The concept of DAOs has been captivating to many in the crypto space for years. When “The DAO” was created in 2016, in the few weeks of its existence and despite obvious flaws, it gather tremendous momentum and amassed 14% of the entire ether supply. Since then the technology has matured and Martin and Matan argue that the time for DAOs has finally arrived.
We were joined by DAOstack Founder Matan Field and Gnosis Founder Martin Köppelmann. We talked about the decentralized exchange protocol DutchX. We also talked about how the two projects together created the dxDAO, which will manage the DutchX protocol, but could go onto its own path. A path that could even lead to being the DAO for all of DeFi.
Topics we discussed in this episode
- The unifying vision behind the various Gnosis projects
- Why Gnosis decided to build decentralized exchange protocol DutchX
- DutchX’s usage of batch auctions to provide good prices and liquidity for any market
- Incentivizing market makers with the Magnolia token
- Why the DutchX needs a DAO
- The role of Reputation in the dxDAO
- How Reputation will be distributed
- Why DAOs unlike companies could become more efficient as they grow
- How the dxDAO could become the biggest organization on earth in the next 10 years
- How one can get involved in the dxDAO
- Toptal: Simplify your hiring process & access the best blockchain talent . Get a $1,000 credit on your first hire at toptal.com/epicenter.
Brian Fabian Crain: So we’re here today with Martin Köppelmann who is the CEO and Founder of Gnosis and Matan Field the CEO and Founder of DAOstack. Both of them have been on the podcast before and today we’re going to speak about this super exciting experiment that they’re doing together which is combining a decentralized exchange and a DAO. And yeah it was a great conversation. We hope you enjoy it as well. Let’s go to the interview.
So we’re here with Martin Köppelmann and Matan Field, both of them are back on the podcast have been here before. Matan actually twice so his third time here and Martin was here three years ago. So quite a long time ago to speak about Gnosis. So we’re going to speak about a very interesting project which is the DutchX and the dxDAO. So yeah thanks so much for joining us you guys.
Matan Field: Well thanks for having us.
Brian: So maybe we can start with you Martin. We spoke about Gnosis before and know of course some people will also some listeners who will be aware of Gnosis because you guys were sponsoring the podcast last year. But tell us a little bit you know what is Gnosis and what’s the evolution that Gnosis has gone through.
Martin Köppelmann: So the core of Gnosis is prediction market and prediction market platform and we see prediction markets really as the new asset class basically. We recently coined the term conditional tokens because it’s really a lot of you can do with prediction markets you can give any event a likelihood or make a market for the occurrence of any event but you can do much more you can see how any event is influencing any other event. So how is one event happening influencing the likelihood of another event happening. But it’s also useful for stuff like how does one event happening influence the price of any asset and that’s super interesting also for decision making how does this decision influence stock of a company or token or something like that. So we say that those are conditional tokens and yeah we provide a framework for those to really create a new asset class and that’s the create part of Gnosis. Then we have a trade part of Gnosis. So we have all those new conditional tokens that needed to be traded somewhere and that became more and more the focus of Gnosis to provide efficient trading mechanisms for this new asset class. But in general for tokens if you if you built a trading mechanism why wouldn’t you. I mean you would allowed to trade anything that’s a from a technical perspective it doesn’t make that much of the difference what you trade there. So create trade. And the third thing we that’s somewhat, well it isn’t 100% related to our initial vision is the whole pod trade trade hold a little bit historically we started to build the multi-sig wallet because it was no and we wanted to do a token sales so we wrote the multi-sig wallet that was able to hold tokens. That became almost the industry standard. Almost every ISO is using it. And we realized well we we should like continue that and to support that and bring that that additional security of the multi-sig wallet to consumers. So have a smart contract wallet where you as a consumer use a multi-sig wallet and you have multiple keys right now in the first setting that’s not so safe. You have for example one key on your phone. One key on your computer or wherever. And it’s a convenient way to use it. So that’s what Gnosos is currently doing. Create trade and hold.
Sunny Aggarwal: Very cool that actually makes a lot of sense. It puts all your major products that you guys have been working on in like context. So what are some of the updates since the last time you were on, so the last time you guys were on was three years ago summer 2016. A lot of stuff has changed since then. In fact the last time that you were on we were actually talking a lot about the dao and it’s interesting that now we’re going to be talking today about the dxDAO. So one of the things I you know since then you guys have spun out of ConsenSys. You guys have done your own token sale I think it was in April 2017 and in my eyes I see like the Gnosis ICO as like the ICO that kind of kicked off the ICO craze. And so how was that whole experience for you guys.
Martin: Yeah well it’s quiet right there still right. Yeah. I think you mentioned the token sale was obviously, well long before the token sale we were still a part of ConsenSys and today we are a company of 50 people working on those three big topics. Yeah I guess we were lucky with the toke sale was the timing. We appreciating selling a bit at the right moment.
So we kind of are in a good position, have a decent runway of many years. I think it went very well and we are in a good position but still so much work. There’s so much like infrastructure still missing. That’s just the case. So yeah and I mean the decision to build stuff like exchanges or exchange technology and yet another wallet was not something we did lightly or I mean we obviously looked at the hundred other indexes that are currently being put in the hundreds of the wallets that are being built and we still decided that it does not cover our needs and we can and we do think we bring additional significant contributions.
Sunny: Cool. So Matan how about you? You know you guys were on much more recently. Only about eight months ago. How is that you know the evolution of DAOstack proceeded since last May.
Matan: Yes so likewise I mean we had a pretty successful or very successful token sale back in May 2018 and then of course that changed a lot. We grew the company now we are a company roughly of 25 people. So that’s well of course that’s stabilizing the company and growing the project and then we made it a lot of efforts on. I mean we we already had a working product before the token sale and we insisted to launch it off and said with the wrong product. But I think the last eight months we had the incredible advance in pushing the product from I would say a prototype into a real production ready like a real product a real product that isn’t a lock in but looks like a real product and works like a real product and has a significant value proposition. Kind of like make it way more professional. So these eight months were a huge amount of effort to bring like the most advanced technology on top of the blockchain and yes very exciting in that we’re just launching that and the X that would be one of the first what maybe with few other that that we will launch with. Basically we would launch the basic platform. I mean we already launch it. I don’t know. Six months ago on the main it with an alpha version which again was kind of like a prototype but now in Q1 towards the end of Q1 we will be launching the whole system you know from from the bottom end of the blockchain contracts all the way to the interface and there are a few layers in between. So the whole system will be launching public data and DX that will be one of the first the probably the first big DAO on top of the platform.
