Can DAOs meet the requirements of the 7 Cooperative Principles?

What would it take for a DAO (Decentralized Autonomous Organization) to transition into a cooperative? In this article, I explore the practicalities of such a transformation and consider the challenges and the benefits that could be realized. Interested in learning more about the relationship between cooperatives and DAOs? Read on!

DAOs are a hot topic right now, especially at the intersection of decentralized technologies, cooperatives, and social justice causes. There is a lot of excitement around the potential of DAOs to offer a new and improved cooperative model that can better support environmental and social justice causes. (In fact, this article was inspired partly by discussion in the Platform Cooperatives Now! course, and partly by the Next Now series of webinars sponsored by Ashoka and the Mutualist Society).¹ While there is still much speculation in this area, there are some practical implications of the ‘DAO as a co-op’ discussion that are worth considering. For example, DAOs could offer a more democratic form of decision-making, as well as greater transparency and accountability. Additionally, DAOs could provide opportunities for people to pool resources and work together toward shared social justice goals in a more efficient and effective way. Conversely, DAOs thrive in an anonymous or pseudonymous space, while co-ops have traditionally supported local, face-to-face interactions. Ultimately, the success of DAOs as a cooperative model will depend on how well they are able to meet the needs of those they aim to serve, whether or not these individuals are known to each other. But there is potential here, and the conversation about the cooperative merits of DAOs is worth continuing. Two good starting points for comparisons include recent writing by Austin Robey² and Kelsie Nabben.³

To examine the relationship between DAOs and co-ops, I use the International Cooperative Association (ICA)’s seven Cooperative Principles⁴ as a framework; this is largely because DAOs have myriad definitions and are still emerging as an organizing structure, while there is considerable social and legal agreement about what constitutes a co-op. It’s also important to note that there are many organizing assemblages that straddle or blur the DAO/co-op dichotomy, including collectives and DisCOs; the point here is not to get into the semantics of labeling organizations, but to look at some of the practical challenges of blending the DAO/coop models.

The ICA, a global stewarding body for the co-operative movement, offers a Statement on Cooperative Identity that includes a co-operative definition, values, and seven principles; the latter of which I’ll explore in detail below. According to the ICA, a cooperative is defined as “an ‘autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically-controlled enterprise.’”⁵ This widely accepted definition of a co-op stands in contrast to the numerous definitions of DAOs, which vary in their specificity. Starting with a technical framing, the Coalition of Automated Legal Applications (COALA) posits that DAO “refers to smart contracts (i.e. blockchain-based software) deployed on a public Permissionless Blockchain, which implements specific decision-making or governance rules enabling a multiplicity of actors to coordinate themselves in a decentralized fashion. These governance rules must be technically, although not necessarily operationally, decentralized.”⁶ Elsewhere, Kelsie Nabben suggests that DAOs are “relational, co-constructive entities, composed of human and machine components, functioning towards a shared objective.”⁷ And a still more concise explanation of DAOs is that they are simply “an incentivised coordination tool for communities.”⁸ These DAO definitions lack agreement in a number of respects, but most centre ‘permissionless’ technology, rather than people; this can be contrasted to the ICA definition, which clearly puts ‘persons’ at the heart of a cooperative enterprise.

Working in conjunction with their membership, the ICA offers seven cooperative principles as “guidelines by which cooperatives put their values into practice.”⁹ In the following sections, I note the principle, and then consider whether a prototypical DAO could in practice centre this principle in its work. Given the multitude of DAOs that exist, this article-as-a-thought exercise runs to generalizations; there are exceptions to every rule.

Principle 1: Voluntary and Open Membership

Cooperatives are voluntary organisations, open to all persons able to use their services and willing to accept the responsibilities of membership, without gender, social, racial, political or religious discrimination.

