Shiba Inu (SHIB) is moving toward greater decentralization by launching a DAO.
The anonymous developers of the meme coin announced they will step back by the end of 2024, handing full control over to the community to further empower decentralized governance.
Shia Inu’s Next Step
The popular meme coin – Shiba Inu (SHIB) – was launched four years ago as an experimental community-driven cryptocurrency. The project was inspired by the popularity of Dogecoin (DOGE) and aimed to build upon the concept of a decentralized token.
LUCIE (Shibarium’s Marketing Strategist) recently revealed another step toward that goal. Specifically, the team is getting ready to launch a DAO (Decentralized Autonomous Organization).
“This transition will empower every holder, regardless of the size of their stake, to have a say in the community’s direction,” the announcement reads.
LUCIE added that the DAO is yet to be implemented and its introduction would give “Shibizens” further control over decisions that impact the ecosystem.
The Marketing Strategist also revealed that the team will launch a designated governance structure anchored by two key councils: Charity Council and Culture & Heritage Council:
“These councils will steer community initiatives, from charitable outreach to preserving the unique culture that defines Shib. With a focus on transparency and inclusivity, these efforts ensure that Shib’s growth remains true to the values that have driven it from the start.”
More Control for the Community by the End of 2024
Last week, two of the anonymous developers of Shiba Inu using the nicknames Shytoshi Kusama and Kaal Dhairya dislcosed that they will step back by the end of the year and hand full control over to the community.
Kusama said this move aligns with their vision for true decentralization in the cryptocurrency space. The development is not about abandoning the project but rather “empowering the community even more than they already have.”
While Shiba Inu is decentralized in terms of its governance and ecosystem, the actual level of decentralization can depend on how actively the community engages in development activities. If a significant portion of the SHIB Army (the collective term depicting SHIB investors, supporters, and traders) remains inactive, decision-making may become concentrated among a smaller, more engaged group of participants.
Additionally, the developers said they will not reveal their identities, arguing that the power of the meme coin is based on its devoted community and not on just a few individuals.
“There’s no need for my face to become a public figure. Let the mask remain famous. The power of SHIB is not because of me or because of Kaal, it is because of the community. And that is what is most important: the technology to take Web 2 to Web 3 and the brand of a very special dog breed that has gone viral many times as a meme,” Kusama said.
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Decentralized Autonomous Organizations (DAOs) represent a revolutionary concept in the blockchain and crypto world, reshaping how we think about governance and collaborative decision-making. This article dives deep into the world of DAOs, providing a comprehensive understanding of ‘What is a DAO’, their meaning, mechanics, and significance in the crypto ecosystem. You’ll also explore the intriguing history of DAOs, including insights into Nick Szabo‘s pioneering role in their invention.
What Is A DAO?
A Decentralized Autonomous Organization (DAO) is an innovative organizational structure that operates on blockchain technology, embodying principles of decentralization, autonomy, and consensus-driven governance. At its core, a DAO is an entity without central leadership, governed by a set of rules encoded in smart contracts. These contracts, running on blockchain platforms such as Ethereum, automate decision-making and enforce the rules of the organization.
Key to understanding ‘what is a DAO‘ is grasping its reliance on blockchain technology. DAOs utilize smart contracts to create a transparent and incorruptible framework for organizational operation. These contracts are programmed to execute automatically when certain conditions are met, ensuring that operations are not only transparent but also free from human error or manipulation.
DAOs fundamentally alter traditional governance structures by enabling token holders to vote on proposals directly, thereby democratizing decision-making processes. This contrasts sharply with traditional organizations where decisions are often made by a select few at the top. Every token holder can have a say proportional to their stake, aligning the interests of the organization with those of its members.
The concept of DAOs gained significant attention following the launch of projects like MakerDAO and The DAO. MakerDAO, for instance, is a decentralized lending platform that allows users to borrow and lend cryptocurrencies. The DAO, one of the earliest examples, was a venture capital fund without a traditional management structure, though it faced challenges that highlighted the need for rigorous security protocols in DAOs.
What is a DAO meaning | Image credit: Chainalysis
In Short: DAO Meaning And DAO Definition
DAO Meaning: A Decentralized Autonomous Organization (DAO) is a novel form of organization governed by digital rules and operated on a blockchain. The term captures the essence of a system where organizational decisions and protocols are encoded in smart contracts, ensuring operations without centralized authority. DAOs epitomize a shift towards decentralized decision-making, leveraging blockchain technology to facilitate transparent, autonomous, and democratic governance processes.
