Podcast transcript: How DAOs are impacting the evolution of ecosystem strategy

31 min approx | 21 Oct 2022

Welcome to the EY Think Ecosystem podcast, a series exploring the intersection of technology collaboration and innovation. In each episode, we orchestrate insights, stories and perspectives from across the EY partner ecosystem, our client base and leadership team, to address the important issues and challenges of today.

Paul Brody  

This is the EY Think Ecosystem podcast, and I am your host Paul Brody, the EY Global Blockchain Leader for today's episode. Now in today's episode, we are going to be taking a close look at DAO’s, decentralized autonomous organizations. They are a fast-growing phenomenon in the era of blockchain. And they are really in a sense, a kind of update on an age-old concept of partnerships and cooperatives. They take the idea of a decentralized group-owned and group-managed organization and transplanted into a blockchain environment where governance, voting rights, business transactions and operations are encoded into a smart contract and deployed on chain. 

Now, Web3 has come up with a lot of disintermediation concepts, and a lot of ideas around blockchain ecosystem are the elimination of ‘need to trust’ or the creation of new mechanisms to build trust. DAOs really go a step further; they don't just create an algorithm or a tool. They're intended to create a better method and tool and organization for collaboration. They're designed to be radically disruptive, to be governed and operate in really transformational ways that are innovative and challenging, and to operate in a very flat and efficient manner, where members have direct access to operations, policy decisions, voting on very detailed decisions in many cases and underpinned by an environment entirely built on software. Now, advocates such as myself see DAOs as a hugely important platform for building new organizations, for creating new ways for people to collaborate and work together, and as a platform that can support the growth of the entire blockchain and Web3 ecosystem and one that will draw in all kinds of new opportunities for businesses and for entrepreneurs. Our goal in this EY Think Ecosystems podcast is to bring in some really expert thought leaders and explore how these DAOs are coming into being, what they can do that's really exceptional, and what challenges they're going to face. 

Now before I get into the podcast today, I've got the standard disclaimers and reminders from the EY legal department. These conversations that we have during EY podcasts should not be relied upon as accounting advice, tax advice, legal advice or investment advice. And they are not necessarily the official views of the EY global organization, or our member firms. 

Let's get into it. Joining us now from San Francisco is Manasi Vora. Manasi is the Vice President of Strategy and Operations at Skynet Labs, a decentralized content distribution protocol, and more importantly for our conversation today she is a co-founder of the Komorebi Collective, which is the first investment DAO focused on female and nonbinary crypto co-founders. Manasi, great to have you here today; you had been at the forefront of DAO innovation. I cannot wait to hear your insights.

Manasi Vora  

Thank you so much, Paul, for having me, super excited for this conversation and looking forward to diving deep into DAOs.

Brody  

Terrific. We also have on our conversation today from Boston, Jeffrey Hojlo, who is the Research Vice President of Industry, Ecosystems and Product Innovation Strategies at IDC. Thank you, Jeffrey, for fitting us into your schedule. 

Jeffrey Hojlo  

Hey, Paul, great to be here. And thanks for having me.

Brody  

So Manasi, let's start with you. DAOs are really reducing barriers to entry for individuals. It used to be kind of a quite a big deal to incorporate an organization and set up an investment group or a business model. Give us some real-world examples of how much simpler and faster this can be done. And tell us about what industries you see kind of starting to take shape and make use of DAOs.

Vora  

Sure. And I think there's a common theme here with DAOs, which is to essentially bring mission-aligned individuals, like-minded individuals who believe in similar goals across borders, doesn't matter where you're based, and to bring them together and work on things that they're most excited about and make an impact, also while channeling capital towards that impact. And so, what DAOs have enabled is essentially to lower barrier to entry to make this happen at a global scale. And what we are seeing right now is evolution of DAOs from just DAO being a standard term to sub classifications or categories of DAOs. 

