Why DAOs: Meta-Organizational Learning

through Digital Consensus

Junyi Li, Jungpil Hahn, Giri Kumar Tayi
Department of Information Systems & Analytics, National University of Singapore
junyi@comp.nus.edu.sg, jungpil@nus.edu.sg, gtayi@albany.edu

Context Learning in the Model Baseline Results

▶ Advances in blockchain technology enable
the emergence of highly decentralized
governance models, such as decentralized
autonomous organizations (DAOs).
▶ With the governance token, anyone can
become a stakeholder and vote on how DAOs
operate.
▶ Despite various functionalities (e.g.,
cryptocurrency exchange, lending), ongoing
DAOs share the consensus-based
governance mode.
▶ Smart contracts can be viewed as a form of
digital consensus involving community
agreement and credible automation.
▶ Meta-organizing among legally autonomous
entities is a new and underexplored
phenomenon.
Research Gap
▶ A typical resource-based perspective [1]
emphasizes IT’s value on creating inimitability.
Yet, DAOs are transparent. (IS community)
▶ Gap 1: Little is known about DAO governance
[2] and the value of digital consensus —
whether it can produce collective intelligence.
▶ Collective intelligence is related to an edge of
chaos [3] in self-organizing systems, due to
the paradoxical nature of the organizational
design, for example, the trade-off between
exploitation and exploration. (OS community)
▶ Gap 2: What is the edge of chaos in digital
consensus design?
In the Carnegie School tradition of experiential
learning, reinforcement learning is driven by en-
coding performance outcomes as success or fail-
ure relative to reality.
▶ Let Φ(x) denote the payoff function for a bit
string x with its dimension m. The original
payoff function [4] is:
m
X
Φ(x) = δj (1)
i=1
where δi = 1 if xi corresponds with reality on ▶ Autonomy cannot communicate effectively,
dimension i; δi = 0 otherwise. and good solutions cannot spread. Good
▶ Learning includes within-group learning and performers stay good, and bad performers
across-group learning, where agents will stay bad — high performance variance.
learn from a superior majority view [4]. ▶ For DAO, good solutions spread via digital
▶ Superior majority view unfolds as follows. 1) consensus — median performance variance.
One agent identifies its superior peers (within ▶ For Hierarchy, individuals confirm to an
the same group) who outperform the focal effective authority — low performance
agents. 2) The dominant belief bits among variance.
these superior peers become the superior
majority view. 3) The focal agent learns from
the superior majority view with learning rate Environmental Turbulence
η = 0.3.
Organizational Structures in the Model
▶ DAOs
Voting Threshold

Research Questions

How does digital consensus benefit organizational

performance?
▶ In what ways does consensus-based
organizational learning differ from traditional
ones, namely autonomy, and hierarchy?
▶ In what circumstances does
consensus-based organizational learning
perform better than the other two?
▶ What is the underlying mechanism accounting
for the performance difference, if any?
▶ Based on the mechanism, how to improve the
digital consensus design?
Entities in the Model
Our model has three main entities—the external
reality, the individual, and the manager.
▶ We describe reality as having two levels: a
belief level and a policy level. The probability
that any one dimension will have a value of 1
(or −1) is 0.5. Values are randomly assigned.
If the real belief is generated randomly as
< 1, 1, −1, −1, −1, 1 >, the real policies will be
< 1, −1 >. (i.e., dominant element across
every 3 bits)
▶ Individuals will process the belief bits, and the
length of belief is m.
▶ Managers will process the policy bits, and the
length of the policy is m/αm, where α is the
aggregation degree.
▶ Hierarchy
Conclusion
▶ IT’s value in maintaining diversity instead of
inimitability.
▶ Digital consensus maintains a certain amount
of diversity and thus tends to perform well in
turbulent environments.
▶ Even though DAO cannot outperform
Baseline Results hierarchy in a static environment, many
aspects of digital consensus design can be
improved, such as voting thresholds.
References
[1] Anandhi S. Bharadwaj. A Resource-Based Perspective on
Information Technology Capability and Firm Performance: An
Empirical Investigation. MIS Quarterly, 24(1):169, March 2000.
[2] Roman Beck, Christoph Müller-Bloch, and John Leslie King.
Governance in the Blockchain Economy: A Framework and
Research Agenda. Journal of the Association for Information
DAOs cannot overperform the most efficient hier- Systems, 19(10):1020–1034, 2018.
[3] Philip Anderson. Perspective: Complexity Theory and Organization
archy. Autonomy is the worst case. Science. Organization Science, 10(3):216–232, June 1999.
Publisher: INFORMS.
[4] James G. March. Exploration and Exploitation in Organizational
Learning. Organization Science, 2(1):71–87, February 1991.