Brian: Cool. And we are going to come back to that in detail in a little bit. But before we dive into the dxDAO stuff let’s talk about the Dutch Exchange. So Martin why did you guys decide to build a decentralized exchange and what’s different about the Dutch Exchange.
Martin: First because we needed a place to trade predictions. It’s as simple as that. So the prediction market obviously is the place where where it already includes the word market so I guess the next question could be why wouldn’t we use one of the existing market mechanisms. And that is because we believe there is a need for a fully decentralized market mechanism and most of the decentralized exchanges right now, are I would call them non-custodial centralized exchanges so that means they are non-custodial you remain in control of the funds but critical part of the of the exchange like the matchmaking, keeping the order book, maybe even deciding which tokens can be traded or not are in centralized control. And I definitely see a need kind of also for those non-custodial centralized exchanges but I definitely also see a need for a like more protocol layer or like infrastructure layer thing that’s just slightly above Ethereum just some decentralized protocol that allows you to efficiently exchange any token into any other token. My claim is that there are a few that are fully decentralized so Uniswap for example is one and you can also do a full on chain order book. So those are basically the two or the three only in fully decentralized exchanges I’m aware of. All of them have unfortunately significant game theoretic problems around front running around being able to provide enough liquidity because the costs are quite high to provide enough liquidity of those mechanisms. So the bottom line is we are really into building something that is a) fully decentralized market mechanism is fully decentralized. Is as efficient as possible of course and doesn’t have any like game theoretic attack vectors like Minor front running is a big one.
Sunny: So could you go ahead and maybe walk through us a little bit about how the DutchX system works and like you know the mechanisms of this exchange and how I feel most people might if when they think of exchanges they’re probably usually thinking of order books that’s about what most people are familiar with. So how does this compare to a traditional order book mechanism.
Martin: Right. Right. So it’s kind of suggested to do to preface that the Dutch Exchange is, yeah I would make the claim it’s right now the only fully decentralized mechanism that cannot be attacked by front running especially from miners. So and we had to do like compromises for that. So how does it work. Yeah it uses the Dutch auction model so let’s say something you want to sell what tokens you want to sell.
Sunny: Let’s say some maker tokens.
Martin: Maker tokens right. So. So there is a pair maker and that’s actually one of the pairs that’s quite active on the DutchX maker Ether let’s say. And roughly the system starts every six hours in auction. So there is a period before the auction where everyone who wants to sell maker tokens. Like puts their maker tokens in this pot. And at some point as the auction starts. And basically the optic mechanism is now trying to sell all those mega tokens that are all in one pot for as a high price as possible. So what it will do is it would start a Dutch auction so that means it starts at a high price. And high ins in our case is defined as two times the previous price. So the previous price is roughly the market price. So it starts at two times the previous price and then the price or you can if it offers this to the to the market to anyone who can do Ethereum transaction on the auction at a dropping rate. So the price continuously drops and now as someone who wants to buy maker you can as the price reaches the level where you are comfortable with you can make a bid. Or you can send Ether. And at that point you know you have the guarantee that you will get that price. Or if the auction continues and unless you clear it it will continue. You then eventually get the final price and the clearing price is the price where there’s enough buy demand at that price to clear the full auction and the pricing function goes like after six hours. So it since it’s a 1 divided by X function after six hours it reaches the previous price and it goes all the way to zero. So after twenty four hours it basically goes to zero. So then there will we definitely expect that they will then be shortly before zero there will be a buyer. I mean obviously ideally around after six hours when it reaches the market price roughly the market price it should close the auction.
Sunny: And so how often does this cycle begin again and again.
Martin: What more or less every six hours. So as the auction is cleared there’s just a 15 minute delay period. And if then there is enough volume and in the current design enough volume means at least one thousand dollars. The next auction would start immediately. So on a liquid on a somewhat liquid pair that has enough demand for his thousand dollar trade every six hours at least. Yeah it would more or less every six hours have a cycle.
Brian: And so is the idea here, like how do you think about liquidity in this context this is something that you think will just naturally come. Because there will be arbitrage opportunities if there isn’t enough liquidity or….
Martin: So I would say the Dutch auction is a good mechanism or there are two use cases I would say. Or maybe more. So one for just very illiquid tokens where you hardly have a market at all. So finding a price every six hours is already like good enough. For liquid tokens, why would you use the Dutch Exchange? For liquid tokens I would say you would only use it for large or you would only want to use it for a large enough volume so that on on the if competing liquid market then you would already moves the price significantly. Because there is slippage. So one experiment we are doing just the 10 days before the DAO would start to do demonstrate this claim and we will for 10 days each day put one hundred thousand dollar and die order in. So we are each day selling or buying Ether, so selling die for Ether. So Gnosis will basically just buy some more Ether with dye. And yeah we are very curious what the final price will be and how the final price will will compare to what the market price at the time. So our claim would be there is no Dex currently that can handle a hundred thousand dollar market order. The DutchX should be one that can do that and roughly the reason is because. Because it basically gives market makers the perfect the perfect setting to do arbitrage or to kind of trade everything where they can get liquidity because it’s totally predictable. So this order is coming in. They can see that hundred thousand dollar. It’s starting at this high price and they see over six hours they slowly see it coming. And during this time they can do all the market makers all the arbitrage people can like compete against each other to give that order the best price. Compare that to if you would just put the market order on a normal exchange and then you only get the price that is available at that moment. So here the market maker can act after they see or it has a guarantee that this volume is incoming.
Sunny: That’s really cool. So a few weeks ago we actually had James Prestwich on with a project called Summa One. And so they were actually using sort of a cross chain Dutch auctions where they were selling Ether in exchange for Bitcoin. And so it is actually very interesting to see that on all of their auctions that they’ve been running they’ve been doing something similar where they’ve just been putting up their own Ether and it’s always been being sold almost out like a 10 to 20 percent discount every time from the market price on centralized exchanges. So like you know while reading your documentation I read about this like Magnolia token and stuff like these things that will help incentivize liquidity. Can you talk a little bit about what these mechanisms are.