One of the biggest sub segments of DAOs that we are seeing are called protocol DAOs. So, these are essentially you can think of them as governing bodies or organizations and communities that focus on DEFI protocol. DEFI means decentralized finance protocol. So, examples there are, for example, Mikado, which is a stable coin protocol, or uniswap, which is a decentralized exchange, or compound, which is a lending protocol. So, all of these protocols have DAOs that are associated with them, where the decisions around collateral requirement, fee, interest rate changes, or even how the treasury gets spend, are made by the DAO. 

Another category, which I'm most familiar with are the investment DAOs, which is essentially a group of people coming together pulling capital to invest in early-stage ideas. We've also seen a rise in charitable DAOs, which are focused more on the non-profit side of things, there's usually a social cause that's associated with them. The speed at which these DAOs have organized and executed is really a testament to the power of Web3. There is also the collector DAO category, with the rise of NFT, we saw that NFT’s reached a point where a lot of them got really expensive, especially the blue chip one. And so, these DAOs were people coming together who were interested in buying NFTs and collectibles to kind of co-invest together and they're pretty close to investment DAO, but they're more focused on collectibles and NFTs. 

I would say there's two more categories that, you know, are industries that we are seeing the DAOs kind of evolve in. One is the social DAO category, which is, again, city DAOs, like, you know, Boston, for example, is coming up with its own DAO where the goal is essentially for communities to kind of connect either, you know, based on a location or a common interest. And I guess the common interest example, which is pretty quirky is LinksDAO, which is bringing together golfers across the world in a membership club model to play golf together, which is getting super fascinating, on the other side. 

And then the final piece of DAOs is media DAOs, which are essentially reinventing the traditional media platforms by creating content that's driven by the community as opposed to an editor or group of people deciding what content gets created. It's really decentralized decision making by the community on content. So, I think those are some kind of key categories and industries that I'm seeing in the DAO space right now.

Brody  

I mean, you're summarizing to me, what just seems like a list of all the different types of companies right. In some ways, I feel like an entire new kind of whole corporate sector is being created. And there's almost you know, if I can organize a charitable DAO, investment DAO, protocol DAO, collector DAO, social DAO, in a sense, it's going to be any type of business organization can be built as a DAO.

Vora  

And I think it's interesting with the rise of DAO, as we saw, DAO is being applied to every single form of business organization. But there are cases where DAOs might not be the best option. And we can dive into that later in the podcast. 

Brody  

Actually, what I really want you to talk about Manasi is how did you end up in this path, you are engaged in a huge number of these DAOs, and they're quite unconventional in the sense that there are things like nonbinary founders, it sounds like this is quite mission-driven for you. Tell us how you ended up here yourself.

Vora  

As I was kind of learning about the space coming from the traditional finance background, I would go to a lot of events and conferences and would still see the same decision makers that were homogenous and similar to what we saw in Web2. And so, this idea of you know, Web3 crypto revolutionizing how we interact financially and socially, but the decision makers still looking the same, like that wasn't something that I could digest and really wanted to see from the early stages of this technology and industry, diversity in this space. So that was the key motivation for me to start Komorebi DAO. 

The reason why we chose DAO is I think it's multifold. The biggest one, of course, is, you know, being investors in the space, we as investors with Komorebi, we want to be hands-on and experience the tools that we are investing in. So, running as a DAO was just an obvious choice, more mission aligned to our investment thesis, which is, you know, essentially betting on this space. But I think another key factor, which I mentioned earlier, is lower barriers to entry. If we were to set up a fund, I think it would have taken us hundreds of thousands of dollars in operational and admin costs, it would have taken us multiple months to even figure out how to go about it. Whereas this with the DAO, we were able to do it in less than two weeks. And that, again, like I mentioned, the speed at which you can organize these communities to come together in a DAO format is really incredible. 

Also, I think, like timing matters a lot. So DAOs are still pretty early. And the best time to experiment is in that early stage. And hopefully with you know, being the first investment DAO in the space that's focused on female and non-binary founders, we are setting the tone and framework for others and inspiring others to take a similar model into consideration.

