efficiency parity hypothesis & the timing of decentralizing w/ nick naraghi

Welcome to the Armada Podcast, where we are focusing in on DAO governance. Let's hop into the show. If you could start with who you are and what you're working on.

Hey, my name is Nick Neragi, and I'm right now working on something called GovernorsDAO, which is a DAO that focuses on helping other DAOs to form and decentralize. We talk about it as negotiating the authority of an organization. A lot of times crypto projects have kicked off and they want to get to become more decentralized, but they started as more of a startup or a founding team that was centralized. We helped them to map out which powers and which stakeholders are in their community and how to move more from a centralized organization to a decentralized organization. And along with that, we have a newsletter. You know, we're doing our kind of learning in the open around DAOs and researching and publishing what we learn. That's called Governors on Substack.

And that's how I found your work, and I've very much enjoyed it. And some of your tweets has been awesome to read. Describe what that actually, that organization is. So you said the Governors DAO. Is that like, are you guys doing like consulting in exchange for Like tokens? Are you guys like, what is the business structure in that? Or is it just like an open source thing? What is that like?

Yeah, so right now we're basically publishing and we are consulting, and I think that might evolve into other things down the line. But the idea is to create kind of expertise and a repeatable model around helping with progressive decentralization as consultants and to grow a DAO that's capable of doing that. kind of like a guild or some of these like freelance groups that have come together and been really successful, like Raid Guild or D-ORG, I think are great examples. I think we envision doing that for putting people on projects to help with authority negotiation.

That's awesome. And what inspires you to look at governance as a space? I don't think there's actually all that many of us really honing in on the space. What kind of inspired you to go deeper specifically in governance?

Yeah, it's a very interesting question. It actually goes back more than 10 years for me to being involved with parliamentary procedure in formal meetings. So I'm an expert at Robert's Rules of Order, and I really love complex systems and learning rules. I've played a lot of video games with lots of rules to understand. and kind of take advantage of growing up. So I've always had this excitement around game theory and taking that kind of into my passion for the future of collective intelligence really is, I guess, the combination of that, those parliamentary procedure ideas and rules and politics combined with some of my work over the last few years has really been focused on collective intelligence. Thinking about how people can be greater than the sum of their parts. And I'm seeing DAOs just right on the precipice of blowing up right now. And I think from a market perspective, governance is one of the largest issues. And the way that people talk about it in DAOs or in potential DAOs or crypto projects today, it's like, oh yeah, we have to solve for governance. But I think that governance is actually a much larger issue. And it's going to involve a multidisciplinary effort of economists and political science and organizational scientists, as well as people who understand mechanism design and actually how to put this together in the crypto space. So it's just a combination of things I've been interested in for a long time and things I'm passionate about now.

I totally agree with you on that. I think that there's this attitude that we need to figure out governance. And you hear this in the classic startup Silicon Valley world of culture is often discussed. Kind of similar, right? It's this kind of age-old suggestion and advice from the experienced and kind of the mentors of that ecosystem say, you have to think about culture day one, you have to be cultivating it. And they talk a lot about this sort of abstract concept of culture. And I'm kind of getting kind of analogies into governance a little bit where I think the great organizations that are thinking about culture from day one are building much more long, stable, and enduring organizations. And I feeling like there's a parallel there in the crypto space of saying, how do we think about governance early and right away is building longer and more enduring organizations. And it's unfortunately in the kind of classic Web2 Silicon Valley world, culture continues to be abstract. But what I love about governance is that it's pragmatic, and that it's rule-based. And there's game theory and humans and psychology and sociology and all that stuff in there. But at the end of the day, you have to write code to go do that. And on one hand, that's a blessing. On the other hand, it's a curse, because if you get core components of that wrong, it can get dicey quickly. But I totally agree with you on sort of this, this thinking about it as an afterthought feels like a byproduct of this general bull run of success of saying like, hey, I put together this protocol and it's blowing up now. Like, I got to figure out governance later, right? And that's, that's classic startup problem. And so 100% agree with kind of your view of that, Lam.

