How DAOs can work for communities

Many people think of DAOs — decentralized autonomous organizations — in terms of investment funds: BitDAO for financial investments; PleasrDAO for NFT art; RedDAO for fashion collectibles. DAO governance is one of the coming stories for how we organize ourselves as humans, and has many uses other than for investment funds.

In 2020, one of my essays won third prize in the Nesta Innovation Challenge. I wanted to consider how DAOs might work in the growing sector of community enterprise. It’s UK-specific, but has wider applications. I’ve reproduced it below and will be writing more about DAOs soon.

What do blockchains have to do with boarded-up shops on Britain’s high streets? When we talk about decentralization, it is usually in the context of cryptocurrencies such as Bitcoin, or enterprise software designed to improve shipping supply chains or audits. These are seemingly abstract topics related to economics or business processes, remote from the practical concerns most people have about their everyday lives.

Yet decentralization can also be political. The UK is one of the most centralised of Western economies, in terms of the proportion of public expenditure controlled by central government. However, there is much to be said for allowing local communities to build ways of living that are specific to their circumstances, rather than suffering the ‘one-size-fits-all’ consequences of decisions made by remote government departments — or indeed by large corporations who open faceless chain stores and then close them down once they are unprofitable.

We need an imaginative new approach to our high streets. Rather than trying and failing to stem the tide of online shopping, we should be bold and be prepared to repurpose bricks-and-mortar assets as mixed-use spaces for living, working and community socialising –- and this is where initiatives such as community-owned pubs, shops and cafés can provide an answer. This essay sets out how decentralised autonomous organizations (DAOs) can replace or augment the existing business models used by community pubs, shops and cafés, and offer advantages that induce more people to start their own social enterprises.

Community pubs and shops

Communities coming together to run enterprises for themselves is not a new idea. The Co-op supermarket in Britain started in 1844 as a cooperative society to allow local people in Rochdale to group together to buy food in bulk which could be shared by the rest of the community. While community shops are growing in number, community pubs are proliferating even faster. By September 2019, there were 120 community pubs in Britain, many of them registered through the Asset of Community Value scheme. These pubs play an important role in the communities they serve, they “foster social relationships among residents, strengthening the level of cohesion in villages and positively contributing to communal well-being.”

Shops and pubs are not the only examples of community enterprises: Totnes Cinema in Devon is a social enterprise providing a cultural focal point in a town that would be too small to support a cinema owned by one of the big chains. Such initiatives are not, of course, limited to Britain. In 2019, Jean-Pierre Desmoulins, the 73-year-old mayor of Saintines, a village in northern France, addressed the closure of the local bakery by turning a corner of the town hall into a bread shop and post office: “[Desmoulins] has turned bread into a public service, and the little town hall into a social hub. ‘It creates a meeting place, a point of social contact,’ he says.”

Sadly, the good news does not tell the whole story. To put the numbers in context, the 120 existing community pubs are a mere drop in the ocean compared to those that have closed: since 1982, the UK has lost more than a quarter of its 68,000 pubs. Given the success of the community-owned pubs, shops, cafes and cinemas that have been started, and their popularity with local people, why are they not on every high street

One obstacle to community ownership and governance is the sheer amount of red tape and organization that is needed to get something like this off the ground, even though the UK government has worked with the FCA to simplify the process and the costs. There are many legal vehicles that are available to people who want to combine their efforts in a social venture, but the most popular is the Community Benefit Enterprise [CBE] model, which was made possible by the 2014 Community Shares legislation. Nearly half of Britain’s community pubs are registered as CBEs, and each has an average of 220 members. CBEs formalise the process of crowdfunding for non-profits and enshrine in law principles such as asset-locking, which means that any capital that is transferred out of the company must either be replaced by new capital or else passed to another community organisation to which asset-locking applies.

This model works relatively well when the participants are happy to use a one-size-fits-all structure, but there is little room for variation in this. Additionally, the book-keeping requirements can be onerous, with the management committee required to keep the details (both physical and electronic addresses) of participants updated, and also to keep duplicate copies of the enterprise’s records so that they can be submitted to the relevant government bodies. The services of solicitors and accountants are often required. The management committee personally shoulder the burden of deciding whether the business is sufficiently solvent for departing members to be able to withdraw equity, and for deciding how profits should be spent, either on reinvestment or by supporting other local charitable initiatives.

Many decisions are taken at an annual general meeting, which is usually held in person. It is no surprise that many social enterprises of this nature are to be found in relatively affluent areas, where residents may already have experience of running businesses or dealing with lawyers and accountants. The 2018 Plunkett report into community pubs shows that the majority were concentrated in the South East and South West, some of the UK’s most prosperous regions. The existing legal structures also lack flexibility: modern populations tend to be transient, and if you move into an area where other residents own shares in a community pub and would like to participate, it may then be difficult for you to become a stakeholder retrospectively. Most schemes also lack a route for lower-income people to build up their own stake in the organization by contributing time, rather than money.