So liquidity is of course the biggest the biggest challenge to to get the liquidity running. And so basically the DutchX has a built in mechanism that will only kick in on February 18th and like in parallel to the DX launch. And that will basically it’s a simple strategy that as those who trade earn in the new token the and then kind of fits there’s no pre mine or whatever. So all the tokens that are purely created from trading on the DutchX and for one Ether worth of trade. You kind of every time a new Magnolia token is minted. And the magnolia token is the token intrinsic to the DutchX and it. We have this fee. This liquidity contribution so now you can think from from each auction the fraction is taken in the in the order of magnitude of 0.5%. So in something that’s somewhat comparable to fee 0.5% is taken out of an auction. And it’s like put into the next auction as an incentive to start this auction. So basically this liquidity contribution is put into the next auction and will be distributed among those who participate in this auction. So if you have a lot of Magnolia you basically have to pay less for it for this liquidity contribution but you still benefit from others paying this liquidity distribution contribution because it’s always distributed among all all traders.
Brian: Okay so that means if I’m like a market maker I do a lot of trading I get a lot of Magnolia. And then I guess it’s like when a centralized exchange rate. If you traded a lot maybe your fee goes from 0.3 to 0.1. And so here also the liquidity contributions would go down from 0.5. You know I don’t know 0.1 or something too because I have a lot of Magnolia but then I still get the distribution each time from those who have less. So it can actually mean that even if I sort of traded the same price every auction that’s actually profitable for me. And then you ensure liquidity that way.
Martin: Correct. Correct. So the fee is the your effective fee is basically the fee rate the liquidity contribution you’re paying. It’s plus the average liquidity contribution everyone else is paying and if everyone else pays a higher liquidity contribution you are a net gainer of that fee. So you get to pay a negative fee if you want to put it that way.
Sunny: What if I just wanted to try trading with myself. And just like earning Magnolia tokens so could I create a bunch of like fake tokens and just like do auctions where I’m the only buyer and seller.
Here we come for one of the reasons why we need DAO. Yeah so anyone can add any token to the Dutch Exchange protocol anytime. But only whitelisted tokens will generate magnolias for specifically that reason. Otherwise you create a Sunny token and you have 100% supply of it and you make a lot of fake trades Exactly and that’s why we need to DAO to curate such a whitelist.
Brian: But could you still have to sort of fake trading and generation of like me trading with myself.
Martin: Yeah sure. I mean as soon as you use a real token, well a token that’s whitelisted you can of course put it on the sell side but also put it on the buy side. The thing also I mean you put it up for sale and then you participate yourself during the auction. The thing is that doesn’t hurt the DutchX. It would even benefit the DutchX because you are nevertheless providing real liquidity because or at least to some extent. So on a order book you can specifically fill your own order and then you mean then you can even fake it by pretending or in some orders you can fake it by pretending you broadcasts in order but in reality you didn’t and you just like matched it yourself and you can completely it’s completely worthless to the exchange. However here remember all funds are put together into an auction. So unless like there’s no activity and this is the only one putting funds up for sale. If you then participate as a buyer you also have to well give everyone else basically in this auction that price. And if you want to make sure that you don’t lose funds, bottom line is every trading activity provides really quantity for those who who just want to trade.
Brian: Right. But couldn’t I still I find some token that nobody cares about. I mean it’s whitelisted. I mean some people trading it but now I’m doing like I don’t know five hundred thousand per every cycle and I’m just trading it myself.
Martin: Then at least that token will be very liquid on the Dutch Exchange. If you put in five hundred thousand. That means I or a random trader can easily put in ten thousand and you are very very much incentivized to do not like keep the price dropping too much because you risk your five hundred thousand so. So you are like very much committed to give the ten thousand that that kind of piggybacked on your five thousand order a very good price because otherwise you risk that others can buy your five hundred thousand below below market price.
Sunny: Yeah so I guess you could think of it like you know the assumption is that if a token was white listed there exists like some other someone else out there willing to buy or sell it and so therefore that DutchX auction mechanism will work properly because of that.
Martin: Yeah. Or at least they would say there is there is utility provided by having sufficient liquidity on the DutchX.
Sunny: So I remember a few months ago when we were in Berlin you and I were talking about like threshold decryption and stuff. So he’s got something that’s like in the current version of the DutchX protocol or is this like a future improvement.
Martin: No. So diffusion exchange is its own topic in a way. So the DutchX should really be seen as a demonstration and it’s live now and everything to say it’s possible to do something fully decentralized and game theoretically sound but I mean six hours that that’s of course a big tradeoff. So we are working on a much more sophisticated exchange auction using snarks for scalability using threshold encryption to combat like for running it and whatever but that’s more still in the it’s getting out of research stage and into development stage. But it’s at least nine month ahead or until that would see the light of main net. .
Brian: Well let’s move to the topic because of the DAO. So why does the DutchX need the DAO.
Martin: Yeah so the Dutch Exchange is really meant to be the infrastructure component for Ethereum. So for example many many smart contract systems need at some point the ability to just simply exchange one token for another or convert, they get some income in some token and they want to convert it in another token. And the DutchX should be a mechanism also for smart contracts to do that. So remember for example the smart contracts they can’t sign order they can’t have a strategy for it to kind of to participate in an order book. So they need such a simple way and they still want to get a fair price and so on. So it should be an infrastructure component. And if it’s a smart contract, the smart contract can’t easily upgrade itself or change itself. So the DutchX needs to provide a high level of reliability extremely high level of reliability. Ideally you would have the guarantee that if you kind of use it you have the the very very high guarantee that in the next 10 years ideally in the next 100 years you can just use that thing. And now you are of course you you can do a trade off so to either you make it completely unchangeable with no upgrade functionality whatsoever you just deploy contracts, they are immutable which of course is the disadvantage that you can’t approve it and you can’t like everything you every parameter you said is whitelist. Everything has to be like correct in the first try and then you can never do anything about it. The alternative is of course you have a centralized entity that can make an upgrade but then you also lose the strong guarantees because you now dependent on this central party that has the keys to it. So we think DAO is the most reasonable middle ground between but can still provide given that the DAO is widely distributed and has like ten thousand reputation holders it can provide strong guarantees that you are not reliant on a single entity anything that point to failure if you want so. But it still is agile and and can make upgrades and improvements and yeah and provide a better system.
