, you know, we don't want to pull away from that, but you can have alternatives.
So ideally what you would probably want from DAOs in order to make a, a meaningful change in that realm is for DAOs to start to demonstrate that they are capable of competing with some of these large corporations you know, on an evil even playing field. And that might disrupt the very nature of centralized corporate corporates that have too much power.
The other way is also for, you know, to get more fair democratic representation in our governance structures so that maybe some policy, policy decisions or laws could be enacted that might, you know, You know, provide some sensible limits and caps on what a corporation is able to do and influence like, you know, potentially preventing corporate corporations from having too much lobbying influence over governments or something like sortition might just naturally, if it's applied to govern government make it really, really hard to lobby candidates because it's randomized.
You'd have to pre lobby all of the potential candidates. And it becomes a lot trickier to do that. So there are, you know, there are ways, but it's gonna require political will to make that happen on a political level.
And it's going to take DAOs to be able to legitimately compete with corporations on a corporate, you know, head to head level and that's just my opinion. There might be other ways that I can't see that, that, you know, could address those concerns.
Jerome Hartigan: Thank you.
Chris Lennox: Do you have any last few questions for Jerome?
I had one just on sort of related to your, your game developer background. Just sort of wondering how you made that switch from, from that as a background into into DAOs. I mean, I kind of see some similarities in terms of their both sort of enacted in code or a very rule-based structure. But can you talk a little bit to that?
Jerome Kelsey: Well, it's really about tokenomics. Lots of video games you know, massive multiplayer online games and also mobile free to play games have some pretty deep tokenomics driving them. And I've been involved in the development of both types of games. So there was a little bit of a natural progression from you know, tokenomics in games to tokenomics on the blockchain.
And then the realization that if you're gonna have tokenomics system on the blockchain, you, you know, especially when you're talking about a system where people are voting on a shared monetary policy that's already a DAO. And that was the initial idea that I woke up with one morning was this idea of Freeos that you could vote on a shared monetary policy.
So it immediately threw this tokenomics question into the realm of the DAO. And then developing that, just realized being, you know, DAO, how the power of DAOs and what the potential might be for DAOs in the future.
Chris Lennox: Cool. One last question?
If not, then we'll we'll wrap things up there. Thank you so much Jerome, for, for taking the time. Really appreciate that. Thanks everyone else for, for dropping in and hopefully we'll catch you in the next one.
Jerome Kelsey: Yeah, thank you Chris and everybody behind the scenes to help make this happen. Really appreciate all of you coming to listen to me talk about DAOs and tokenomics.
Thank you. Thank you.
Chris Lennox: Cheers all. Thank you.