DAO Definition: DAOs are defined as entities where governance and decision-making are conducted by a collective of stakeholders rather than centralized leadership. These stakeholders typically hold tokens or digital assets that grant them voting rights within the organization.
The defining characteristic of a DAO is its reliance on smart contracts to automate administrative functions and enforce the rules set forth by its members. This automation not only minimizes the need for intermediaries but also ensures that the organization’s operations are immutable, transparent, and aligned with the interests of its token holders. DAOs, therefore, redefine organizational management by embedding trust, integrity, and collective intelligence at their core.
The Mechanics Of Decentralized Autonomous Organizations
The mechanics of Decentralized Autonomous Organizations (DAOs) represent a paradigm shift in how we conceive and execute organizational structure and governance. Rooted in blockchain technology, DAOs offer a framework for orchestrating collective action and decision-making in a decentralized, transparent, and automated manner. This approach challenges traditional hierarchical models, providing a blueprint for a more democratic and equitable form of organizational governance.
How DAOs Work
DAOs operate on a blend of technological innovation and organizational principles. The foundation of a DAO is its smart contract, which resides on a blockchain platform, most commonly Ethereum. These contracts are self-executing and contain the rules of the organization. Once deployed, only the consensus of the organization’s members can alter these contracts, guaranteeing immutability and transparency.
The process initiates with setting up a DAO by deploying smart contracts that define the organization’s rules. This includes the decision-making process, fund management, and member participation guidelines. Typically, participation in a DAO is token-based, with members holding tokens that denote their voting rights. The more tokens a member holds, the greater their influence in decision-making processes.
Voting in a DAO is a critical aspect. Members propose changes or actions, and these proposals are put to a vote. The smart contract automatically executes the decision based on the outcome of the vote, ensuring that the process is transparent and tamper-proof. This structure allows for a decentralized governance model, where no single entity has control over the organization, and decisions are made collectively by its members.
DAO governance – the example of Uniswap | Image credit: Uniswap Docs
The Unique Characteristics Of DAO Crypto
DAO crypto refers to the use of cryptocurrency within DAOs for governance and transactional purposes. This aspect of DAOs presents several unique characteristics:
Token-Based Governance: In DAOs, governance is primarily exercised through tokens. These tokens are not just a currency but a means of participating in the decision-making process. They can represent voting power, membership rights, or even a share in the DAO’s profits.
Decentralization: DAOs function on a decentralized model, diverging from traditional organizations. Without CEOs or boards, the community collectively makes decisions. Blockchain technology facilitates this decentralization, preventing any single point of failure or control from compromising the organization.
Transparency and Immutability: DAOs record all transactions and decisions on the blockchain, ensuring unmatched transparency. The immutable nature of these records means that once a decision is made and logged, it cannot be changed, fostering a trustless environment for member interaction.
Automation And Efficiency: The use of smart contracts in DAOs automates various processes, from governance to financial transactions. This automation reduces the need for intermediaries, cuts down on bureaucratic overhead, and increases efficiency.
Global Participation: DAOs operate on the internet, enabling anyone, regardless of location, to participate. This global reach expands the potential for innovation and collaboration, transcending geographical and political boundaries.
The combination of these characteristics makes DAO crypto a powerful tool for creating and managing decentralized, transparent, and efficient organizations, poised to revolutionize how we think about and participate in collective decision-making and governance.
The Evolution Of DAOs
The concept and evolution of Decentralized Autonomous Organizations (DAOs) mark a significant milestone in the realm of digital governance and blockchain technology. The beginning can be traced back into the 1990s, even before Bitcoin and blockchain existed.
History: Nick Szabo Invented DAOs
The historical roots of DAOs can be traced back to the visionary ideas of Nick Szabo, a pioneering cryptographer and computer scientist. Szabo, who coined the term ‘smart contracts’ in the 1990s, laid the foundational concepts that would eventually lead to the creation of DAOs.
Szabo is credited with pioneering smart contracts in a 1996 paper. Remarkably, his ideas also influenced Bitcoin’s development. In 1998, Szabo created BitGold, considered by some as a precursor to Bitcoin.