Yeah. And I think one of the interesting things is, you know, that it's, you have to be thinking about it from day one, both, both for culture and for governance. But it's also an iterative process to develop it. It reminds me of when I read the Tezos whitepaper a long time ago. They, they mentioned a game called Nomic. Have you ever heard of that? No, I haven't. Uh, I'll send you a link to it. But Nomic is basically, uh, a game where there are rules and there's some mutable rules and there's some immutable rules, and everyone on their turn gets to propose, uh, a change to the rules, either a new rule or to remove a rule or to make a Immutable rule mutable or vice versa. And in the rules are, you know, how you win, what you can do on a turn, etc. And all of that can be changed. So the game goes on for a very long time and it can evolve into very different kind of rule states than what you end up with at the beginning of the game. But it is kind of this foundational process of saying, okay, well, we have a rule set to start, we have governance to start, we have culture to start and we're thinking about it and it's not like an afterthought, but it is something that's going to incrementally evolve and trying to be intentional about that, especially as you're taking more centralized power and giving it to community in a very experimental way, is very exciting to think about and also challenging.

Yeah, absolutely. Yeah, I'm super curious to check out that game. It sounds like a game within a game a bit. So we'll add it to the show notes. notes as well. And we'll move on to the kind of the fictional character question in one second. But one of the other analogies that I loved in the culture in the Web2 Silicon Valley space is, I feel like a lot of startups, right, it's thinking about a garden. And it's like, you can sprinkle a bunch of seeds into a field, and you can plow it, and you can just kind of do it disorganized, and that garden will eventually grow fruits and vegetables. And they may be in weird places or suboptimal growth and things like that. And then there's sort of gardening, which is this Optimized process of thinking about which soil for which plants and which light. And, you know, if you grow corn on this side, does that block the sun to block the tomatoes, right? It's like, it's very intentional. And you can garden and farm obviously at scales that are just fundamentally different. And I'm thinking a little bit as you were talking about that game of sort of the governance loops as well, where it was, if you start with a cultivated, curated mindset, at least you have an opportunity to start changing. But if you kind of start that garden by just throwing seeds and dirt and water and rain and letting it run its course, it's going to be a mess. There will be output, there will be a yield, but that yield will be fundamentally stunted compared to the other one. So I'm super excited to check out that game. We'll add it to the show notes. Before we go too far down the rabbit hole, which fictional character would you love to have dinner with?

I would love to have dinner with Nell from Diamond Age. I read Diamond Age with my partner and I was— it was Such an inspiring way of thinking about learning and all the different technologies that might exist in the future. But just to have— just, I love talking to people who have very different educational backgrounds and hearing the way that that affects how they think. And it would be cool to experience, yeah, talking with Nell after having learned so much from a very intelligent AI. That guided her mostly based on her curiosity.

That's a fascinating answer. I have that in my Goodreads queue. I need to eventually read that. It sounds like you'd highly recommend the book.

Yeah, it was a great book. It starts out kind of very confusing. Neal Stephenson's very famous style where he just kind of immerses you in it and then you have to just get through that, but very thought-provoking by the end of it.

Great. So in your blog post on your Substack, you talked about this idea of efficiency parity hypothesis. For listeners who haven't read that, can you explain that?

Yeah. So the efficiency parity hypothesis is basically the idea that there's a point in the future where DAOs are going to become as efficient as traditional organizations. I think of hierarchical top-down organizations like startups that grow into big corporations. And the hypothesis, why this hypothesis is interesting to me, is I think that the learning rate that DAOs are undergoing and will undergo is going to be exponential. And the learning rate for how traditional orgs become more efficient is maybe linear at best. So where we're sitting right now, DAOs have governance problems, they have open issues around how to assign voting power, how to do compensation, how to do knowledge sharing, and those inhibit efficiency. But I think that the base ability of DAOs to share knowledge with each other, to iterate and experiment, and then their ability to fork and share effective protocols and frameworks between DAOs means that the ecosystem itself is going to learn very quickly. So I'm looking for when efficiency parity will hit and then kind of the implications of when we get to efficiency parity.

