by Felix Machart, Nov. 29

We are super excited that we have been backing Colony with Greenfield and here is why.

Being one of the earliest projects to think about DAOs in 2015/16, Colony has finally been coming to market on more scalable infrastructure with their v2 and some exciting early adopters leveraging the decentralized governance framework (see selected current features).

We have been researching the blockchain space extensively from a governance perspective, which makes us especially proud to back Colony at this inflection point (see e.g. state of blockchain governance, long-term alignment in cryptonetworks/DAOs) as it is coming at just the right time for DeFi communities that are yearning for alternatives to the currently insufficient governance models.

In theory crypto provides us with inclusive, permissionless and open systems, but the reality of blockchain governance today has turned into one of low voter turnout and participation.

Today governance largely depends on token-holders voting on most decisions, while it is unclear if sustainable social decentralization is possible with pure token-holder governance that seems likely to suffer from naturally centralizing tendencies of capital accumulation. Also prominent DeFi builders have become frustrated with their lack of influence over projects and the average professionalism of token holders (or lack thereof).

Let’s take a step back and look at what successful governance should look like. In our view effective governance enables decision-making that reflects available information as well as the vision, mission and value system of a given community to the greatest extent possible.

Furthermore, governance is about incentivizing actors to create value for the community (governance by the infrastructure). If it is about human labor, this starts by attracting the most knowledgeable labor force. By meritocratically rewarding high-quality work and distributing governance power/influence over decision making through such contributions, the best contributors can be attracted.

Knowledge & attention is the ultimate scarce resource for organizations

Agency theory commands that the providers of specialized inputs should be in charge of governance, which has traditionally been providers of physical capital/ investors, as they are locked-in with their investments (sunk costs — inputs are not useful otherwise or it is costly to make them so). In the knowledge age and digital sphere it is increasingly specialized knowledge, data and the use of standards that represents those specialized inputs or sunk costs.

While still capital that is being invested, staked or locked-up for extended amounts of time to contribute to network security and value creation is relevant, we increasingly live in an age of capital abundance. Colony is intended to value both the capital and labor classes of stakeholders. They are Yin and Yang in a sense.

Products and services represent only the leaves of a tree, but the true “roots of competitiveness” lie in the core competencies, its roots storing an organization’s main resource (knowledge). If knowledge is distributed across networks and outside the boundaries of firms, not ownership or direct control of resources represents a competitive advantage, but rather access to them.

Considering a distributed resource base, competencies reside in an organization’s ability to design interfaces between externally situated knowledge, to provide architectures for meaningful conversation and collaboration, and to develop evaluative infrastructures to make contributions visible and valuable. Once made visible the evaluations need to be reliably accounted for and ideally governance power distributed according to them in order to attract the most knowledgeable contributors.

Distributing governance rights to contributors of labor is akin to the form of a worker cooperative, which is an appealing structure due to their positive effects on employee alignment. This is congruent with the view that employees in knowledge-intensive work tend to be more skeptical of hierarchical employment relations and believe that “the locus of decisions has to coincide with the locus of knowledge”.

Colony finally allows accessing knowledge at the edges & agility in DAOs

Colony is a protocol for a new type of open, meritocratic organization that operates via software as opposed to paperwork. It is the “get things done” DAO framework, as they focus heavily on mechanisms which eliminate the need for voting in daily operations as far as possible to let contributors focus on execution.

Colony enables true DAOs — organizations that are more akin to evolving organisms that constantly adapt its structure based on the inputs of participants.

While in general any decision making mechanism can be implemented through the use of permissions and extensions, Colony specializes in designing unique mechanisms to scale decentralized governance, while avoiding common pitfalls.

Leveraging local information for decision making

Colony is inspired by complex adaptive systems like ant colonies: dynamic networks of agents which react and adapt to stimuli from each other and their environment. From simple rules emerges collective behaviour and self-organization of the system as a whole.

Colony leverages elements of classical hierarchies, while remaining agile

In order to scale decision making Colony uses an asynchronous process of continuous decision-making, using a domain tree similar to a traditional structural hierarchy. This allows different domains of an organization to execute relatively autonomously, while not everyone needs to see everything at the same time. Decision making authority (reputation) is distributed through high-quality work, which leads to hierarchy being an emergent property of valuable contributions as opposed to being unjustly conferred from the top. Reputation is leveraged as a carrier of market information in a similar way as prices are.

As such, the mechanism is similar to Bridgewater’s believability-weighted decision making in that participants earn their believability score (reputation) in specific domains through work that is deemed valuable by the organization. Opinions of people who are more believable are then weighted more heavily than less believable people.

The system can also be viewed as a decision-making algorithm that constantly tunes itself to represent the most up-to-date distribution of knowledge and dedication in a given organization.

Also, since reputation is earned by those who have proven to be the most active participants through recent contributions, voter apathy should naturally be mitigated.

Fundamentally, the use of work-driven, time-decaying reputation in funding decisions promises to mix the best of top-down hierarchy (influence being proportionate to experience and expertise), with the best of independent decision-making at the periphery (leveraging local knowledge).