So, how might decentralized technologies support the growth of these initiatives and provide a people-focused move away from centralized decision-making towards a future where individuals can decide the future of their own communities and build the lives they want, centred around vibrant high streets where everyone feels a sense of ownership and pride?

This is where DAOs come in. By using blockchain technology, DAOs can automate the decision-making processes that are pain points for many organizations, as well as simplifying record-keeping and removing the need for a small group of people within the organization to take on responsibility for these time-consuming tasks.

So, what are DAOs, and how do they work?

By now, most people have heard of Bitcoin, and many people will also have heard of blockchain technology, which is the innovation that underpins Bitcoin and other cryptocurrencies. Blockchains are a way of storing information in many places at once, in a form that can be verified by anyone who wants. If a payment is made through the banking system, ordinary people cannot go online and look at the Barclays or HSBC database and see that their payment has been transferred. But with Bitcoin, anyone
in the world can see the transactions, in real time.

A smart contract goes one step further than simply allowing for transparent payments, and allows code to be executed that represents agreements between people or organisations. Working on the principle that ‘I see what you see’, this means that these agreements and records can be kept in a format that is always accessible by everyone who needs to see them. A DAO is simply a smart contract that sets certain conditions that are agreed by everyone at the organization’s inception, and which allows members to vote periodically to decide the direction of the enterprise.

In 2016, the first DAO was created. It was intended as an open venture capital fund, where people could contribute cash for investment and vote to finance the projects they wanted to invest in. So, how might something like this work for community ownership? One answer could be to provide simple legal templates for co-owned enterprises, with an easy-to-use web or mobile interface to allow new investments or subscriptions, and simplified voting on governance issues. Instead of a community pub, café or shop being run and operated by humans within a CBE, it could be run by a DAO, with the costs and agreed rules codified in code running on a blockchain.

So, how would a DAO be an improvement over the existing model? Simplicity and low costs are key elements, and it is easy to envisage how founders would be able to choose from a set of open-source templates a solution that would be most suitable for their business case (such as those offered by organisations like Colony, DAOStack and Aragon). I would argue that the savings in money and effort would be considerable, particularly in the area of record-keeping: no need for duplicate sets of records that need to be maintained by hand or audited by third parties, for example.

Making sure participants have an equal voice

Voting and decision-making are other areas where DAOs can improve processes. Instead of annual meetings where, despite the best efforts of participants, proceedings tend to be dominated by those who are used to having their voices heard and who understand legal and accounting matters, every participant in a DAO has an equal voice. In other words, DAOs can depersonalise decision-making, so that when tough calls have to be made (such as telling a departing member that there is not enough equity to release their stake immediately), members can place their vote in private and without being influenced by more vocal elements.

Governance can be fine-tuned by voting incrementally, rather than in a ‘big bang’ once a year, and this process of ongoing participation helps keep members engaged. While there is an obvious need for improved user experience in the current world of decentralized applications and DAOs, most within the ecosystem predict that soon, easy-to-use website and mobile app interfaces will make the whole process of participation and decision-making easier.

DAOs go much further in democratizing shared ownership and governance and offer far greater flexibility for our modern, transient societies than existing structures. A DAO can be a living entity in which participants are able to sell their stake at any time without the legal overheads of having to get a solicitor involved for every change, and where the ownership parameters could flex according to individual requirements.

The current community shares legislation allows people either to volunteer their time, or be paid by the enterprise: in other words, a binary choice. However, in my opinion, one of the most interesting advantages of replacing a CBE with a DAO is the idea of tokenization, where volunteers could build up a stake in the enterprise by contributing their time. This is an ideal way to keep capital within the organisation and allow those who wish to exit to be refunded easily. To record employee stakeholdings and allocate shares in exchange for labour on an ongoing basis would be costly and onerous under the current structures, but a smart contract could allow the person working behind the bar in a community pub, for example, to convert each hour worked into equity, in a seamless and almost free process.

Projects such as Aragon have been set up specifically to allow communities to govern themselves in a decentralized manner, but the precise technologies that could be used matter less than the principles. Community pubs are a simplified example, as these organisations already exist as non-profit entities, but by examining how DAOs might improve their operations and encourage more people to participate, we gain a clue about how whole networks of interlocking community-focused organisations might spring up, putting modern tools into the hands of individuals so that they can self-organise in a transparent, low-effort, low-cost environment and decide for themselves how to shape their neighbourhoods and their futures.