And do you believe that that gap, the reason the DAOs are accelerating an exponential curve as opposed to a linear curve, is because of the fundamental way they are organized as compared to a traditional organization?

Yes. So I think that the first thing is that DAOs have a focus on experimentation. DAOs are like to actually put in a set of smart contracts as an experiment and say, we're going to run this experiment for X amount of time. And then in addition to that, the market forces in the ecosystem, it's fundamentally open. I saw this tweet, I forget who said it. It was like, be open or be interoperable or die by a thousand, death by a thousand cuts in terms of innovation that comes from other places. And I think that that's a really strong pressure, but I also think that a lot of people who are building in the space now are doing so with the philosophy of being open and saying, if you can do what we're doing better or you can improve on it, then fork it and and keep building the ecosystem. And I think that augments the overall learning.

Yeah, I totally agree with that. I think the area that I only ever struggle with is sort of this capitalist mindset of, you know, how does a product and profitability and kind of a core business organization's dominance in a particular job to be done kind of influence its position in the world. And what I mean by that is like, you know, Apple, for example, with the iPhone, it's like, as an organization, are they set up as most efficiently as they possibly could? And are they learning? And are they, you know, are they kind of their traditional org, right? And in the vector of Apple as a whole, it's like, does that product and that profitability sort of lift them for decades to deal with the inefficiencies of the organization that allows them to sort of solve those problems later? Versus these organizations that are emerging now that are fundamentally different. And I'm just so interested in sort of seeing this balance between organization and then the product or the service or the protocol, whatever the job to be done that that entity is serving, and seeing those sort of balance between each other is, for myself, just a super intriguing kind of battle that we'll see play out.

Yeah, I think one of the core elements that we need to solve for is the DAO of DAOs. If you can get a DAO of 8 people who, like a Jeff Bezos 2-pizza team, and they're working effectively together because they have kind of the innate human qualities that allow them to communicate and sense-make together, and that team can produce meaningful outputs. How does that DAO participate in a DAO of DAOs that can then make group decisions, sensemake on that larger collective, and represent all of the different perspectives, opinions, and knowledge that the people have on the baseline level. And if we can solve for that fundamental dynamic, then I think you have something that's much more scalable than the fragility of a multi-level hierarchical org. Apple is tens of thousands of employees, which means that there's probably a dozen layers of hierarchy, if not more. And I believe that that gets really far beyond our capacity as humans to navigate well. So you have an idea of an executive, senior vice president, how are those people navigating their roles and what could be done better by collective intelligence and what could be done better by algorithms. That's really where I'm interested to see experimentation and learning in the industry of DAOs.

Yeah, that's certainly where my fixation is at as well, is this idea of— and we had Andrew Beal on as one of our first episodes, and he was talking about Governance 2.0 versus Governance 1.0. And the way that he was articulating it was, Governance 1.0 is this idea of all the token holders are sort of all making decisions against one, you know, process. And then this idea of Governance 2.0 and kind of putting in some of this sort of DAOs of DAOs and kind of in the terminology you're using of saying, how do we have different groups of people that, you know, the N of 8, N of 3, N of 50, uh, all coordinating together in some process? And I totally agree with you, that's probably where that exponential kind of unlocking probably really starts to shine. And, and agreed that that will dominate the traditional organizations once we kind of figure that out. But it certainly seems sort of like the open problem As it relates to scale in that regard.

Absolutely.

So what are the right times for decentralizing? And I suppose I'm, I'm kind of implying something here with how does maybe a traditional organization think about going into decentralization? Or if you want to modify the question a little bit of like, how do small teams that maybe have a team of 8 and they're having success and thinking about governance, how do they kind of know when to start breaking apart elements of that team or that process?

