The never ending conversation

Did you ever feel like you were having a conversation that repeats itself, over and over and over again? I feel this way every time the topic of DAOs comes up. Hence today's consideration of Moloch DAO, after a recent Twitter joust on the topic.

I really, really want to like Moloch, though it may be because it takes its name from a passage in Alan Ginsberg's Howl, and I like poems. Now Ginsberg was no Whitman, but Howl is a hell of a poem and the Moloch section is classic Ginsberg -- screamingly over-the-top in a mid-century American hallucinogenic way:

"What sphinx of cement and aluminum bashed open their skulls and ate up their brains and imagination?

Moloch! Solitude! Filth! Ugliness! Ashcans and unobtainable dollars! Children screaming under the stairways! Boys sobbing in armies! Old men weeping in the parks!

Moloch! Moloch! Nightmare of Moloch! Moloch the loveless! Mental Moloch! Moloch the heavy judger of men!

Moloch the incomprehensible prison! Moloch the crossbone soulless jailhouse and Congress of sorrows! Moloch whose buildings are judgment! Moloch the vast stone of war! Moloch the stunned governments!"

That's a wonderful passage from a fine poem. What this has to do with Blockchain or governance, for that matter, remains really unclear to me. (If you're more interested in poetry than crypto today, here's a fine essay on Ginsberg's relationship to Walt Whitman, which is more on point perhaps: The Poetry of Walt Whitman and Allen Ginsberg).

The explanation, we are told, is that the name Moloch DAO is "an ironic joke about the possible futility of attempting to solve coordination problems." According to the whitepaper, Ginsberg is "referring [to] human beings' tendency to consistently choose suboptimal solutions to group coordination problems." Thus, the purpose of Moloch DAO is to "fund and further the development of public infrastructure related to Eth 2.0 ... [by] incentivizing coordination between the various Eth 2.0 projects and major ecosystem stakeholders."

While this is the Block Crypto, not the Block Poetry, I am pretty sure that if Ginsberg read above exegesis that he would either throw the nearest bottle of mezcal at the wall or laugh out loud or both. Or maybe he'd quote Emily Dickinson at you about splitting the lark to find the music (hint, splitting open a bird doesn’t end well). Still, the poem doesn't have a damn thing to do with coordination problems as far as I can tell. 

Moving from poetry, we are told that the reason why Ethereum 2.0 isn't happening as fast as one might like is explainable by "rational economic behavior" -- "the benefit generated by the technology for the community is greater than the individualized benefit to any particular entity." 

This explanation also caused me to scratch my head, puzzled. The fact that other people may benefit in the aggregate more from your investment (a bridge, an airport for examples) doesn't necessarily create a disincentive to those investments. I could easily argue that the only thing people care about in making investment is making money. The fact that someone else may benefit more may or may not factor into the analysis. This reasoning resonates about as deeply as the analysis of Ginsberg's poem.

The solution, you ask? Whelp. It's is to restructure incentives "so that costs and benefits are split equally amongst all participants." This is done by giving people ... wait for it ... proportional voting rights, based on the amount of their investment. The whitepaper even has a formula that depicting this.

One thing that I do find intriguing about Moloch -- other than the name and the poetry -- is the excellently named "ragequit" feature, which allows a user to exit with their paid in capital if they don't like the result of a vote. Being able to take your capital out any time is neat. But good luck doing that with a traditional corporate entity, the kind with bank accounts and corporate formalities etc.

At the same time, of course it really hamstrings an organization, with charitable intentions or not, if a significant portion of the capital can be withdrawn at any time. And if voting is proportional based on paid in capital, governance and decision is going to be driven by people with the largest investments, as they have the largest share of the votes. Which makes me ask ... how is this a novel solution to anything?

The ability to exit an organization with your cash right always is kinda cool and also pretty novel. And I do see that Moloch has been managed to collect over a million dollars in pooled assets and has been used to fund at least a couple of infrastructure initiatives. How one fits this structure into a corporate form (you know, the kind with limited liability and tax advantages) is a different question entirely.

Also, back to have the same conversation repeatedly, did I mention that this new-fangled proportional investment scheme doesn't have a corporate structure surrounding it? So while you proportional voting and the ability to quit automatically and take your money with you, you also get a general partnership or unincorporated association and join and several liability.

As one of the KAJILLION cases out there on unincorporated associations and joint and several liability explains:

An unincorporated association is a body of individual persons organized without a charter for the prosecution of some common enterprise. An unincorporated association is not a legal entity separate from its members. Moreover, the liability of its members is joint and several ... see also S.C. Code Ann. § 15-35-170 (2005) ("On judgment being obtained against an unincorporated association[,] . . . the individual property of any copartner or member thereof found in the State shall be liable to judgment and execution for satisfaction of any such judgment.").

See Patterson v. Witter, 791 S.E.2d 294, 301 (S.C. Ct. App. June 15, 2016) (internal citations omitted). As you can see, the definition of "unincorporated association" is really broad. Also, joint and several liability means that liability of the group can be attributed to any single individual and a judgment collected from them. I will spare you a long citation of cases but this is pretty much the state of play across the United States. A general partnership is a little different but the same basic concept applies when it comes to liability. The fact that your unincorporated association has a notion to do good for the world -- build public infrastructure, feed homeless larks -- isn't a defense, incidentally.

Anyway, this is a conversation I have been having for about 4 years. The argument that Moloch can raise money faster or cheaper than a corporation or a trust that is set up properly is as true as the fact that it's cheaper to build a car without brakes. You can do that, but it won't end well. This is a common refrain, by the way -- "lawyers are too expensive; tech can fix corporate formation with forms ... on the blockchain."

While I am not going to win the argument with anyone either here on Twitter, my experience as a litigator is that money that you save cutting corners upfront by using forms and not having conversations about governance just moves the legal expense from the transactional lawyers to the litigators.

There are some projects in the works that claim to easily wrap a DAO in legal form and in the process of doing so provide protection while getting rid of legal expense by creating boilerplate for you. In other words, Legal Zoom, but on the blockchain. Legal zoom is also a great litigation Petri dish. Hint -- all of those words in those documents actually mean things. You can find an analysis of one of these projects that I mostly agree with by my friend Preston Byrne, here). For now, and probably for a long time to come, the notion that you can spin up a functioning and useful corporate form as easily as a website is about as true as the argument that Alan Ginsberg was writing about coordination problems.

PS:  if you want to read a really good poem that is at least notionally about law and maybe even coordination among humans, allow me to recommend this one: "Make a Law so that the Spine Remembers its Wings."