Brian: And so you mentioned that the Dutch Exchange has been running for six months. So does the dxDAO take over the Dutch Exchange smart contractor can you can you talk a little bit about how this transition is going to work.
Martin: So when we deployed the DutchX we throw away the key or that there is no way to upgrade it. So the DutchX instance that is live right now on mainnet will be in this form as long life on the mainnet as long as mainnet exists. And maybe storage rent will eat it at some point but whatever. We have to deploy a new one. We have to deploy a new version of the Dutch Exchange which as owner and the DAO will obviously be the owner and the owner has like the ability to whitelist tokens to upgrade to contract through the update mechanism basically to arbitrary changes.
Sunny: So why can’t you you know use the same mechanism actually forever where instead of having to have a proper upgrade path we just keep on leaving the old version of the DutchX sitting on Ethereum and just keep deploying new versions and ask people who want to switch over to the new version they can move their liquidity over to the new version.
Martin: Right. I think I think that would be a sensible strategy if that thing would be its own like like DEP and an end users would directly like trade on it and then the end users could just decide to switch to the new version or stay on the old version. However if you really want to build many layers on top and you see this this exchange more as again infrastructure component you want to build all the decentralized finance applications. Say for example does those things or the margin trading that needs the price feed and the DutchX by the way should provide quite reliable or hard to manipulate price feeds. They need to price feed. They need a liquidation mechanism. And you want to put smart contracts layers on top and maybe another smart contract lay on top and then only in application then it becomes really messy if all of those layers and layers have to have their own upgrade mechanisms or then. So I do think there are fundamental infrastructure components where ideally you can build on top of them and have the guarantee that they will run and be maintained. Yeah. Will run and have continuous liquidity for for a long time and just assume there would be this fork and everyone would move to the new one but there’s one contract it’s still running on the old one. And then suddenly there’s the old one runs out of liquidity and it’s then really not anymore a very reliable price feed or you get to the prices.
Sunny: On the other hand out isn’t this also can be seen somewhat as a security vulnerability as well which like you know what we’re doing programming this is why you do package locking where you don’t want your underlying libraries to just like to swap out from under you break interfaces etc.
Martin: Of course of course. I mean absolutely. So the dxDAO is a radical experiment and it has to prove itself that it can provide this level of reliability and it has to prove itself on many levels. The dxDAO has to prove itself on a technical level that the contract needs to be secure. Obviously. It has to prove itself on a social or on a game theoretic level that kind of the the the actions of the DAO or the value system off the DAO. Yeah there are many ifs and things that first need to be proven. But eventually I would say DAO might be able to to provide those strong guarantees that it keeps things going. Does updates does like stays on top of the well most recent technology but doesn’t. Yeah but again you are not dependent on a single sector but on this collective just 10000 people or maybe more maybe to add add some thoughts on this.
So basically. Well fork rules is good. So first these two things fork rules is one only good for upgrades but it’s not good for any other kind of decision that the DAO can can make the DAO can make decisions that the fork cannot make. But I think more importantly fork rules is a great governance mechanism. It’s the best decentralized governance mechanism for decisions that are very very infrequent. So if you need to make a decision once in a year I would say that probably yeah fork rules is probably the best decentralized governance mechanism. But once you want to make many many small decisions and now we can kind of like enter like what contracts including in the upgrade situation what do we call upgrade token whitelisting an upgrade, do you want to fork every time you know whether to list a token or not. So once you are starting to speak about tens and hundreds and eventually thousands and tens of thousands of decisions a year then fork will just make absolutely no sense and you will have to have a DAO to collect decisions at scale when I am saying at scale I means at scale in terms of throughput of decisions but then scale of throughput of decisions correlate with natural scale of DAO itself. So if you have you know thousands of people they will have thousands of ideas to execute on. And that’s something that simply you have to have a DAO if you want to harvest that potential.
Sunny: Yeah I guess that kind of actually makes a lot of sense. So I’ve had this similar discussion a lot with Will Warren from 0x about like you know does your X protocol really need a governance mechanism. And I was kind of making a similar claim there saying that okay look you can just launch your 0x V2 and then all of the relayers who can just point to 0x V2 but I guess like sort of the big difference here is that my perception of that works for 0x because it’s centralized relayers and they can like individually just choose to point to the new version of the 0x contract. But if you’re really trying to focus more on like the whole a larger decentralized finance ecosystem it’s kind of who knows it might not be centralized relayers who are pointing at the DutchX. It could be other decentralized apps that are pointing at it. So you do need a more coordinated system than you would in something like 0x for example.
Matan: Yeah I mean I would even try to argue that even in 0x the minimal feature that you need which is maybe an upgrade once a year. Yeah I would say I agree with you like that fork is just just as good. But if I also think that for 0x you can think of many more things that you could do in the similar fashion and for these you need DAO’s as well.
Brian: So Matan you mention this ultimate ambition right that something like the dxDAO could make ten thousand decisions a year or maybe more. And I guess that ties into very much what we spoke about last time right to holographic consensus and so you know the mechanisms of DAO. So can you explain a little bit how is that going to work. And I was specifically curious also about you know reputation. Right there’s this thing called reputation which is going to have a key role into the dxDAO.
Matan: Sure. So firstly reputation. I mean it’s a sensitive word and you know some people interpret it differently and even more so when you compare it with the REP of Augur. So let’s just get clear the definition when we say reputation we simply mean voting power like the weight of your voting is your reputation it is just a number. But the way that this reputation is allocated to you can be anything you think of it can also be related to some tokens such as locking of tokens and we’ll probably speak about that but reputation is we just mean your voting power. The second thing about reputation is to say so often people talk when they talk about reputation what they mean, and again that’s very different from the REP token of Augur what they mean is that reputation is not transferable. Now it is partially true but then we need to decide what we mean by transferable. But I think that there is what people usually do not speak about is a more important feature of reputation which is rotation is slashable, it’s deductible. So I can in fact while in the reputation contract itself it is non transferable so we cannot transfer your reputation directly from an address to an address. You can do that indirectly so I can hold my reputation in a smart contract and then have a token owning that smart contract and then I can transfer the ownership token to another address and indirectly transfer the reputation to a different owner. But still my reputation score that is tied one to one and solidly to this address, in this case the smart contract address can be deductible by the owner of the rotation system which in this case is the DAO. So if I’m making something which is socially unacceptable the DAO can decide to slash my reputation and in fact that’s a critical element I would even say boldly that I think that’s the only way to fight with for example on chain bribery attacks. So this is roughly about reputation and maybe just really quickly about holographic consensus. I mean the whole problem. Well I think the biggest problem of DAO that was triggering this line of thought is that well basically you get into it into a scalability problem right from the beginning just as much as you get the scalability problem with consensus protocol with blockchain in the same way in fact you get a scalability problem with decentralized governance and it seemed naively you cannot make many decisions that are also resilient so this started the line of thought of holographic consensus which is basically allowing you to make decisions by relatively a small amount of reputation out of the DAO. So that is scalable but in a way that guarantees that small group is actually representative in the sense that decision made in those groups actually reflect what the entire reputation system would think if they would just have the attention to consider those decisions. So does resiliency. So as far as I know that’s the only current mechanism I’m aware of that resolve this the tension between scalability and resilience in the domain of general governance.