Despite the unbridled marketing enthusiasm for all things Web3-related in recent years, technical access and understanding remain huge challenges for DAOs. In theory DAOs are open to all persons able to use their services; DAOs are “permissionless,” which means that there isn’t a single entity or individual deciding who gets to participate. But in practice, the accessibility of Web3 technology is a hefty barrier. The level of technical understanding required to play in the sandbox is high and the jargon is so prolific, it can be nearly impenetrable for newcomers.¹⁰

Then there is the financial aspect: while many cooperatives offer a membership model based on a small one-time payment; for example, REI or the late MEC (RIP!); the buy-in for some DAOs is considerably higher than the $30USD fee charged by REI. CityDAO citizenship is currently selling for 0.47ETH (about $560USD) for a basic citizenship (although the price has declined precipitously in recent weeks; it was selling for almost double that price when the research for this article began.)¹¹

Other DAOs take a different approach; 1Hive’s community wiki states that “barriers to entry are extremely low; simply show up and start to contribute.”¹² This contribution is rewarded with Honey—1Hive’s cryptocurrency—but this approach still assumes one would need to be comfortable with setting up a self-custodial wallet to store the Honey. Ultimately, “transparency is a universal requirement in cooperatives,”¹³ and the current level of technical sophistication required to participate in a DAO renders them relatively opaque.

Principle 2. Democratic Member Control

Cooperatives are democratic organisations controlled by their members, who actively participate in setting their policies and making decisions. Men and women serving as elected representatives are accountable to the membership. In primary cooperatives members have equal voting rights (one member, one vote) and cooperatives at other levels are also organised in a democratic manner.

The structured and accessible rule of “one member, one vote” is at the core of most cooperatives’ governance.¹⁴ DAOs often use tokens (cryptographic assets) as a proxy for a vote (or votes) on governance-related decisions. Unlike cooperatives, where one human being equals one vote via the membership that person holds in the co-op, DAOs distribute tokens in a variety of ways. Early participants in DAOs are often awarded for their sweat equity with tokens, meaning that one person may have many votes to cast. As well, most DAOs allow for delegation of tokens; essentially, allowing votes by proxy for DAO members who are too busy to care (though co-ops certainly aren’t immune to member apathy). Lastly, DAO members can also sell their tokens onward, which has impacts on long-term stability of projects. As Kei Kreutler writes in her frequently referenced ‘prehistory of DAOs’:

Tokens may be one key to unlock the ownership economy, but to reach a more equitable version of this future, we must participate in crafting the culture around token distribution, mediation, and governance now. This becomes important because, unlike shares in cooperatives, many tokens that double as governance rights can be sold on secondary markets. While this makes the conditions for entrance into an organization easier, DAOs can learn from cooperatives’ emphasis on long termism, through establishing more cultural patterns around token vesting, limited transferability, or more experimental mechanisms.¹⁵

Borrowing co-ops “cultural patterns” around voting has been explored in recent articles on Soulbound tokens, which are theorized as being non-transferrable and confer a fixed, accrued reputation to the holder of a particular crypto wallet.¹⁶ But until token distribution becomes more akin to co-op votes and less like shares, DAOs will have challenges replicating democratic voting structures.

Principle 3: Member Economic Participation

Members contribute equitably to, and democratically control, the capital of their cooperative. At least part of that capital is usually the common property of the cooperative. Members usually receive limited compensation, if any, on capital subscribed as a condition of membership. Members allocate surpluses for any or all of the following purposes: developing their cooperative, possibly by setting up reserves, part of which at least would be indivisible; benefiting members in proportion to their transactions with the cooperative; and supporting other activities approved by the membership.

DAOs certainly have the ability to pool large sums of money for a variety of purposes, some of which are pretty esoteric,¹⁷ and there is an entire subset of DAOs formed solely around venture capital or investments.¹⁸ Kei Kreutler suggests that a bank account is one of only two requirements for forming a DAO (the other is a chat group), and points to a multi-signature wallet as the best tool for pooling funds: “Multi-signature accounts allow pseudonymous groups, across jurisdictions, to pool and manage funds within minutes, a capacity far beyond a traditional joint bank account.”¹⁹ In practice then, DAOs could fulfill many aspects of the third principle, although some creative governance such as DXdao’s reputation-based membership²⁰ (and a close reading of various securities laws) would be required to ensure that indivisible reserves are possible. Likewise, mechanisms to control equitable contribution would need to be realized through governance measures as many current frameworks favour early adopters.

