The future of cities is in social DAOs
Decentralized autonomous organizations (DAOs) can help solve coordination problems and build community in cities.
If 2021 was the year of crypto and non-fungible tokens (NFTs), then will 2022 be the year of the decentralized autonomous organization (DAO)?
Even if DAOs don’t reach maturity in 2022, we can be sure that they will grow in their importance and ability to build community and confer utility.
The Pros and Cons of Cities
Economists and social scientists have long viewed cities as places of creativity and excitement. There are a lot of reasons for this, but they boil down into the concept of agglomeration externalities, which refer to benefits that accrue when there are many people living in closer quarters.
Consider, for example, the extra convenience of walking down the street to a shop, rather than having to drive 10 miles. That’s only possible because there is enough demand in a small enough area to make it profitable for a business to have that many shops. In more rural areas, it simply isn’t profitable to have as many shops as close to one another. Researchers have found that these “non-pecuniary amenities” have mattered a lot over the past 20 years.
Take another instance. Cities are also a place of intense social interaction. Researchers have built quantitative models where increased social interaction with one another leads to greater creativity and development of ideas that drive economic growth. (Not surprising, but challenging to prove!)
However, the past two years have pointed out some of the fragilities of cities. For example, we’ve seen a deterioration in social order, an increase in crime, declines in school quality and student outcomes, and much more.
Particularly with the presence of remote work, there’s no need to necessarily reside in a city and pay the high cost of living when you can do the same job from anywhere. My recent research points towards some benefits of hybrid work, manifesting in the form of higher job satisfaction.
What’s at the source of a lot of these problems is a fundamental coordination problem. That is, as the population in an area becomes more and more heterogeneous, we need more mechanisms for resolving differences and identifying common ground so that everyone can move forward.
And yet, local and state governments have had little innovation over the past 20 years. Using data across industries from the Bureau of Economic Analysis (BEA), I found that real value added (normalized for inflation) increased by only 15% among state governments between 1997 and 2020. To put that in comparison, real value added among all private industry grew by 63%.
Put simply, there’s been little innovation among state and local governments.
Beyond even state and local governments, federal government hasn’t been doing too well either. My good friend Matt Harder points out here how rising centralization throughout the federal government has led to worse, not better, outcomes. Simply throwing more money at problems isn’t a fix.
We need a solution.
What Are DAOs?
DAOs are self-governing organizations typically formed by groups of similarly-minded individuals with specific goals. They can be as small or big as the users desire, ranging from building a community of people who live together on an island (“island DAO”) to a fundraising effort to purchase an authentic copy of the U.S. Constitution (“Constitution DAO”).
While a DAO is, on its own, simply software — that is, smart contracts that specify what happens when something else happens, i.e. a process that unites everyone together through executable code — it ultimately consists of the people and values that draw the users together. DAOs operate by working with “Contractors” who submit proposals (e.g., launching a product or providing services) and get approved and supervised.
Contractors require a group of signatories (“the Curator”) who validate the proposal and provides the transfer of funds. These funds are provided by the users who pool together for the broader good. That creates skin in the game — if a Contractor fails, then it would reflect poorly on the signatories. In other words, there is a “dynamic game” between the principals and the agents.
While DAOs are not new — see, for example, a nice primer by Stephan Tual all the way back in 2016 with many more details — they have had limited use.
- Social factors — before 2020, the concept of remote work at scale was foreign, so the concept of governing organizations through smart contracts was probably also an alien concept. But now remote work is trendy— perhaps too trendy (?) — and smart contracts are beginning to permeate every industry… even agriculture!
- Technological factors —even though blockchain as a concept goes back at least 15 years, one of the constraints to using it at scale has been the cost associated with proof of work… and even Ethereum’s proof of stake. But new advances in computing power and technological solutions to the staking process are bringing substantial reductions in gas fees.
- Complexity of work and population heterogeneity — a large proportion of the revolution in automation and artificial intelligence has been focused on replacing tasks that are routine, manual, and generally simpler. However, as more tasks become complex and require people working with one another, smart contracts become integral for validating and facilitating work product without bottling up the supply chain.