Yeah, absolutely. This is— it's such an interesting question and it's somewhat challenging. I don't think that there's a one-size-fits-all approach here, but I think that basically there's a scale question and there's a responsibility question, and then there's a question of how well can we delegate certain tasks to individuals or DAOs in a way that we can trust will get them done effectively. And part of that has to do with the people that you recruit, as well as the incentives and mechanisms that are in place to, to get that work done. I'll also mention that a16z has a wonderful article from a little over a year ago about progressive decentralization in crypto. And I think they mentioned it as focusing on product market fit and then community participation and then community ownership. I can share that link as well. But the way that we've been thinking about it at GovernorsDAO is it's not just progressive decentralization because that's a bit opinionated. It's authority negotiation. So when is it the right time or what is the total I love this term from Michael Zargham at Block Science. He mentions this idea of the control surface in a complex system. And it's basically, I think about that as like, what are all of the powers that an organization has available to them to either centralize or decentralize? And then an authority negotiation is to say, let's map out the control surface, let's map out the stakeholders, And let's see who we can trust to accomplish the responsibilities that are associated with the powers and who we ideally will want to trust eventually in terms of that progressive approach. And then finally, who wants what powers? And then it becomes this negotiation of, okay, well, you want it, but we can't trust you. So how do we put a mechanism in place? Or you want it, but I think that's an existential risk. If the community wants an authority, but the the founding team thinks it's an existential risk to the organization or the vision, then there's, there's, you know, kind of heated debate there. And that says, okay, well, maybe we stay centralized for now, or maybe we can commit to focusing on giving this power to the community on some timeframe, but we're not sure exactly when that will be yet. And a lot of this, I think, is also happening live with new technologies that are being developed, new mechanisms, new cryptographic incentives. You get basically people doing experiments and saying, hey, we think this works, or, hey, I tried this over here, maybe we can do something similar at this organization. And that, I think, is going to lead to a lot more confidence from founding teams that said, hey, we have this vision, we want to make it come to life, we want to decentralize, but We can't start, we can't start off that way and help them actually get there.

I love that. Yeah, there's, we'll put a show link to the a16z kind of progress, but I love that thinking of, you know, phase 1, phase 2, phase 3 type process. And then, and I sort of love your guys' approach and something that I did a little bit with product management with individual contributors was sort of like system ownership of like, here's what a system is, here's what success for that system looks like. Here's who's responsible for it, and here's who we want to be responsible for it. And I found it from a managing humans perspective, a really, really efficient process. And so as I heard you kind of talk about this, like, man, that's so obvious of like, how do you do that when you think about a founding team to a community into, you know, token holders more broadly? That's a super interesting approach. And yeah, we'll add show notes in there as well to kind of get more reading out there. How are you seeing organizations successfully decentralize through this process? I mean, you touched on it before, but can you take through an actual kind of like next step of like, okay, I want to go do this? What does that look like?

Yeah, so this is slightly tangential, but one thing I'll mention that I see that I really am liking is the audience-first businesses. This isn't exactly the same, but I think thought leaders in terms of how to— if you're just an entrepreneur, not even necessarily in Web3, but just anyone who's creating a new business, you start with building an audience and then building a community and then serving that community content and then serving that community product down the line. You have this community engagement, community participation component that is a requisite precursor for decentralization. Because decentralization means having people that are participating in the network in a meaningful way. And in order to have people participating meaningfully, you have to have people and people that are motivated. So I think one of the things I'm seeing projects that are decentralizing well do effectively is to have a lot of engagement at various tiers. So for example, some of the DAOs that I've, you know, I've walked into, I'll do a shout out for DAO Rush Week, which happens once quarter and you can kind of see new DAOs that you can engage with. Many of the DAOs that were presenting during that week were just saying like, hey, you know, to join, you just show up to our Discord and you post stuff and you read and you sign up for a newsletter and we'll give you points for tweeting. And then the next level of engagement is you can apply to be a member and you do an application project and we'll pay you $100 or 100 xDai for that. And Okay, the next stage from there is just this really easeful funnel that allows people to get more and more engaged and more excited about the project, more excited about the community in a way that is not just when moon, sir, and these price chats that are happening in a lot of the DeFi projects, unfortunately. So I think that's probably one of the most important steps, is just having the funnel to engage members to get them to participate meaningfully.