Brody  

Thank you. I am actually quite inspired. And when I heard your story, I knew immediately that if we were going to do anything on DAOs, we had to have you a part of it. Now, I want to turn to you, Jeffrey, because you're looking at DAOs, you're also looking at all kinds of technology ecosystems. What kind of potential advantages do you think DAOs may have in the future over what I might call a traditional technology ecosystem?

Hojlo  

I think DAOs help address the top inhibitors of industry ecosystems, according to our data, right? We survey annually, over 1,200 executives, from CEOs to business line leadership, to IT leadership. And, you know, the biggest detriments to establishing an ecosystem are ensuring that trust is in place, right? That participants that you work with, are trusted, you know who they are, you know, what they can contribute, you know, they'll deliver on what they promise, as well as fair value sharing, right, that participants in an ecosystem want to be ensured that their contribution, that they're compensated for it, whether monetarily or otherwise, that they have a voice really, within the ecosystem. And it's not just one particular player orchestrating everything. DAOs are governed by smart contracts, NFTs on a blockchain platform that naturally allow for that decentralized automated consensus building decision making approach to a network or an organization, right, I think that's why, you know, traditional, you know, Web2 world organizations, are really thinking about where Web3 fits in, because of the structure that's, that's already in place that enables faster scale. 

Manasi mentioned this, the ecosystems, but also scale of any size, right, I think, you know, DAOs aren't about, you know, scaling to the most participants that you can get, it could be a very, you know, focused topic or mission. In fact, most of them I think are, and so it enables rapid scale up to whatever size is appropriate for that particular DAO, I think, you know, the traditional organizations that are looking at ecosystems really can learn from that, right, that it's not just about, you know, scaling to, you know, this monstrosity of an ecosystem, but really having, you know, focusing on quality. For all these reasons, it's why we know DAOs as a transformational technology. In a recent report that I published, which we call a tech scape. So, I just was thinking about all the technology that needs to be in place or can enable industry ecosystems, and I really see DAOs as holding a lot of promise on that front. The other thing that I mentioned is that, you know, I think one of the biggest reasons for, you know, working within industry ecosystem for expanding the way that that an organization works with partners with participants in an ecosystem, as well as, you know, begins incorporating DAOs into their approach, is to extend open innovation, to innovate more quickly, right? And you think of all the different areas that DAOs can cover that Manasi talked about, I think this is a really important consideration.

Vora  

I think, you know, historically we've seen, at least four organizations where users are participants outside of the traditional organization that create a lot of value being locked out. So, I give this example a lot, which is, you know, consider social media like Twitter, and most of Twitter is the content, the energy, the thought leadership that happens on Twitter is created by the users of Twitter, which, again, are outside of Twitter as an organization, and don't really have a skin in the game or even ownership in the upside that Twitter as an organization sees. So, I think DAOs, you know definitely breaks that up and creates kind of better synergies, brings organizations and these users and outside participants a lot closer and creates these deeper long-term connections that are super valuable. On the flip side, I would also add that you know, if it's a new company, or new organization, DAOs really helped bootstrap and create these, like early communities that are, you know, rooting for your project to succeed, and you can launch with an existing user base or community, even before you know your product is built out.

Brody  

One of the things that I wanted to cover though, and you both sort of touched on it, Jeff, with you was fair value sharing and you Manasi with incentives. The whole space of crypto economics, right, is this analysis of how do we incent all the participants to be constructive participants in an ecosystem to get their share of the outcomes and also to incentivize good behavior, right? One of the downsides of social media is you can participate in a network. But if you don't have a stake in it, or the relationships that are in it, you can be a troll, right, you can just cause fights and disruption. Whereas in a DAO, disruptive behavior that damages the value of the ecosystem as a whole gets your stake slashed. And I think that's a potentially very substantial ecosystem advantage over more traditional ecosystems, where the benefits are not widely shared. And many of the participants don't actually have a substantive stake in the overall health of the ecosystem.

