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What Government and Business Should Learn from DAOs

Decentralized Autonomous Organizations (DAOs) are entities that do not require a centralized system of governance to function, instead relying on their members to run the network.

Historically, governments and businesses have not deployed decentralized decision-making for both practical and traditional reasons; however, by mobilizing the incentivization enabled by blockchains and incorporating the principles of game theory, DAOs are able to harness the collective wisdom of their members to achieve higher levels of productivity and efficiency, traits that should interest legacy organizations.

A Matter of Incentive

The somewhat radical notion of decentralized organization is exemplified in the prediction market Augur, which is currently in beta testing. The platform is derived from the idea that the combined predictions of the crowd will be closer to the actual outcome of an event than the prediction made by any single individual.

The result is an efficient forecasting tool and correlated opportunities for real-money trading. Because Augur is founded on a belief in the “wisdom of the crowd,” the platform depends on its individual members to make good judgments. To say it another way, Augur’s forecasting tool would lose value if a significant portion of its members used poor judgment when voting on potential outcomes. So, how does Augur ensure its members behave in a manner that supports the overall organization? The short answer: game theory.

Game theory predicts that rational actors tend to make choices that result in higher rewards and less punishment. As described in Augur’s white paper, “Those who forecast the outcome correctly win money, and those who forecast incorrectly lose money.”

In accordance with game theory principles, if an Augur speculator fails to guess an outcome correctly, due to either carelessness or bad intent, they suffer economic consequences (i.e., punishment). On the other hand, if the speculator guesses an outcome correctly, they win economic rewards.

Instead of relying on a centralized system to determine the correct outcome of events, Augur again relies on members of its community, called “reporters.” To use an example: if the question was, “Will Obama win the presidency in 2012?” reporters would note an outcome of “yes” once the event occurred. The consensus of the reporters’ findings is considered to be the actual outcome of the event. Like the built-in incentives encouraging good behavior from speculators, reporters earn rewards in the form of Augur’s native token, the reputation (REP), for noting true outcomes, and lose REP for noting false outcomes.

Betting on Decentralization

Though most blockchain startups are not pure DAOs, many deploy the principles of game theory to endow their members with extraordinary decision-making capabilities. Platforms such as Steemit, Storj and Viuly channel the principles of game theory to incentivize members to act in ways that benefit the entire network, and dissuade detrimental and malicious behavior. In many token-based platforms, holders are vested in the success of the network because their tokens increase in value when the network thrives, and decrease in value when the network struggles.

In a grand demonstration of confidence, Augur may soon invite its members to bet for or against its own success by presenting them with the provocative question “Will Augur be hacked?”

If Augur’s sensational test market succeeds, both government and corporate entities would do well to take a hard look at the value of DAOs and the role blockchain technology plays in incentivizing productive behavior throughout an organization.

Of course, legacy institutions will have to think long and hard about how best to apply the principles being leveraged by Augur for their own purposes. The application of game theory through a decentralized, autonomous agent for financial institutions, in which price speculation is already a regular practice, seems clear. Whether governments could find a way to automate and decentralize their voting or other processes is a thornier issue.

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