Martin: And that may be the one element that brought our two projects together is that that is achieved more or less through prediction markets. So you have prediction markets for the proposals that ask the question will that proposal be accepted by the vote. And that serves as a filter or a way to prioritise or boost proposals. So if the market has a high confident that this proposal will be accepted then it might be fine to lower the thresholds or the requirements for the vote mechanism to accept this proposal.
Matan: Yeah maybe just to comment on that, for a long time this big question was on the table and people have realized that governance systems, you know the regular notion of governance system, you know voting with static reputation, they’re relatively resilient but are very not scalable. At the same time markets are usually in the more effective but they’re very not resilient you can easily manipulate them. So the solution eventually was to actually combine the two. So the decisions are made by reputation holders only. But then in order to scale their capacity there is another system in prediction markets of people who only make predictions. They are not making decisions, in this manner the predictors do not make a decision but they just predict what the voters will say, and by doing that prediction they will basically scale the capacity of things that the voter can decide about.
Brian: So I have a question here. Now Martin, Gnosis is all about creating markets for like everything. And you guys made the point that reputation can be sort of transferred, it could be held by the smart contract and then maybe that controls reputation and then you could sell shares in this smart contract. I mean why not just make reputation like fully tokenized and transferrable. It seems like almost making where naturally a market could be you don’t allow a market.
Matan: Yeah. So firstly again the important point is less whether it’s transferable or non transferable. And as I said in some sense it’s indirectly transferable. That’s a conversation Martin and I had for the past three years. So it is transferable but it’s it’s deductible. And that’s really what matters. So it’s true that making it directly transferable in a way potentially opens up more problems and we don’t see the reason to do that. But it’s not the main point, the main points the deductible. And I would say that you probably can transfer and that you can sell your reputation in a very very small scale like maybe to your brother but you will not be able to scalably have it like an auction marketplace where you can buy as much opposition as you want or sell as much as you want. So it’s similar to the situation where for example often you know people talk about bribery in DAOS’s. Often bribery I would not create an attack vector so often bribery is something that is very hard to coordinate and scale up. But onchain bribery is super attackable. It’s a huge attack vector. So you want to make sure that these things are not scalable and unchainable.
Sunny: If I understand correctly, the main reason you are trying to avoid the transferability is so you have stuff be slashable. And so if someone does something not according to social consensus they can be slashed by the DAO. We have a similar problem as well in the proof of stake world and we solve this using on bonding periods where why not have a system where if you want voting power you have to bond the tokens and then you have to go through a long on bonding period. But once you go to the on bonding period then they’re transferable again. Isn’t that also a potential solution.
Matan: This this an equivalent solution and I’m just representing a more generic than that. So basically the relevant way for the DAO but more generally one of the ways to have reputation is indeed locking some tokens so you lock some tokens and then the reputation score is simply the number that reflects how much voting power you got from locking the tokens. And then you can actually play with the formula much more generally. For example it can be the amount of tokens that you locked but it can also be the amount of tokens that you locked down the time that you lock it for or many other formula and more generally you can also have reputation systems that are not coming from tokens so yes the answer is that it is equivalent but much more gentle than that.
Martin: And well maybe to jump in, that is actually one of the main mechanisms how the reputation of this dxDAO will be distributed. So one thing that’s super important to us is we tried to set up the initial distribution of this reputation or the ownership or the stakeholder ship of the DAO to be really brought and to be kind of this fair decentralized. No pre allocation to Gnosis or to DAOstack. So there will be mainly two things or three things you can do. So one is trade on the Dutch Exchange and earn those Magnolia tokens that will distribute 50% of the reputation. 30% would be given to those who locked down tokens and that will be all tokens, we expect currently a number of like 50 year situated tokens it would be whitelisted on the Dutch Exchange so any tokens that’s white listed and traded on the Dutch Exchange, holders of those tokens can just like lock down this token for up to a year and depending on how much value they lock for how long they will get a fraction of that 30 percent, 8% or 10% to Ether, the same for just locking down Ether. And the last 10% will be auctioned off for Gen tokens. That’s the DAOstack tokens. So the DAO would start having those Gen tokens and they are used to kind of subsidize the governance mechanism. So in a way the DAO will pay out those 10 tokens for successful proposals or more specifically it will use those Gen tokens to incentivize the prediction markets or to incentivize for people to make predictions that can find good proposals.
Sunny: Is there a cap to the amount a reputation. So what is the initial supply of reputation. Because it seems to me that like the 50% that’s distributed by Magnolia as well as the 30% that’s distributed by locking ERC20s both require the whitelist but it seems that the whitelist doesn’t exist until the dxDAO exists. So it seems to be like a circular situation.
Martin: That’s one of the few things we unfortunately have to predefine. So yeah we have to predefine the whitelist. We basically tried to do where it’s somewhat random but most of the top fifty, maybe we can extend it to one hundred tokens and if anyone wants to be on the White List they can contact us and then we will make sure that that’s also added. But I mean it just works fast because we have to evaluate each token, is it actually a real token in the sense that I mean each token is in some way can be an attack vector if if there is one malicious token then someone could grab way too much.
Matan: Yeah. If you’re going to put your sunny token and then control the sunny economy then you’ll maliciously generate a lot of Magnolia and basically wipe up the value of Magnolia. So yeah we want to make sure that there is no sunny tokens and the DAO will be the guard for for for later on.
