The Case For CAOs

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Decentralized Autonomous Organizations (DAOs) are very popular in the blockchain community. They are awesome and the world should have more of them, but this doesn’t mean every function of every organization should be decentralized. Some organizations benefit from centralized control, particularly when functions like executive decision-making, project management, or military action are central to the organization’s value, or when the creators of the organization simply intend to own or control it themselves.

Even these centralized organizations (traditional businesses) can benefit from automation made possible by decentralized services and functions.

Enter the CAO

(Centralized Autonomous Organization)

Imagine that you have started a business to build and sell software. It’s your baby. You quit your job to work on it full time and wake up at 4am worrying whether you will land the next big customer. Distributing control of this business offers little value (at least for now), but you want to avoid the paperwork associated with incorporation and getting a business bank account, you could save a lot of time and money by using smart contracts to automate common agreements and to engage talent across borders, and you would love access to the financing available on DeFi protocols. Perhaps some of your customers are DAOs, and prefer to pay you via smart contract and streaming payments.

This story illustrates a bunch of great reasons to be a CAO:

  • Significant reduction in administrative overhead for both you and for counterparties. (This recent piece by Balaji Srinivasan beautifully illustrates the cost of this overhead when managing cap tables. Imagine applying the same analysis to all of business.)
  • Higher degree of trust, particularly across borders, meaning you can recruit and onboard help faster
  • Access to financing from a decentralized finance ecosystem that is growing 10x per year
  • Ability to accommodate a rapidly-growing DAO market

The benefits in detail

It’s helpful to think in terms of using blockchain to create a much better user interface for the fiat legal system. The idea is to use a set of concise legal agreements, ideally combined with integrations, to move a company’s revenues, assets and liabilities on-chain, where they can benefit from automation.

Instant, blockchain-compatible business

Instead of filing for incorporation with a lawyer or Stripe Atlas, you simply purchase an NFT from a service that has already linked it to a pre-registered C Corp or LLC. This can be accomplished in multiple ways depending on the needs of the organization, but some entrepreneurs are already experimenting with this kind of mechanism to put real estate ownership on blockchains.

This approach has the following benefits:

  • The ability to acquire a legal entity almost instantaneously
  • As a registered business, the owner has the ability to open traditional bank accounts, sign lease agreements, accept traditional investment, and pay standard payroll.
  • The ability for a blockchain to control the ownership of the business, meaning that the owner can use some or all of it as collateral in a smart contract
  • The NFT could come attached to a crypto-wallet and a smart contract with governance procedures, putting it in an even better position to make commitments and transact on-chain. Imagine, for example, if transferring the NFT not only transferred legal ownership of the business, but also its accounts and on-chain relationships, all of which would be public and transparent.

Efficient, user-friendly, borderless agreements

Smart contracts move assets automatically, meaning that your business partner in Timor Leste (ranked last for contract enforcement) doesn’t have to worry about enforcing his revenue share agreement with you. You can set up a smart contract so that it only be changed procedurally, through a process in which all parties have control, protecting the rights of each party without limiting flexibility.

The challenge here is making sure the business’ money is on-chain in the first place. I discuss this in detail in Procedures vs Contracts: Web3 beyond Artists, Fan Clubs, and Royalties, but essentially: centralized parties, what I call “anchors,” can help ensure that a business’ assets, its revenue, for example, is converted to crypto (most likely a stablecoin) and sent to a wallet.

Currently, smart contracts are most appropriate when either promising how money will flow in the future or when managing value that is quantitatively rather than subjectively determined (no computer code can determine if a designer’s work was “good enough”), but this will change as arbitration mechanisms like Kleros improve and blockchain lawyer guilds like LexDAO grow.

Access to Decentralized Finance

The number of US dollars locked in decentralized finance protocols (a good measure of the industry’s overall value) grew from $27 billion to $101 billion in the last year (2021). Currently, almost all of the financial activity in this space involves highly-liquid crypo-assets (using Ethereum or Bitcoin as collateral, for example). Traditional businesses tend to have less-liquid, of-chain assets, like equity and future revenue, meaning they are less able to benefit.

That could change, however, if businesses’ revenues and assets were already on-chain. A shoe store with stable monthly revenue could create tokenized rights to that revenue as collateral for a loan, or simply sell a portion of it to investors. Automated protocols could work with this kind of asset when as they begin adopting machine learning-based risk-assessment mechanisms.

Benefits:

  • Speed: The more of a business’s financial and governance activity happens on-chain, the more transparent it will be to a protocol, meaning the faster it can be approved for a loan.
  • Simplicity: Imagine the time business could save if loan applications were automatic and vetting investors was offloaded to a members-only token exchange. No more copying SAFE templates from Y-Combinator. Just click a button to issue some tokens.
  • Cost: Streaming payments — continuous transfer of very small amounts of money — could significantly reduce the cost of interest over the corse of a loan.

Attractive to DAO customers

Say your company offers project management software, and that some of your customers are DAOs who vote to allocate money based on proposals. Your company could submit a proposal to the DOA that it use your software, then accept payment automatically into its wallet if the proposal were to be approved.

(Any traditional business with a wallet could of course do this as well, but that’s kind of the point: traditional businesses adopting Web3 tools where doing so adds value.)

Whats next for CAOs?

The possibilities for CAOs (and DAOs, for that matter) expand as the infrastructure linking blockchains to real-world assets improves. Here are some areas where we would like to see innovation:

Anchors

Institutional anchors: Banks, crypto exchanges, and FinTech companies could offer escrow-ish accounts (trusts? Ideas from people with law degrees are very welcome!) that could be locked to only allow withdrawals via smart contract. From a liability perspective, the owner of the account/responsible party could still be the business because it still controls what commitments the smart contract can make.

Creator platform anchors: Platforms like Substack and Patreon could advance Web3 generally by allowing smart contracts to control both revenue and intellectual property. For the former, it could simply make disbursements via stablecoin to a smart contract. For the latter, it could offer an interface for smart contracts that control the submission and removal of content. This would let businesses build procedures for collective control of intellectual property.

Tools

Tools for creating and managing small-business-focused smart contracts: Businesses should be able to create tokenized legal agreements in a few clicks and manage them in a simple interface. We are doing this with Contributor Credits, but that’s just an isolated example of the kinds of tools we can (and will) build.

Wallets built into Web 2.0 interfaces: Not everyone needs to directly control their own wallet, particularly if the amounts of money involved are small. Forcing users to do so is exacerbating a network-effect problem: a business cannot use Web3 tools because their contractors or customers do not.

Tax and business filing tools for NFT-based businesses: Businesses need to interact with government beyond incorporation. On-chain procedures for submitting annual reports, paying franchise taxes, and maintaining professional association memberships would be super.

Crazy idea

Rapid bank account creation: One of the first reasons an entrepreneur sets up a legal business entity is to get a separate business bank account. This process takes time. It would be great to sell NFT-linked businesses with pre-set account and routing numbers (or IBAN), perhaps linked to a temporary account with a low limit. The business could use this account for early purchases like software while it waits for the bank to approve a full account.

This post was written by Jake Chase-Lubitz, the founder of Cooperativ Labs. You can find him on Twitter.

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