His vision of automating contract and transaction protocols on a digital platform paved the way for the first DAOs. Although Szabo himself did not create a DAO, his work on smart contracts and digital currency greatly influenced their development. The principle of decentralized control and automation in DAOs is a direct extension of Szabo’s foresight in using blockchain technology for more than just creating digital currency.
Most Famous Decentralized Autonomous Organizations
Over the years, several DAOs have gained prominence, showcasing the potential and diversity of this organizational form. Some of the most notable DAOs include:
The DAO
The DAO, also known as Genesis DAO, stands as a landmark in the history of decentralized organizations. Launched in 2016 on the Ethereum blockchain, it was envisioned as a decentralized venture capital fund, enabling investors to vote on which projects to fund.
The DAO quickly garnered significant attention, raising over $150 million in Ether, making it one of the largest crowdfunding campaigns at the time. However, a vulnerability in its smart contract code led to a significant hack, resulting in the loss of a substantial portion of the funds.
This event not only exposed the security risks associated with smart contracts but also influenced the subsequent hard fork of the Ethereum blockchain, leading to the split between Ethereum (ETH) and Ethereum Classic (ETC). The DAO’s story is a seminal chapter in DAO history, highlighting the importance of security and governance structures in decentralized organizations.
UniswapDAO
UniswapDAO governs Uniswap, one of the leading decentralized exchanges (DEXs) in the crypto space. It represents the community-driven aspect of the Uniswap platform, allowing token holders to vote on key decisions and proposals concerning the platform’s development and governance.
The creation marked a significant step towards decentralized governance in DeFi, empowering users to shape the platform’s future. Through a transparent and democratic process, UniswapDAO handles various aspects such as protocol upgrades, treasury management, and even community initiatives, illustrating the power of collective decision-making in decentralized finance.
MakerDAO
MakerDAO is a prominent DAO in the decentralized finance sector, primarily known for creating and managing DAI, one of the first decentralized stablecoins pegged to the US dollar. It operates on the Ethereum blockchain and uses a dual-token system consisting of DAI and MKR tokens.
While DAI is used as a stable medium of exchange, MKR tokens represent governance rights within the system. Holders of MKR tokens can vote on critical decisions like risk management, collateral types, and fee adjustments, making MakerDAO a pioneer in decentralized governance and stablecoin implementation. Its innovative approach to collateral-backed stablecoin issuance and governance has set a standard in the DeFi industry.
Stable DAO
Stable DAO is a decentralized cross-chain reserve currency protocol, inspired by the model of OlympusDAO. It aims to provide a reliable and consistent income stream, functioning as a semi-passive source of profits without depending on active involvement.
Stable DAO introduces features like a Universal Basic Income and referral rewards for early adopters. However, some experts raise concerns about its legitimacy. It’s essential to exercise caution and conduct thorough research before considering involvement with Stable DAO.
DAO Governance And DAO Token
The concepts of DAO governance and DAO tokens are central to the functionality and success of Decentralized Autonomous Organizations. They collectively represent the democratic and decentralized ethos of DAOs, setting them apart from traditional organizational structures.
DAO Governance
At the heart of every DAO is a governance system that is both transparent and inclusive, ensuring that every member has a voice in the decision-making process. This system is typically enacted through a voting mechanism, where token holders submit and vote on proposals concerning the DAO’s operation, policy changes, and other crucial decisions.
The voting power is generally proportional to the number of tokens a member holds, embedding a democratic structure into the DAO’s operations. This method of governance ensures that the direction of the DAO aligns with the interests of its community, as decisions are made collectively rather than by a centralized authority.
The governance structure in a DAO is codified in its smart contracts, which lay out the rules for proposing and voting on decisions. These rules can vary widely among different DAOs, tailored to their specific needs and goals. Some DAOs may require a simple majority for a proposal to pass, while others might have more complex mechanisms involving various types of votes or quorums. This flexibility allows DAOs to adapt their governance models to suit their evolving requirements.
DAO Token
DAO tokens play a crucial role in governance. They are not just a medium of exchange but also represent voting rights and membership within the DAO. These tokens are often distributed during the DAO’s formation, either through a public sale, airdrop, or as rewards for contributions to the DAO. The distribution method impacts the decentralization of the DAO; for instance, a broad distribution of tokens can lead to a more decentralized governance structure.