Sunny: Yeah. Do you need price oracles for each of these tokens as well then.
Martin: Well Dutch Exchange.
Matan: So actually this is really interesting because you are now seeing how two systems use each other so system A uses B and system B uses A, but this is just the beginning we already have in mind you know three, four or five systems that we would like to attach to that and we already see like the bi directional interdependence of them and that’s really the power of unchained DAPS. I mean that they could really emerge and you know integrate with each other and keep decentralization and I think that’s something that we haven’t seen before. That’s also the powerful of Ethereum.
Brian: So what about the economic value of the reputation token, does it have value and what will drive its value.
Martin: So yeah let me make this outrageous statement. I think there is a small chance but I would probably go on record and say it’s like roughly 1% chance that the dxDAO will be the biggest organization on earth in 10 years.
Brian: So says the biggest organization means like, control the most resources or…
Martin: Yeah, control the most resources.
Brian: Can you expand on that, justify that. What would that look like. I mean that’s an outrageous statement. Which is great. But.
Martin: Right. Right. I mean I think that we need to like separate in two parts. So we really need to speak about the potential of DAO’s. And and I think the way Matan and me, and Matan jump in anytime, DAO’s are probably the next big step forward in ways how humans organize. So I like this quote that DAO’s might be as important as the invention of the firm in the 16th and 17th century. Because they are in my expectation or to our expectations, the only mechanism that allows strong coordination between ten thousand up to millions of people. And so we think DAO’s can be significantly more efficient in decision making in processing input from ten thousand, one million members and coming to decisions so this may be overused term of collective intelligence and stuff like that. So I mean you’re probably talking more about that but that’s roughly the general idea that there is a good chance or small, I mean still small chance but there is a chance that the DAO’s will really be the next evolution and will replace firms as kind of the most powerful things for humans to organize. Now we can talk about why might the dxDAO have a chance to to be the first DAO that kind of achieves that scale. Or it kind of makes those throughputs, those larger achievements and we would say the timing finally might be right. So I think with the DAO two and a half years ago we already got an idea of how things can explode. And go wrong of course. But I mean beside that kind of going wrong part of it already, for those who are close to it it was it was magical. Kind of what happened once with this DAO was created and suddenly all teams in the space were like looking at this DAO and trying to interact with this DAO become and part of this DAO make proposals for this DAO, there was this huge magnet for I mean this was really just a period of five weeks I believe if I recall it correctly. But again it gave already an idea of what might be possible.
And yeah, the dxDAO in a way does the more somewhat more conservative approach in the sense that it doesn’t like start with the big token sale but it starts with this big reputation distribution period but I mean it might decide well it will be up to the DAO to decide to do a token sale or other forms of rate raising capital once it’s live. So the dxDAO has a full power to do anything that is possible on Ethereum right now. And that’s much much more than than two and a half years ago so this DAO can, well it can have dollars. It is a trivial one but we have now dye and all the stable coins this DAO can host a website and control content so we have ENS and IPFS. So the DAO can control the domain and that alone kind of means the business model of of let’s say Bloomberg and Tech Crunch and New York Times. Basically most of the value of those three companies is just captured by their website or kind of by their ability to publish information that is kind of curated by them.
Then there’s not much more the DAO can can take a lot of the smart contract systems that are developed are open source. It could deploy them, projects could decide to on purpose hand over upgrade ability to this DAO because they want to give up their centralized control. They often do have. So yeah those are a few.
Matan: Maybe I can just add on that. So I guess why the next DAO can be can be so big. So I think we think slightly repeating and echoing what Martin says. But just to be more specific the bold claim about DAO’s or expectation is that they can be sort of like super scalable organization. So the problem of centralized organizations is really that they do not scale well meaning that they can scale but when they scale they become less and less effective. So less and less if you wish effective per person. And this decay factor is really you know it’s really strong and every time would invent new technology you kind of like allow to stretch somewhat that factor and then you know we went from theorems to eventually corporations but still the pay that you’re paying for scanning is very very big. So very big organization or very ineffective and we believe that the DAO, the centralized organization actually can keep effectivity when they grow. And maybe we don’t know we will see but maybe they can even increase effective we’d just like network effect they can increase the effectivity per person as they grow. And if that is true then those two corporations would be the same thing that network effects. You know in the early Internet days where two previous a apps so for example a network effect based social media to previous old media. They just took over because they become more effective as they grow and they completely become the predominant dominant in there. So there is expectation that the DAO will basically in a way eat up the domain of production in some sense and then the second thing to identify is that because of these exponential network effect thing then there is just an enormous advantage for early movers. So basically that that is to say that the first DAO that will be successful in that sense that he can super scale itself effectively will probably be the biggest eventually at least biggest in its own domain.
So then the last point is just ask whether we are ready whether the technology is in place in the sense of making it able to scale up and whether its its technology is ready in terms of not having a huge breakdown. Of course we don’t know and that’s why you know that’s why Martin is just saying 1%. There’s so many things can go wrong but we want to say that the technology has matured so much in the last few years that there is some chance some not negligible but small chance that things are ready to scale up without a major breakdown. And if that happens and the premise that DAO’s are super scalable we’ll just see that the first DAO basically eating up its own domain and then you guys go but what is this domain so I would say that that dxDAO is really a decentralized finance DAO , DutchX is just you know its first products for its assets but there are so many tools that you want to decentralize that can be decentralized, financial tools, and if dxDAO succeeds it I would expect it to be the basically the largest financial organization on the planet. Of course everything is you know these are the pink, the hopeful scenario but of course everything can go wrong. But I think definitely we are trying to argue that the technology has made such a big mileage in the past few years that that this is possible.
Brian: OK. This is a super fascinating. Thanks so much for explaining this. Now in the traditional financial world we have banks and banks can get to a certain size or you know different companies can get a certain size. And I guess the biggest companies you know maybe to have like a million employees something like Walmart. Now you’ve made the point that the effectivity to some to some extent decreases so there tends to be this kind of limit. We don’t have companies of super enormous or you know much more enormous size. And then the other thing is we have things like anti-trust law and some government regulations that say OK we actually have to make sure that no company you know totally dominates the market. Now with what you’re saying if that’s true that actually there are network effects around the DAO and the efficiency increases as it grows. I mean what’s the ultimate outcome here does this mean that there would be if it turns out like that and let’s say DeFi ends up being you know finance ends up just being eaten by decentralized finance and then you have this DeFi DAO that you know completely consumes DeFi like what is the ultimate outcome here.