I totally buy what you're talking about, especially in the Web2 kind of classic startup space. My last venture was a failed social network. And, you know, we built this network thinking, hey, we're gonna build this network, and it has these amazing properties, and people are gonna want to join it because it enables them to do something entirely different than they were able to do before. And we learned really quickly that we really underestimated the importance of community, especially in 2021, 2020. as compared to having even started my last venture before that in like 2015, right? What's changed, I think, over the last 5+ years in seeing these audience-first businesses certainly is a Web2 trend that I 100% buy. And then of course, it makes so much sense that that's the foundation of success in Web3, given decentralization is key. So I love that insight.

Yeah, thank you.

How do you see the future blend of traditional organizations and DAOs? And this question is meant to be a little bit from like a macro fast forward, you know, 20 years, whatever the timeframe you want to think about it in. But how do you kind of see the world and society? What's the balance between a traditional organization and DAOs in the future?

Yeah. So this, this, if we go back to the efficiency parity hypothesis right now, I think we're pre-efficiency parity. We're solving important problems to move toward efficiency parity. But on an exponential growth curve, you end up with DAOs being much more efficient than traditional orgs in most cases. So I think the first part of my answer to your question is that starting a DAO will be easier, getting people involved in a DAO will be easier, and ultimately operating a DAO will be more effective than a traditional organization. So what I, what I'm seeing is that We have a new style of emergent bottoms-up organization that I think will outcompete in the market the hierarchical top-down organizations. And you'll start to see things like marketplaces become decentralized organizations, unstoppable in the way that Bitcoin is unstoppable, protocols in the way that SushiSwap is a protocol or Uniswap is a protocol. And taking smaller fees and operating more effectively. Of course, Uber, Airbnb, those are strong cases for decentralization. I still think that the engineers who sit down and create Uber and the UX designers who are actually going through the massive complexity behind what seems like a really simple app are adding a lot of value, but eventually that gets commoditized because people can copy it. The second part is I think that there are probably some use cases where traditional orgs will need to be applied. But the real question is, coming back to this authority negotiation point, is, you know, which powers in the control surface should be given to larger community versus given to kind of a trusted entity? So it's not pure decentralization as in decentralize everything all the way in all use cases. It's decentralization as in we are moving from centralized organizations to fundamentally decentralized organizations that sometimes have clumps of authority or power in areas where there are also clumps of trust, or there are certain things that we can't accomplish any other way because the mechanisms don't exist or otherwise.

So you see a world where there's a blend. I like your word pockets. How do you see— like, one of the things I've been struggling with and trying to handicap just broadly is central governments, central, you know, these massive powerful organizations, you know, the Apples of the world sort of navigating this new world. I suspect that there's going to be a lot of pushback, whether it's regulation or anti-competitive behavior, whatever it may be, do you just think that fundamentally at scale over long enough duration, it's just like we're just in a transition period, so it's hard for me to sort of see those 2 worlds? Or how do you imagine sort of the establishment relinquishing control and power and influence aside from just being outcompeted?