Evolving with time

A core innovation of Colony are mechanisms which leverage time to enable the permissionless allocation of resources. Time plays a role in Colony in two critical ways: Reputation earned decays over time (implemented via a L2 reputation mining network), and when leveraging one of their signature decision-making mechanisms “funding queues”, funds are allocated continuously as a function of time (as opposed to discrete pass/fail methods). The more reputation backing a proposal, the faster it is funded, but even someone with little reputation can slowly claim resources.

As a result resources are always moving in a Colony. As opposed to overcoming inertia through a synchronous voting process, participants are asynchronously influencing the flow of resources over time.

Start a DAO as easy as a Facebook group — customize and extend as you go

Colony framework is general purpose — the following set-up could be implemented:

• A founding team defines a vision, articles of association and/or a constitution, while starting out with a permissioned system (founders have all permissions to e.g. move funds)
• Once they are ready to decentralize they initialize the reputation system with them being essentially the reputation seed
• Following, reputation is distributed to first contributors (through successfully completing tasks paid in the colony’s native token)
• The colony spreads (technically enabled through the L2 reputation mining mechanism — one could however also describe earning reputation itself akin to reputation mining)
• Decisions regarding sub-domains can be executed “at the edges” of the organization with sufficient amounts of reputation and/or token holdings backing a “motion”. This can for example be organizing an event in the Event Management sub-domain or changing a local parameter. The required reputation depends on how much of the colony is affected.
• Undisputed motions would be executed without any voting (and thus without significant attention overhead)
• Anyone can dispute the motion by putting up stake -> a vote among the reputation holders of the relevant domain is triggered -> if the dispute remains, the decision can be escalated to ever larger sets of domains/reputation holders up until the root (top-level) domain
• The mere existence of the dispute mechanism (and necessity to post a stake that can be slashed) should lead to motions being usually compliant with the org. values/vision/constitution/articles of association
• Optional in the future: If arrived at the top-level domain (100% of reputation holders can vote), the decision can be disputed with a neutral arbitration court (e.g. DAO based Kleros or in future Colony’s own arbitration mechanism or theoretically a traditional private court such as the ICC)

Early adopter case study: Shapeshift

The crypto pioneers at Shapeshift have recently distributed its FOX token in the largest ever airdrop conducted in terms of the number of recipients in order to dissolve its corporate structure and instead create a DAO. They have chosen Colony as part of their stack together with a Gnosis multisig and snapshot Safesnap in order to work towards their vision.

The main goals of their organizational structure:

• Enable anyone to easily start contributing and earning FOX
• Enable workstreams to operate with a high level of autonomy to achieve their mission and goals
• Maximize governance participation and minimize fatigue
• Enable workstreams to securely manage and utilize funds allocated to them from the DAO

Workstreams and Individual Contributors/Squads are powered by Colony on xDAI, initially controlled by the ShapeShift DAO’s Gnosis SafeSnap set-up.

• SnapShot enables FOX Token holders to vote on proposals by signing free messages rather than broadcasting expensive transactions
• SafeSnap enables proposal creators to include 1 or more transactions with a proposal, which if passed, will be executed by the ShapeShift DAO’s Gnosis Safe
• Gnosis Safe is the treasury for the ShapeShift DAO and the admin of ShapeShift’s Colony
• ShapeShift’s Colony enables DAO-appointed workstream leaders to request funding from the DAO and allocate it to individual contributors, squads, or other workstream expenses

The Shapeshift DAO will use the described structure as a starting point, while already starting to brainstorm how to evolve further.

There are certainly many opportunities to leverage Colony more extensively, especially once reputation is increasingly distributed among its contributor community. As a next step, decision-making power within work streams could be transferred to reputation-holders, leveraging Colony’s “lazy consensus” to enable agility at the edges of the organization.

Colonies could also be set up or emerge as organizations with 3+ tiers in which the peripheral domains use permissions to make unilateral decisions, since the rubicon of trust was already crossed when funds entered that domain. Regular operations could be continuously funded which effectively means delegating decision-making authority to the periphery based on the budget they receive either based on epochs (e.g. quarters) or continuous funding queues. Larger or extraordinary expenditures on the other hand might require more explicit governance through the lazy consensus process, which might trigger a vote.

Colony uniquely enables progressive decentralization across stakeholder classes

Initially a colony (DAO) might be controlled by the founding team that sets the vision and mission, while hiring an initial set of leaders for different domains such as product or marketing. Increasingly as reputation is distributed across domains and as an increasing number of contributors join the organization, decision-making power decentralizes gradually.

Over the long-run we could see increasing social decentralization across stakeholder classes, in communities that value such through Colony. One can imagine a DAO that distributes authority both across token holders and reputation holders in a hybrid fashion (various set-ups in terms of majority requirements are imaginable). Token holders might to a large extent be represented by the founding team, investors and users, while reputation holders represent contributors of labor with a bias to recent contributions (due to decay).

In the end, Colony should allow for truly decentralized DAOs, also on the social level, that can continuously adapt to new information in an effective manner.

We are super excited to be part of this amazing community that continues to be on the bleeding edge of DAO infrastructure tooling for human coordination.

Check out Colony’s resources and join the community: Blog, Documentation, Github, whitepaper, Discord, Twitter.