Hojlo  

Yeah, I think the structure of Web3 and DAO is right, enabled by blockchain by NFTs, you know, and by tokens, there's a natural incentive structure built in where you can, on one side, draw and attract participants to DAOs through airdropping tokens and having a you know, an established blockchain in place like an Ethereum or otherwise, that ensures, you know, processes move along, that ensures immutability of communication of collaboration. And I think the other element of ensuring incentives that's maybe not present in the traditional ecosystem, Web2 world is this laser focus on mission, right, and I talked about quality over quantity. I think that traditional industry ecosystems strive for that, they strive to have a common mission, but everyone has their own their own interests. I mean, you know, a couple of additional DAO categories I was thinking about as, Manasi, was going through this, you know, that I've come across I mean, you know, the music and entertainment business as DAOs, right? There’s a color community DAO is one that highlights new music, event DAO, concerts, music, entertainment. So, it's, you know, a place for entertainers to get together who maybe are marginalized otherwise and maybe a small community but very, very driven to make that work. The whole DESI - we've talked about DEFI - decentralized finance, so decentralized science, right? For years, Boston Children's Hospital here in our hometown Manasi and mine, of Boston, Open Pediatrics was formed by Boston Children's Hospital and, and other hospitals around the world to facilitate practitioner communication, collaboration, sharing best practices to ensure patient outcomes. Now we're seeing in this DESI space, you know, DAOs like Open Science and Molecule and Lab, Lab DAO, you know, pop up to really accomplish the same thing. But I think the reason they are, you know, gaining traction, is because of the underlying infrastructure that's already in place to ensure that, you know, whoever you're collaborating with, whoever's sharing ideas, you can trust, you know, what's being shared.

Vora  

Yeah. And I think these incentives, you know, aligning people by incentives and creating the skin-in-the-game really creates magic in the sense that we are now leveraging the power of the collective. I think, especially in the investment DAO, our thesis is investment DAOs can definitely provide better portfolio support than traditional VCs can. Whereas, you know, in a traditional VC, you have maybe as a portfolio company, you have access to one or two partners and their expertise, in a DAO format, you're really leveraging, depending on the size of the DAO, 30 to 200 people who might have different expertise in different areas of interest that, you know, as you're growing your company, and building out a product can help you really accelerate that. 

Brody  

So, Jeffrey, is there an opportunity for conventional organizations to learn from DAOs. What should they take away from the innovation that's happening in this organizational model marketplace?

Hojlo  

Yes, is the short answer. I think this is where you'll see organizations, corporations getting involved with, with DAOs by taking the approach of complementing their ecosystems with DAOs to address different needs, or different domains in their business, whether it be finance, venture capital, or you know, service delivery, you know, enhancing customer experience, innovation, new innovation, and within that bucket, I certainly, you know, software innovation, or digital innovation is, is certainly a big component of that, and a big driver of DAOs scaling to the, you know, to the point where they are right now. As well as just looking to DAOs for IP and best practices, I don't think overnight, we're going to, you know, flip the switch and go from Web2 to Web3, and suddenly DAOs are the new, you know corporation and organization as some have said. In the future, they will be one element in an organization and corporation of the future. I don't think they're going to displace the older organizations; I think what you'll see is the two coming together really as industry ecosystem partners to complement the way of working. You know I talked about, you know, an open innovation approach. And I've talked about open pediatrics, just mentioned that so, you know, others I think about in this area, because I think they are related to this evolution, you know, evolution or revolution of DAOs, you know, think of companies like InnoCentive, or Indiegogo or Open IDEO, right, forums and communities where you can post challenges and problems, and next initiatives for people to vote on and to respond to and deliver challenges to. 