Martin: Right. So I want to clarify something I mean the problem so yes one problem of companies that they can grow above a million people let’s say. But the problem is harder the problem is that not only that. I mean even in million even in the hundred thousand they are not effective and they are not effective because the interest incentives are not aligned. So the incentive of the owner of the company or the other influencers of the company whether it’s the owner or the biggest stakeholder or the CEO or the Board of Directors their incentive and the incentive of the stakeholders and of the employees and of the clients all these incentives are not well aligned. And that’s why it’s not effective and it’s not effective, I mean you can look at it from it from it from effectivity point of view it’s just not effective. It can be more effective, but we also look it from it from you know more social point of view. It’s not but then you know I don’t want to get too much of subjective terms like just but it doesn’t serve the incentive of most of the people that are involved in that organization. That’s the point. And if a DAO can maintain effectivity at scale it also means that by definition that it can maintain the line of interest at scale. And if that’s I mean all of the trust laws and regulation that you need to have in order not to have one company controlling the market it’s because that that company is controlled by a single person or maybe a few person, some of these huge companies actually controlled by a single person and then it leads to a such a distort of line of interest of 1/2 billion, literally 1/2 billion. And here we have, if we are right in our in our wild guess, then basically that body can take over the market but in a way that maintains the lack of interest of all of those billion people involved. So you don’t need to worry about the trust laws you basically get what you get at the end. You simply get and that’s all what DAO is about. You simply get a very well effective and in a way fair but fair is built into effective coordination between 1 billion agents around shared interest.
Sunny: But in most companies today don’t employees also have aligned interests. Usually they have stuff like options agreements and whatnot or even like you know something that things that aren’t even traditional companies like there was some news last year about Uber and Airbnb trying to distribute equity to what are currently their contractors. So don’t we all already see this shift towards like especially in the 90s. You know the big thing that happened in the 90s was executives started getting compensated primarily in equity rather than salary. And so do we not already see sort of this shift towards incentive alignment even in traditional companies or you know 21st century companies like Uber and Airbnb.
Martin: Absolutely I mean absolutely, that is just actually strengthening our claim. This transition from centralization to decentralization. This transition from a huge distortion of aligning interest into more equitable or I don’t know balance or whatever you call it, line of interest, is absolutely an evolutionary transition it’s the diagnostic evolutionary transition and we see that transition happening for decades. And the only thing is that each time that new technology is coming in it enables you to set up, you know a higher level of that coordination and alignment. But we also experience that the human greed, wherever there is a way to take over power you know, so you had like system that kind of like started in course of decentralization but then there was some power orchestration that could recentralize them. And we’ve seen that over and over again an in that sense I think that blockchain has really changed the rules in a sense that it allows for technology that in a way maybe be cannot be captured. I mean of course we need to worry a lot about that and that’s one of those things that can go wrong of course all of the game theoretic rules here that this system won’t be able to be captured that at some point. It’s really no frontier in that sense.
Sunny: Another question I have really quickly about the reputation token is you know doesn’t the non transferability in it in a way maybe limit the potential future decentralization of the system. Because a lot of tokens today are like pretty centralized in their distribution. But the idea is that over time market mechanics will help decentralize them. But if we don’t allow reputation to be bought and sold on like public markets, what if the initial distribution that comes out next month is super centralized. What is the mechanism for resolving that.
Martin: So first of all I would say if if we if we don’t achieve at least a sufficient level of decentralization and I would say that our internal goals at least that one thousand participants ideally ten thousand participants. Well the DAO will not be interesting. That is one element. The other element is if it gets like this sufficiently decentralized initial distribution of course it needs to have much more reputation holders over time. And there are already ways built in that of course new reputation is issued. So one thing that is by default built into the protocol is anyone can make a proposal towards DAO, anyone. You don’t have to have a reputation. If that proposal is accepted by the DAO. You will gain. You will get some reputation and we just like today did the math. We are trying to set those parameters what all those should be and we roughly kind of said and if the DAO runs successfully for one year and successfully means like they’re constantly proposals they’re constantly accepted proposals then after one year it should distribute another 30% or a new 30% reputation in this first year to those who who made those proposals.
Sunny: So in theory also the DAO could decide to print a bunch of new reputation and then auction that off on DutchX.
Martin: Correct. Correct. I mean it could do that or I mean it could also just decide to continue incentivizing like trading on the DutchX if it says OK there’s not enough liquidity then it would just do whatever it thinks is is useful to grow the DAO and grow the ecosystem it will control over time.
Matan: I mean again we said that there is an assumption here we said that more decentralized is better. So if that is true then if the DAO will even if it is you know let’s say that the first phase of distribution was just mildly successful and rather than the expected one thousand reputation holders, we just have one hundred. But the thing is that if those one hundred believe in the agenda of the DAO, if they believed that decentralized is good they then have the incentive the interest to keep on distributing reputations so they can reputation in so many other ways and they just have the incentive to grow and grow that DAO. Secondly there is also the mechanism of delegation and of course is another way to kind of like you can have, it’s kind of like a mild form of transferability of reputation that can be retractable or not retractable depending on the condition. So I just say that definitely decentralization is important and more so we are saying that it’s evolutionarily advantageous and thus will happen and if not in the first DAO, in the second that it will make it better.
Brian: I guess before we wrap up I’m curious so do you see, if the dxDAO becomes this DeFi DAO, do you also think that in the future maybe something like Gnosis prediction markets would be managed by the dxDAO
Martin: Certainly. So I mean we are not yet going all in on the dxDAO but if it would turn out to be a DAO that gives kind of the guarantees like we will trust the DAO that it would make reasonable decisions. Then of course if we have any smart contract system that needs to have some maybe parameter change upgrades we would probably always give that power to the dxDAO because again we think platforms are more attractive if they are decentralized, it’s more attractive to build on top of a decentralized platform. We want to build decentralized platforms and that means we have to give away control and we think that the dxDAO or something like that is the right thing to give it to.
Brian: I guess I have another question sort of related here. So is there a role of the GNO token somewhere here.