In addition to voting rights, DAO tokens can also have other utilities, such as profit-sharing rights, access to specific services within the DAO, or staking opportunities. The specific functions and rights associated with DAO tokens vary based on the DAO’s structure and objectives.
The integration of DAO tokens into governance mechanisms is a critical innovation in the blockchain space. It provides a tangible way to align the incentives of the participants with the success of the DAO. This alignment ensures that members are motivated to act in the best interest of the DAO, fostering a collaborative and effective ecosystem.
Practical Guides
How To Create A DAO?
Creating a Decentralized Autonomous Organization (DAO) involves a series of strategic, technical, and community-building steps, each crucial to the DAO’s success.
Define The Purpose And Structure: Start by clearly defining the DAO’s purpose, goals, and governance structure. This includes deciding on the voting mechanisms, membership criteria, and the role of the DAO tokens.
Develop The Smart Contracts: The core of a DAO is its smart contracts. These need to be meticulously coded, tested, and audited to ensure they execute as intended and are secure from vulnerabilities. These contracts should encapsulate the rules, voting mechanisms, and other operational aspects of the DAO.
Deploy On A Blockchain Platform: Choose a suitable blockchain platform (Ethereum is a popular choice) and deploy the smart contracts. This step officially launches the DAO on the blockchain.
Token Creation And Distribution: Create DAO tokens for governance and voting and distribute them through methods such as public sales, airdrops, or rewards for early contributors.
Build A Community: A DAO is only as strong as its community. Engage with potential members, promote your DAO’s vision, and encourage participation and voting.
Establish Legal Compliance: Ensure that your DAO complies with relevant legal and regulatory frameworks, a step often overlooked but crucial for long-term viability.
Continuous Development And Adoption: A DAO should evolve with its community’s needs and the broader blockchain ecosystem. Regular updates and improvements to the smart contracts and governance models may be necessary.
DAOs In Web3
In the web3 space, DAOs are more than just governance mechanisms; they are fundamental building blocks for decentralized applications (dApps) and services. They enable collective decision-making and resource allocation in a trustless environment, crucial for the decentralized ethos of web3. DAOs in Web3 can govern anything from content platforms to financial protocols, providing a transparent and democratic way to manage decentralized networks.
NFT DAO
NFT DAO is an innovative organization focused on enhancing and expanding the use of Non-Fungible Tokens (NFTs). Their mission is to develop open-source tools and components for building NFTs, applications, and marketplaces. A significant part of their work involves educating the next generation, offering Web3.0 project apprenticeships to college students.
Key initiatives of NFT DAO include developing NFT related open-source frameworks and standards, particularly for the Cardano blockchain. They have created their own NFT marketplace and are working on additional tools such as NFT Minting APIs and an auction API. Additionally, their payment gateway supports both fiat and cryptocurrency transactions.
Funded initially through votes from the Cardano community via Project Catalyst, NFT DAO also engages in consulting for projects aligned with their NFT technology expertise. They emphasize the development of open-source software components and actively support student involvement in blockchain and NFT projects through apprenticeships and scholarships.
List Of DAOs
Here’s a non-exhaustive list of notable DAOs, each exemplifying different aspects and use cases of DAOs:
Compound: Autonomous interest rate protocol for lending and borrowing.
MakerDAO: Decentralized lending platform and stablecoin issuer.
Aragon: Platform for creating and managing DAOs.
MolochDAO: Focused on Ethereum development funding.
Curve Finance DAO: Governs the Curve decentralized exchange.
PleasrDAO: A collective that acquires culturally significant NFTs.
Friends With Benefits (FWB): A social DAO focused on culture and networking.
Gitcoin DAO: Funds open-source development projects.
These DAOs, among many others, showcase the diverse applications and potential of decentralized autonomous organizations in various sectors of the digital economy.
The Future and Challenges of DAOs
The future of Decentralized Autonomous Organizations (DAOs) is both promising and laden with challenges. As DAOs evolve, they stand ready to make a significant impact across various sectors, ranging from finance to governance. However, realizing this potential involves carefully navigating a set of challenges.
Future Prospects
Wider Adoption In DeFi And Beyond: Anticipation is high for DAOs to take on a more integral role in decentralized finance (DeFi). The have the potential to provide a transparent and democratic framework for financial transactions and decision-making.
Expansion Into Mainstream Business: Beyond the blockchain sphere, DAOs have the potential to transform traditional business models. They offer a more collaborative and equitable approach to corporate governance.