In a way that's happening in DAOs, where, you know, the governance is in place where, you know, you're establishing new initiatives, new challenges and problems that have to be addressed, and the community gets together and teams up to address those. You know, in the software space, you know, get GitHub with their GitHub marketplace. I mean, that's been around forever, you could say that would be that's kind of an early, early phased approach of what we're seeing now evolve in with DAOs. I don't think any of these are going away. So DAOs will exist in concert. But I think that the approach is just evolved to the point now and the technology foundation is in place, as I talked about, to just enhance this, this open innovation that needs to happen that the companies want to happen to enhance all aspects of their business.

Brody  

And I think that's true. Now, I want to turn to Manasi because one of the things I think that's also true is that DAOs may need to learn from conventional organizations, in terms of trying to moderate the level of delegation or direct action, right. We've seen examples early in the year where people were micromanaging some of the DAOs, so the delegated team saying things like voting on eliminating departments and even individuals. And it seems like you can go too far in the direct democracy category.

Vora  

Yeah. And I think there's definitely a lot to be learned from the conventional industry ecosystems and how organizations are run. DAOs very soon realize that all decisions being voted on by all members is not really sustainable. And you know, with any governance system, any organization you will encounter, voter apathy or decision-making fatigue, if there's just too much going on all the time, or the inability to keep up with the nuances to make informed decision. 

So, I think there's definitely a balance in terms of how much granular these decisions can get. And what I'm seeing kind of evolve in the decentralized kind of decision-making space is there is a certain level of high-level decisions. For example, how do you allocate treasury? What are the different working groups; what are the things that particular DAOs should focus on for the next three months? I think those are kind of getting you know, decided by the DAO as a whole and then you are entrusting these like defined goals to be executed by elected working group members. 

And you know, the best example I can give here in terms of how this is evolving is how investment DAOs structured these days. Where, you know, a lot of the legwork, the sourcing deals to find, you know, doing the due diligence with founders, writing up investment members actually happens by a small group of contributors in the DAO, however, the decision and the discussion around whether an investment should be made or not, is happening at that broad DAO level where, you know, different DAO members kind of comment on the proposal make, you know, informed decisions and by quorum, and by kind of majority voting are different forms of voting mechanisms, and of making decisions on where investments can be made. So, there's definitely you know, we're seeing high level kind of decisions being formed by the DAO and then entrusting based on you know, some mounting mechanisms, quorum thresholds to these agents of the DAO that are essentially executing the vision that the entire DAO has.

Hojlo  

Yeah, I think DAOs are driven by, you know, entrepreneurship, right experimentation, and just trying new ways to solve existing problems in the world are which is exciting, right? It's so exciting to watch. However, because they're driven by entrepreneurship is probably the visionary for DAOs is probably a small group of people or one person. I'm not advocating that we go back to a corporate structure. However, I think, you know, some traditional leadership, which I think Manasi's getting to is certainly required. And, you know, teams and groups that work on have maybe certain areas of expertise, you know, work on certain initiatives and projects, yet there is that kind of leadership and governance in place. 

Manasi talked about deploying capital from DAO treasuries, there's a site that lists the treasuries of some of the some of the DAOs out there, right, which is OpenOrgs.info. You can see some of the DAO's out there have enormous treasuries. So, you know, as they're kind of innovating and building new software, addressing problems and challenges. They're also, you know, financially, you know, pretty viable. Right, so how does that investment go? And how was that put to put to good use? Right, so I think I think both sides can learn from one another at traditional companies learning from DAOs and DAOs learning from traditional companies., 

Vora  

Yeah. And I think, Jeff, you know, you brought up a good point where, you know, when we think of DAOs, definitely there isn't a central authority or central leadership, but local leaders can emerge in areas that they are, you know, experts of and this concept of leaders being elected by DAO members and leadership being fluid, as opposed to fixed is what makes DAOs unique. 

And also, the fact that you know, these treasuries in a traditional organization are controlled by a few people, there's definitely a surface area of, you know, being manipulated, or the single point of failure versus everything in a DAO is transparent. All you know, all the movements and treasuries can be viewed, and it's not controlled by a single person or a single entity. And these kinds of distinctions where there is no single point of failure, no central kind of authority makes DAOs unique. And the fact that anyone and everyone can kind of make proposals and, you know, build up enough momentum to bring about a change to a DAO or, you know, things that they are interested in working about, definitely, I think distinguishes DAOs from traditional organizations and something that traditional organizations can learn from DAOs. 