Martin: Yes, so, well no not in the dxDAO, or not directly. And again that was important to us that the dxDAO should not be a Gnosis DAO. There is right now a role for GNO in the DutchX and that is something super interesting to watch so right now I describe this liquidity contribution mechanism and the Magnolia. So that’s one part. So you can have a lot of Magnolia and that gives you an advantage by paying a little less in liquidity contribution and effectively gaining fee. And the other thing you can do is you can use OWL in that is always the idea behind Gnosis or GNO, that you lock down GNO and you get fee credits. So right now the DAO uses OWL so you can pay part of this liquidity contribution in OWL so roughly that means if you have you GNO and OWL you kind of get the slight advantage similar like you can get the advantage with the Magnolia. And it will be super interesting to see what what the DAO does with that. So in theory the DAO could fork out GNO.
Matan: Just to be precise. I mean not that fork out in the sense of blockchain, I mean it wouldn’t even to change the whole contract it has the ownership and ability to change the logic and basically kick out GNO but then we also believe that there is actually advantage of the DAO to maintain it. Maybe we’ll see how it plays out but maybe the DAO has incentive to be aligned with the Gnosis economy.
Martin: Right. So kind of the way we we envision it is that there will be DAO token holders to a larger extent of all the different token projects and then they kind of prove it by locking down a token. So ideally the dxDAO will have part of the Gnosis community a part of the 0x community part of the whatever, I don’t know status and many others. So ideally the DAO will have shared interests with those groups and we would see Gnosis as a company is like someone interacting with this DAO and probably once in a while and making proposals to build stuff for that DAO. And ideally the DAO would see that as valuable and therefore don’t for out GNO but that is definitely the risk I guess we are taking. If you believe in decentralization. If you believe in giving up control. Yeah that’s a consequence that you give up control and you risk that you lose control.
Brian: Cool. Well thanks so much for coming on guys. It was really really interesting to speak about. I mean I also remember you know back back in the day we did episodes about the DAO when that was happening and I remember that incredible momentum and excitement around that. And certainly it was so obvious back then and even though this was such a primitive attempt of the incredible power that DAO’s have. So finally we’re at the point where this is kind of coming back and maybe if a much different level of maturity that’s something incredibly exciting.
Now we’re going to have of course links to a bunch of different stuff but probably some listeners do want to get involved and you know participate in the DAO. Do you guys have some maybe final words or pointers so what should people look out for what’s the timeline here.
Martin: So one final word is this thing is risky. DAO’s have unforeseeable consequences. You can lose everything and so on. So if you do it with that expectation then well I mean definitely the DAOstack channels and the Gnosis channels are channels where you will get relevant information. dxdao.daostack.io I believe, will be the website where from starting February 18th. This initial distribution period of the of the reputation would start and you can there do the different actions like locking down tokens and so on and get off course all the relevant information and this period will then go for 30 days. So for 30 days starting February 18th. Yeah you can do all the actions to become part of this DAO. And then there’s two weeks like cool down or kind of initiation period. And then starting early April the DAO is live and develop its own life and maybe just one last comment. So with Gnosis we obviously, yeah obviously Gnosis and DAOstack are kicking off as DAO but it’s really important to us to make it clear that this is not a Gnosis DAO so we already made to the the pre-commitment and we will make this announcement a few times, we will burn all bridges early April. So basically once this initiation period is over we will basically say Gnosis involvement is over for now. It may be is over maybe eventually we will then start again like injecting with the DAO but at that point we will basically say either the thing develops its own life and kind of does something out of its own or it will die. And we will let it die. We won’t do anything. So we will close our github repository, we will close the communication channels and it should develop its own like ways. Where where does it communicate. How do people coordinate. We think really, I mean we saw it like projectslike well obviously Bitcoin, that it helps that at some point the creator steps back and allows the thing to be not limited by the Creator. Basically.
Matan: Yeah maybe to add. So I mean of course as Martin says DAO’s Gnosis channels are are open and although as he said we are burning those old bridges and DAOstack and Gnosis will not drive the DAO once it is alive, it has a life of its own, but there are some places I mean. So firstly there is there is a forum that we are setting up for that. Again we don’t want to have any ownership of that forum but they were setting up a form where people can speak. So the DAOtalk.org. I mean you can already go there and right now well of course right now it’s not lives so there is no discussion but people can decide on their own to have a discussion there. Secondly, we’re building the whole stack so in that sense we will build the contracts and the protocols and you know in more layers of technology by the end of that stack there is an interface which is called Alchemy so that’s an interface that could be a key through which you can participate in the DAO. But again we have no wish to have a control on that interface. And in that sense there is already a bunch of other alternative interfaces by independent actors that are being built up to also serve as gateways to the DAO. But anyway you can participate in that DAO through that interface and of course participate in the reputation bootstrap period to get reputation.
Martin: I would mention that I would recommend everyone looking at the Genesis DAO. So that’s the DAO that’s running right now and you can see it’s kind of much more limited I guess in scope but it’s super interesting to see. Like currently it has a hundred twenty people maybe. And it’s super interesting already to see or to feel like it’s developing its own life it’s developing its own rules developing its own value set and yeah it’s it’s simpler. An earlier version of the protocol but you already can get a sense of how the dxDAO then might look like.
Matan: Right. So if you go right now to alchemy.daostack.io you will find the Genesis DAO, right now there is only one DAO there it is Genesis DAO. It operates under the alpha version of this stack and the interface and the protocol and everything it’s clunky it is slow it is you know it has a bad UX it’s you know everything that you wouldn’t like for a product and yet you know we just launch it completely anonymous like completely quietly with fifty people and now you just grow two hundred and twenty five and it produced two hundred proposal out of which I think 60 something has passed. Out of those sixty something proposals there were documents, a few interfaces, modules, browsers, three meet ups, a suggestion proposal that we haven’t thought. I guess it’s surprisingly an effective way, we funded that DAO it was an experiment and I think it was a super effective way to get their return on that fund. So this is just a sandbox, it’s a prototype. And very soon in this Q1 before even the dxDAO launches we will launch the system in detail it will be completely different world different application much more slicker fast design and many more features and so on so we are we are waiting for the better.
Brian: Cool. Well Martin and Matan thanks so much for coming on. I’m really excited to see how this all turns out. Sounds like an amazing experiment. And I’ll be following it closely. So thanks so much for joining us today.