Principle 4: Autonomy and Independence

Cooperatives are autonomous, self-help organisations controlled by their members. If they enter into agreements with other organisations, including governments, or raise capital from external sources, they do so on terms that ensure democratic control by their members and maintain their cooperative autonomy.

Autonomous is right in the name, so theoretically, DAOs should have no issues with this principle. In practice, the reality is more nuanced. Autonomy and self-sovereignty are terms associated with the decentralized web in general, but usually in the context of data ownership as well as the ability to exchange data in a permissionless way. Numerous DAOs are backed by VC firms such as Andreessen Horowitz, a financial model that runs counter to democratic member control.²¹ However, many DAOs—especially those that are set up as investment DAOs—are actually self-funded models.

Principle 5: Education, Training, and Information

Cooperatives provide education and training for their members, elected representatives, managers, and employees so they can contribute effectively to the development of their co-operatives. They inform the general public - particularly young people and opinion leaders - about the nature and benefits of co-operation.

Most DAOs have a mixed on-chain and off-chain model; that is, financial and governance decisions are discussed in forums or chat tools like Discord (i.e. off-chain) and then transacted on a public blockchain. In theory, some of this off-chain organization could be focussed on learning and information sharing. For instance, there are a growing number of education-centered DAOs including DeveloperDAO, which helps developers hone their Web3 skills.²² Another, OdysseyDAO, is focussed solely on Web3 education, offering free online courses on cryptocurrency and other Web3 topics (although it’s unclear whether they are a DAO in name alone, or whether they also have on chain governance).²³

In practice this principle and the two that follow are distinctly cooperative: care for members, cooperatives, and community is what sets co-ops apart from most other organizing models. The aforementioned DAOs are education focussed; learning and community building are not separate parts of their work. But looking ahead, given the ease of creating online educational content, it’s possible that other social DAOs will mature to the point of offering education and learning to their members.

Principles 6. Cooperation Among Cooperatives

Cooperatives serve their members most effectively and strengthen the cooperative movement by working together through local, national, regional and international structures.

There are two factors to consider when asking whether DAOs could meet the sixth principle: the first are the technical constraints on blockchains, which notoriously resist interoperability.²⁴ The second is whether DAOs as an organizing structure are homogenous enough to work together in a meaningful way. The technical piece is complicated, but there are numerous projects underway that will allow cross-blockchain connections; e.g. Cosmos’ Inter-Blockchain Communication protocol.²⁵ And despite the heterogeneity of the DAO world, there are some examples of DAOs working with others, such as the Breadchain and PactDAO partnership. These two mutual aid organizations “are working in partnership to model new ways of collaborating in real life, and in the “cryptoverse.”²⁶ Given their wide-ranging foundational logic–many DAOs spring from the deep libertarian roots of Web3–DAOs are a long way off from supporting each other meaningfully, as cooperatives purport to do.

Principle 7: Concern for Community

Cooperatives work for the sustainable development of their communities through policies approved by their members.

Kei Kruetler writes: “As a guiding star, web3 applications could aim to introduce value in relations which have been historically denied it, such as labor and environment, rather than creating new financialized relations.”²⁷ In practice, most DAOs have yet to introduce this kind of human-centered value; the pseudonymous or anonymous, decentralized nature of DAOs runs counter to ushering in caring and concern for people at a local or community level. As Divya Siddarth et al note, the “architecture [of Web3] is optimized for a highly narrow set of problems, and thus by its very nature is unable to interface with the rich economic and social networks in which problem-solving coordination is actually needed.”²⁸ This is not to say that DAOs cannot do this; the PactDAO example above shows that concern for community is not antithetical to the DAO model. Yet, the promise of transformative work at the local level remains largely unrealized; especially when compared to the strides DAOs have made in coordinating for financial and individual gains.²⁹

DAOs are still in their early days, and it is too soon to say whether or not they will be able to deliver on the cooperative promise. However, there is potential for DAOs to become a powerful tool for social change, and exploring and experimenting with this model in order to realize its full potential is certainly worthwhile.