Yeah, there's a lot of factors here and I'm only seeing some of them and I'm also a technological optimist, so take this with a grain of salt. I think that outcompeting is gonna be the primary mode where this transition happens. So today, for example, you see there's this phenomenon in enterprise called transformations, digital transformations and agile transformations, and this is where a giant company that's very old wants to continue to exist and has the sufficient revenues and, and, you know, balance sheet to be able to move, to be able to make organization-wide transitions. Digital transition, digital being the move from, you know, doing things mostly on paper to doing things mostly in databases. And then agile transformation as doing software engineering mostly from a waterfall methodology into an agile methodology. And these transformations take 4 years, millions of dollars of consultants coming in, training teams, and it allows a company that's very old to continue to be profitable and kind of behemoth status in the next generation of technology. But the problem is that The rate of technological improvement and experimentation and learning within smaller organizations is getting to be increasingly fast. What that means is that that 4-year process, or like the way that an enterprise can actually learn, ingest new skills, and then try to stay competitive with these new organizations, that timeframe might be too long. So I look at the cost curve of what it takes to start a startup and classically how that came down with AWS and cloud services, and then think about the other costs of starting a startup going down. I think about the Wyoming bill for DAOs and how their long-term vision is to get it to be under $1,000, and from the command line you can launch a new DAO. How easy is it gonna be when these costs decrease so significantly to spin up new experiments that have the potential to learn very quickly? And then if those organizations are learning faster, they're scaling faster. You think about like Coinbase hitting $150 billion valuation in 9 years versus Citibank taking 100 years or something like that. Mm-hmm. You think about the scale that SushiSwap was able to get to just in months and years. And I think that there's an opportunity there for enterprises to just be straight up outcompeted. Governments is a totally separate issue. So to answer your primary question, I think that what you're seeing in, say, Miami, where I'm based, New York, there's governments are starting to take perspective or to take opinions as to how currencies should or should not be regulated. And I think that will slowly expand into the regulation of decentralized finance. I think it will expand into the regulation of DAOs. But with a trillion market cap of Bitcoin, You, as someone who's sitting in the government seat, you've got to think about how does this affect the way that I am effectively able to govern and maintain authority and power in the control surface that I was elected to? And what are the— as politicians, how do we play the political games of Web3, of crypto? I think one thing you see, like Mayor Suarez in Miami is is looking at. It's like, if this works out and we're doing it well here and we show that this is how a government can interact with Bitcoin, interact with crypto broadly and the ecosystem, that's going to be huge for his career. So I think he gets that. I think the people around him get that. And it will become more and more in the political, in the standard political ethos as the governance of the world starts to interface with the governance of DAOs and DeFi projects.

Yeah, I agree with just about everything you said there. And the piece that I think I am struggling with is the mayor of Miami is certainly on the right bandwagon and doing the best they can, but operating then within a state framework, a federal framework, it's like, that's where my pessimism starts to, you know, to grow. But I agree with you on the long haul. I think it's the transition there that I think I continue to struggle with. And I've talked about this on the podcast in the past, and I don't mean to repeat myself in terms of— I just think the transition from this industrial kind of digital, what we saw from agricultural into industrial and then industrial into this information age. And I think we're just kind of in this beginning of dealing with that. I suspect there will be a lot of turmoil as we transition to that whole world. Because I agree, it's the inevitable future. And there are going to be people that are going to put themselves in positions to champion it. And I think they're doing the right thing. And if they hit that, they're in huge, great spots. And I think that's what we want and what we need. I'm just sort of thinking about how do we get there in a pragmatic approach and do it within a framework that is safe and safe as it relates to succeeding, right? And saying like, hey, if we got to go too far crazy, that might be the right way to break the model and establish the entirely new paradigm, but it's also dicey as it relates to actually accomplishing the vision. So it's just a, it's a question I always wrestle with and I always like to ask about. So appreciate you going down the rabbit hole with me. If you could remind people where to check your work out and if you wanna comment on that, I didn't mean to end it on there, but—

Yeah. I would just say, just a quick note is what the internet enables people to do is organize more effectively. And then those internet organizations can interact in kind of the real world and you get— I'll just point at GameStop and WallStreetBets as like a weird phenomenon where that happened. And I think we'll start to see that type of thing but become increasingly advanced, more capable of organizing, doing more complex things as collectives, and then participate in standard government as long as it exists. Right. So what is a technologically empowered decentralized super PAC look like? Right. That, that's kind of my angle on it.

Yeah, I think that is a really strong point, right? Is we've become hyper-partisan and we've been pushed in the left versus right. And then all these issues that happen in pop culture push into one of, one of those 2 camps inevitably. And I think you're right. Like, what is a super coordinated super PAC or whatever really going after the political structure as a whole? Because at the end of the day, If it's humans that are worried about governance, and now they're connecting and coordinating digitally, which we've been obviously doing, you know, Russia and, you know, disinformation, like all this stuff has been happening into a traditional kind of classic world, tangible world. But what happens when those 2 worlds start blending? I mean, I think you're right, we can start building incentives and structures to actually use the digital governance to modify real kind of real-life governance. So that's a great point. If you could remind people where to check out your work and where to find you.

Yeah, right on. So on Twitter, I'm @NickNaragi, N-A-R-A-G-H-I, and you can read our materials from Governors at governors.substack.com.

Thanks again for joining the show.

My pleasure. Thank you so much for having me.

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