Brody  

So, we could probably spend a whole hour just talking about how to optimize voting and managing treasuries. We don't have time to do that. I do want us to finish up with what I guess we should call maybe the lightning round. So, imagining Jeff and Manasi that you were both talking to somebody who is about to start a new organization or a new business, what would be your quick three-point elevator pitch getting them to seriously consider doing a DAO instead of say a traditional corporation entity or charitable infrastructure? So maybe a start with you Manasi. How would you make the quick pitch for doing a DAO as the next organization that somebody built?

Vora  

I think as the internet has evolved, we are moving from Web2 to Web3 and there are these like huge paradigm shifts in how we organize. The way we do business, the way we coordinate has to evolve, and DAOs are an Internet first or internet native way for people, regardless of borders, you know, regardless of jurisdiction to come together, own and collectively manage a treasury that can be deployed towards a common goal. So, the potential I think, for DAOs is huge. It's still to be seen, but I'm just excited by the prospect of being able to experiment, try something new and alternative form of what organizations look like and moving away from these very traditional hierarchical models, embracing transparency as a norm not the exception. And revitalizing governance through this new lens of decentralized ownership. I think it opens up a new design space, and really creates a lot of space for innovation. 

Brody  

Fantastic. And Jeffrey your pitch? 

Hojlo  

Yeah, I think DAOs are new. So, they are expanding and growing very, very quickly and doing great work out there. In particular, in support of three key areas that we see, according to our research companies focusing on around industry ecosystems. Areas such as sharing data and insights, sharing and co-developing applications, and then sharing operations and expertise. DAOs enable you to kind of centralize data, based on a mission with a common group of people who have the same interests. Tremendous software development, innovation is happening within DAOs. And then there's just an incredible amount of expertise, within DAOs, to tap into, and these are, in many cases, people aren't doing it for the money, they're doing it for the mission and the chance to, to really advance technology and the way that we live our lives, you know, our personal lives and our work lives. 

What I'll leave you with is DAOs are exploding, yet we're in the early days, they're referred to as exploratory as experimental, as I mentioned, you know, recently, we had a global survey, and I wanted to just add some data behind, you know, DAOs, and to see what people are thinking about it. And we asked, how important do you view DAOs to your industry ecosystem approach. And again, I think of DAOs as this complementary element to how companies are working with their industry ecosystem partners and sharing data applications and operations. So, 35% said very important today, and 38% said somewhat important today, right. So almost three quarters. It's an important initiative for companies today. I think when we ask the investment question on what IT investments are you making, you know, I think a lot of organizations are still trying to figure out exactly what they need to do, to integrate to leverage DAOs. That's another discussion for another day. But there is a ton of interest and focus right now. We also asked, the last question, was when designing your industry ecosystem, what are the most important technology considerations? So not IT investments specifically. So DAOs were the top answer and just to give you a perspective, followed by IT automation closely and supply chain visibility and agility, right, two topics we all are very familiar with, but interesting that, that that was, you know, DAOs were so high on the list.

Brody  

So that brings us to the end of our podcast, I want to say thank you to our two incredible guests, Manasi Vora in San Francisco, and Jeffrey Hojlo in Boston, both of whom are experts on decentralized autonomous organizations. I'm Paul Brody, I'm the EY Global Blockchain Leader. I've been your host for today's episode of the EY Think Ecosystem podcast. And I hope you'll join us again for future episodes.

Vora  

Thank you so much, Paul, for having us. Excited to see how the DAO space evolves. Probably we can come back together in a year and talk about it.

Hojlo  

Thanks, Paul, for the conversation. I really enjoyed speaking with you and Manasi today about DAOs, and thank you to everyone for tuning into this podcast.