Integration With Emerging Technologies: As technologies like AI and IoT advance, DAOs could integrate these to enhance automated decision-making and operational efficiency.
Legal Recognition And Frameworks: The future may see more countries recognizing DAOs as legal entities. This could provide them with a more stable and recognized operational framework.
Challenges To Overcome
Regulatory Uncertainty: The biggest challenge facing DAOs is the lack of clear regulatory frameworks. This creates uncertainty and potential legal challenges, especially in cross-border operations.
Security Risks: DAOs, being largely dependent on smart contracts, are susceptible to security risks. Ensuring the integrity and security of these contracts is paramount.
Scalability Issues: As DAOs grow, they face scalability challenges, both in terms large numbers of transactions and in decision-making processes.
Complexity In Governance: Balancing decentralization with efficient decision-making can be complex. DAOs must navigate the intricacies of collective governance while maintaining operational efficiency.
Technological Barriers: For wider adoption, DAOs need to address the technological barriers that might prevent non-tech-savvy individuals from participating fully.
The coming years will likely see innovative solutions to these challenges. This will pave the way for more widespread adoption and impact of DAOs across various sectors.
FAQ
What Is A DAO Meaning?
DAO stands for Decentralized Autonomous Organization. It refers to an organization governed by its members under transparent rules encoded in a computer program, operating independently of central government influence. DAOs embody decentralized governance models implemented on blockchain technology.
How Does DAO Governance Work?
In DAO governance, members democratically make decisions through collective voting. Each member’s voting power typically corresponds to their stake or token count. Smart contracts encode governance rules, ensuring transparency and compliance with established processes.
What Does DAO Mean?
DAO stands for Decentralized Autonomous Organization. It signifies an organizational structure that operates autonomously and decentralized, without central leadership, through smart contracts on a blockchain.
Who Made DAO?
Various entities and communities create DAOs to establish a decentralized governance body. Nick Szabo, in the 1990s, coined the term ‘smart contracts,’ a core component of DAOs.
What Are DAOs?
In DAOs, organizations decentralize and automate governance and decision-making using smart contracts on a blockchain. They operate without traditional management structures, and their rules and transactions are transparent and verifiable.
Whats A DAO?
A DAO is a blockchain-based system that enables collective decision-making or governance in a decentralized and automated manner. It stands for Decentralized Autonomous Organization.
What Is DAO Crypto?
DAO crypto refers to the use of cryptocurrencies and tokens within the DAO for governance, transactions, or incentivization. These tokens often represent voting rights and are key to the participatory governance model of DAOs.
What Is DAO Web3?
In the context of Web3 a DAO is a form of organization that operates on these principles. It represents a shift from traditional centralized internet services to a decentralized, user-governed approach.
What Is An Example Of A DAO?
An example is MakerDAO, a decentralized organization that manages the DAI stablecoin and operates on the Ethereum blockchain. It uses smart contracts to enable token holders to vote on decisions like risk management and development proposals.
What DAO Means In Crypto?
In the crypto world, DAO stands for Decentralized Autonomous Organization. The concept revolves around decentralizing and automating organizational governance and decision-making using smart contracts on a blockchain.
Who Owns A DAO?
Members or token holders collectively own a DAO. Unlike traditional organizations with a clear hierarchy, DAOs distribute ownership and decision-making power among their members. This aligns with the ethos of decentralization.
Abu Dhabi introduces a trailblazing DLT regulatory framework, setting global standards for blockchain foundations and DAOs.
Abu Dhabi Global Market (ADGM) has unveiled the Distributed Ledger Technology (DLT) Foundations Regulations 2023, establishing a pioneering legislative structure for blockchain and DAOs. The Registration Authority of ADGM announced that these regulations will help to bolster the blockchain and Web3 sector, thereby propelling the region and ADGM into the forefront of digital asset regulation.
The DLT Foundations Regulations have been crafted to specifically address the complexities of the blockchain ecosystem, allowing for the operation and issuance of tokens by DAOs and blockchain foundations. In this regard, the UAE stands as the world’s first, setting a high bar for regulatory frameworks globally.