As more tasks become complex and require people working with one another, smart contracts become integral for validating and facilitating work product without bottling up the supply chain.
With the convergence of these three forces, we’re beginning to see major strides in the application of smart contracts, particularly in DAOs.
How DAOs Can Help Solve City Challenges
All of the challenges that we’re seeing in cities, ranging from the deterioration of social structure to rising crime rates, are basically a coordination problem.
Economists and social scientists use that term to describe the phenomenon of multiple actors being unable to “contract” on tasks efficiently — that is, agree on execution of tasks through a “principal” and an “agent.”
DAOs can help in a couple of ways.
First, they bring together like-minded people around agreed upon objectives. Cities attract such a wide range of people who come with different interests. Some move for a job, whereas others move to spend more time outside in the trails or to participate in the arts community. DAOs can refocus people in cities on the principles, goals, and concepts that unite them.
DAOs can refocus people in cities on the principles, goals, and concepts that unite them.
Second, they provide a scalable solution for creating skin in the game around the execution of tasks. One of the reasons we see rising crime rates is because residents don’t engage with their civic institutions, ranging from voting to simply making their voices heard in town halls. However, DAOs create skin in the game since the Curators are staking their own resources and reputation to supervise the Contractors over well-specified tasks.
Third, they enable rapid communication and validation, bringing down the cost of civic engagement. Whereas some residents might disconnect from local governance activities based on a perception that they’re not worth the time, thereby free-riding on the engagement among others, DAOs allow people to communicate, vote, and supervise easily through smart contracts.
Whereas some residents might disconnect from local governance activities based on a perception that they’re not worth the time… DAOs allow people to communicate, vote, and supervise easily through smart contracts.
Therein lies the major benefit: DAOs provide an easy and verifiable way to build community and work towards solving shared problems — and by working together, everyone in turn builds even greater community.
Take, for instance, the low rate of voter turnout. Some estimates suggest that only 15–27% of people vote in the election for their local mayor. No matter how you look at it, that’s low — and it means that the best candidates don’t necessarily win. Rather, the candidates who can mobilize even tiny bases might win, which doesn’t necessarily reflect the median voter’s interests.
Practical Use-cases
Turning cities into DAOs overnight is impossible — and it probably wouldn’t be good either! But, we can pilot DAOs around concrete use cases. For example, even without blockchain, my friend Matt Harder has helped local leaders in Atlanta and New York vote on how to invest local revenues on initiatives.
The solution here is not rocket science.
- Conduct interviews and market research to understand the issues people care about and the set of prospective initiatives that could be pursued
- Enumerate those initiatives with a clear articulation of costs and benefits
- Create a voting system that reflects voter preferences over the initiatives
The hard part is on the implementation of the third bullet. That’s where smart contracts can be so useful because they allow a Curator to hire a Contractor to execute — all while having a process for verification and supervision. In the process, each resident has skin in the game because they own a token that confers benefits (i.e., governance) that they use to vote.
Operationalizing these ideas isn’t too far off. Already, Miami has launched the Miami Coin. For example, Mayor Frances Suarez has talked about how he is going to use the proceeds of their coin launch to introduce programs that promote cleaner energy, help under-privileged communities, and expand crypto and digital education. Meanwhile, the coins in circulation become a form of representation and way of signaling voter preferences.
Nonetheless, the implementation of city DAOs is going to require a lot more work — a subject we will continue writing about. We are especially interested in how DAOs can be used to improve the funding mechanisms around the arts and other city non-pecuniary amenities (e.g., parks). DAOs are already been used as an alternative method of financing (e.g., compared to VCs).
But, at the very least, we should educate ourselves about the emerging means for self-governance that are now available and have already been piloted with smaller use-cases. Soon, DAOs may well become one of the most effective ways to govern cities and bring people together in authentic community.
This article was written by Christos A. Makridis, the Chief Technology Officer and Head of Research at Living Opera, a multimedia art-technology startup. He also is a research affiliate at Stanford University’s Digital Economy Lab and Columbia Business School’s Chazen Institute, and holds dual doctorates in economics and management science & engineering from Stanford University.