ADGM emphasized that these regulations are critical as Abu Dhabi has rapidly become a prime location for leading digital asset innovators. The DLT Foundations Regime is envisioned to be a catalyst for substantial progress in the digital assets space, advocating for a transparent and efficient future. ADGM has also released a 76-page report, detailing the DLT Foundations Regulations, which includes registration requirements for businesses, obligations, documentation, and auditing processes.
With this regulatory framework, ADGM reaffirms the UAE’s status as a global trailblazer in the digital economy, paving the way for a transparent, efficient, and secure digital asset future.
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Roger L. Martin is one of the world’s foremost business strategists, serving as an advisor to the CEOs of some of the world’s largest companies including Procter & Gamble and Ford. In this interview we discuss the pitfalls with modern corporate governance and how things have become exacerbated by the rise of passive investing, proxy services and the pandemic-driven stock market boom.
We also touch on the growing trend of major technology firms, such as Google, Facebook and even Coinbase, concentrating voting power in the hands of executives. Finally, we explore what all this means for the growth of DAOs and token prices during this period of crypto development.
Excerpted from our premium research service, Forbes CryptoAsset and Blockchain Advisor. Subscribe today to get first access to breaking news, trading signals, exclusive interviews, and much more.
Forbes: What do you see today as some of the flaws in the modern incarnation of a corporation? And what are some of the key points of attention and trade off that you see between the various types of stakeholders?
Roger Martin: I’m not sure that the modern widely held publicly traded company is governable. The problem is that there’s this notion of professional managers who run the company. And we have this notion that there’s a principal agent problem, where there is a challenge of having the management operate the company in a way that’s consistent with what the shareholders/owners want. There are two proposed solutions to the agency problem. One is to have stock-based compensation that’s supposed to align the interests of management and shareholders. There is a board of directors that works on the shareholders’ behalf to make sure that the directors or the senior management is operating in accordance with what the shareholders would want. So, here’s the question. If management are agents, and have self-control problems and interests that aren’t necessarily aligned with those of the shareholders, could you explain to me how another group of people who we call directors, who also aren’t the shareholders, would have the desire and motivation to serve those shareholders?
It’s an article of faith that the widely held publicly traded company is constructively governable. And of course there is this notion that stock-based compensation will align the interests of management and shareholders and I’ve written extensively about that, but it actually does the opposite. Everybody thinks the stock price is somehow a real thing that really reflects the company and its operations, and they’re often baffled when earnings are up 20% and the stock goes down. The reason is that the stock price is nothing real. It’s something entirely ethereal. It is simply the culmination of what all people in the capital markets observing the company imagined its future prospects to be. We know that because the S&P 500 has traded on average at 19x or 20x across its history, which means the stock prices incorporate 1x for current earnings and the other 19x times for future expectations. So we believe that stock-based compensation provides an incentive to make the company perform better. It isn’t. You don’t get higher stock prices by making the company perform better. You get a higher than today’s stock price by making the company perform better than people think it’s going to perform today. So the only thing that actually increases stock prices is a positive surprise. Hence, the question is, can management keep on delivering positive surprises to capital markets? Executives figured out that the game is to heighten the stock price, use aggressive accounting or whatever, to get expectations up, and then get out or cash out before the expectations fall back. And that’s why you get all this manipulation. In fact, the smartest thing you can possibly do as a CEO—and lots of CEOs do this—is as soon as you take over the position, you say, oh my god, now I understand what’s really going on here; the company is an incredible disaster. By saying so you are trying to get the stock price down. Then you do a bunch of things to get it back up to the level it was when you arrived. And you’ll be rich. So a publicly traded company is not governable. That’s a fundamental problem.
Forbes: Have any of these issues been exacerbated by the frenzied capital markets during the pandemic?
Martin: The worst position for management of a company to be in is to have overvalued equity. If you’ve got equity that is trading for more than you, as the manager, knows it’s worth, you can be inclined to take desperate actions; make big, gigantic risky bets to try and do something to keep a collapse of the stock price from happening. That’s when most managerial sins are committed: when your equity is overvalued. The best place to be as a manager is if your equity is mildly undervalued, which gives you room to do things to get the stock price up. Because if there isn’t room and if in fact, there’s negative room, you just know the crash is coming. These ultra-high markets, which are spurred by the Fed keeping interest rates thus far at zero and pumping the economy absolutely chock full of cash, are making equity and debt go up. But there’s a correction coming. It’s just a matter of how, when and just how brutal it will be.
Forbes: You’ve also written about how the rise in passive index investing has disconnected shareholders from the managers, which exacerbates the problem of corporate governance. Can you touch on that, and perhaps also discuss how proxy funds fit in here?
Martin: I think the proxy voting firms ISS, etc., are just ideologues. They have an ideology, which has nothing to do with anything that is demonstrated, proven or the like. I think they help lazy people be able to say, oh, ISS told me that I should vote this way so I’m okay. And ISS, from my experience, has no clue what is actually good for the performance of a company. It’s one of these things where the dominant players in the capital markets are not playing with their own money. It’s not even close. Pension fund managers, BlackRock, Fidelity, State Street, Vanguard are also playing with somebody else’s money. Hardly anybody’s playing with their own money. And it’s real people actually making those decisions. So you have to analyze their incentives. The main incentive for pension fund managers, for example, is to not be fired. It’s not to make the most money possible for shareholders. I will say that I have met pension fund managers who do take on pensioners’ interests as their responsibility, but that’s the exception, not the rule. So the idea that somehow they would be paragons of great management is just far fetched.
Forbes: Do you have any tell tale signs for distinguishing a good money manager from a bad one? Also, are there any ways for how this broken proxy system could be improved?
Martin: I think the improvement is going to come from much more of a return to the corporate structure of the 1920s and 1930s, where public shareholders were simply along for the ride and these were semi-public companies. Because there was somebody who owned the majority stake and or at least a controlling stake and said, “hey, if you want to come along, go ahead. But I’m managing this. My net worth is tied up with this, and I’m going to make the decisions. And I don’t basically care what you think.” Now you’ll notice there’s a new kind of firm emerging in America that has taken that form, right? Tesla and Google, etc., where the leaders pretty explicitly say, “I do not care what you think, I am uninterested completely. And I’ll do what I want.” I think we’re going to have more of that. And I think that’s a better structure than the widely held publicly traded company.
Forbes: That is an interesting point, because even looking at crypto with firms like Coinbase where Brian Armstrong controls a majority of the voting power, we are seeing some of the major firms follow this lead.
Martin: As long as they’re honest and clear from the outset. That’s why I liked Google. When it went public, they were super clear. It was like, we’re in charge. You are free to come along for the ride. We’re fine with that, but do not be confused.
Forbes: Let’s now turn our attention to DAOs, decentralized autonomous organizations. What are your thoughts?
Martin: That sounds like a phenomenally dumb idea to me. I think it’s mainly massive hype. So there’s a tool that a bunch of very geeky people have come up with, they’re totally in love with, and they’re trying to find something useful to do with it. And they’re trying to create an ideology about it—oh, it’s all about decentralization. And they’ll find things to use the tool for. NFTs (non-fungible tokens) is a good example. It created an industry because now you can prove ownership of something. I don’t doubt that it’ll have applications. Do I see it as a way of changing human nature? Which is what this is saying; that people want a kind of completely decentralized, everybody votes thing. If they wanted that, Facebook and Google wouldn’t control the internet. Remember, we had the hype back then—oh, it’s going to be the most democratizing force on the face of the planet. Everybody can contribute and everybody can be on their own. Look what happened. Way, way more centralized nodes, centralized control of a sort we’ve never seen in the history of the planet. So if people are lustful and longing for all sorts of decentralized systems where everybody participates in every decision, humans have never worked that way. And I don’t think humans want to. And they are showing us that by having fealty to Facebook and Google.
Forbes: Do you think it’s because humans don’t want that? Or they’re just lazy and they appreciate the convenience and don’t understand the tradeoffs that come with these platforms?
Martin: All action is designed. People do what they want and what they want is to not participate in every decision and take personal agency for fixing everything. Then they will act accordingly. I think that almost everything about blockchain is fantastical; it’s hype but as usual, there’s something real inside the hype. So the internet as of 2000 was the hype, right? You didn’t need earnings; all you need is eyeballs and everything else to follow, and we’ll vendor finance it because that’s fine because it’s eyeballs and all the rules are suspended. It’s all different. Well, what happened? The whole thing blew up. Did the internet go away? No, it bred some very useful things that have changed the world for the better. I see the same with blockchain, which has no chance of reaching all the hype. And so, if you’re a sensible, not hype-oriented blockchain person, you can probably make a legitimate buck on it. That’s the best case scenario for blockchain as far as I’m concerned.
