Are DAOs a new way for companies to go public?

Transcript

Angie Lau: What is a Decentralized Autonomous Organization or DAO? And why are more and more companies starting to become one? From Bitcoin to DeFi, how we got here from the eyes of one that saw it all — or at least most of it. 

Welcome to Word on the Block, the series that takes a deeper dive into blockchain and the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast.News. I’m Forkast Editor-in-Chief Angie Lau.

Well, throughout its history, Bitcoin has drawn the attention of regulators around the world and because of that, crypto firms have been playing catch up to satisfy the diverse global regulatory requirements. But what if there is no one in charge? Just as Bitcoin creator Satoshi Nakamoto’s disappearance may have been a blessing in disguise for the decentralization of Bitcoin, a true decentralized organization may require no leader.

So now, we’re talking about ShapeShift. This is a non-custodial crypto trading platform and it’s one of those companies that’s taking this bold foreign step. It is dissolving its corporate structure. So no more CEO, no more middle management, or even staff. Instead, the company, as you know, won’t exist. It is decentralizing and its FOX Token is becoming the place of ownership. FOX Governance, token holders will be the ones actually guarding and running the house. A DAO governed by its users.

Joining me today is the founder and CEO of ShapeShift, whose executive days are now numbered. He also founded crypto gambling platform SatoshiDICE, and took part in building one of America’s first crypto exchanges, BitInstant. A true pioneer and veteran, Erik Voorhees.

Erik, welcome to the show.

Erik Voorhees: Thanks for having me on.

Lau: You are what they call an OG, an original gangster — a true veteran of this industry. For a lot of people joining the industry today, context is everything. So how has this world changed from when you started in the industry?

Voorhees: I’ve been in the Bitcoin world for about 10 years. The major change is just how big it’s gotten. It is now something that most people have heard of. Most people have heard of Bitcoin. I don’t have to explain what that is anymore. And that’s been really fun to see. Certainly, every major financial institution in the world is paying attention to this, and I think we’re still in the early stages of its ascent. So it’s just been really fun to see it actually achieving a lot of the things that we fantasized about a decade ago.

Lau: And it really was the promise of so much more than what a legacy system had given us. I don’t think it’s an accident that Bitcoin was birthed during the global financial crisis in 2008. When you started and saw the promise of decentralization in cryptocurrency and blockchain and all of that. What was it that attracted you most? What was it that you saw that a lot of people didn’t see?

Voorhees: Frankly, I am a believer in markets, and I think the most important good of all in a market is money. And so the fact that money around the world is controlled by a monopoly provider, the government and central banks is, I think, a problem. That’s antithetical to a market-based economy.

And so when I learned about Bitcoin, it was actually a plausible alternative form of money at the base layer. When any two people in the world can transfer value between each other with no one’s permission and no one can stop it, that’s very empowering. I think that is a great equalizer of a force, of power, of opportunity. Everyone in the world now has an immutable form of money, and they need no one’s permission to use it. That’s a beautiful thing and that’s why I got into it very early.

Lau: And philosophically, how did that drive you to form ShapeShift in 2014? I’ll familiarize those of you who don’t know ShapeShift. This is a no-account model for trading — at least in its very beginning — that enabled trades without anyone needing to register. I think you called it a cryptocurrency vending machine.

Voorhees: Yeah.

Lau: That philosophy when you started ShapeShift — tell us a little bit more about that.

Voorhees: I started ShapeShift right after Mt. Gox imploded. And Mt. Gox was kind of the big early Bitcoin exchange back in the day. And they blew up and had a huge problem, lost $400 million of customer money. When I started ShapeShift, I wanted to build something that would protect users through the design of the platform, so that no one needed to trust us. That’s very important. Just like in Bitcoin, no one needs to trust anyone involved in Bitcoin because the code is open source and everyone is holding their own funds.

So I wanted to bring that model, that principle into ShapeShift itself, and ShapeShift allowed people to trade one digital asset for another with no counterparty holding funds, and that made it safer for them. So we didn’t hold their funds. We didn’t hold their personal information. And it works much like a vending machine does. You walk up, you put a coin in, and out comes a candy bar. That’s how ShapeShift works but for digital assets.

Lau: As you can imagine, the regulators likely took a dim view of that. KYC, AML, know-your-customer, anti-money laundering regulations increasingly really being a point of contention in the space. In the early years in 2014 when anybody could do it and it was relatively anonymous, essentially, did you feel a lot of pressure from the regulators? Did you start feeling that?

We can talk about going back into the history of one of your early partners at BitInstant as well, and Charlie Shrem having to face an indictment and then jail time for that. So getting into trouble with the regulators is kind of part of the early narrative of blockchain and crypto. With ShapeShift, did you start feeling that pressure?

Voorhees: Yeah. Absolutely, we did. A good way to frame this is like, as most people understand, that back in the 1500s, 1600s, this concept of separating church and state. It was a struggle — a fight. Ultimately, I think people realized that it was important that something as crucial and personal to people’s lives as religion is not controlled by the government.

Money is even more personal and important to people’s lives. In that regard, trying to separate money and state is really the entire ethos of what cryptocurrency is. Obviously, not everyone is going to approve of that. Not everyone is going to want money to be controlled by individuals. They want it to be controlled by the state, by some central authority. So that’s a very fundamental struggle that the entire industry is realizing right now. And so ShapeShift has certainly been a part of that.

Lau: So in 2018, you actually did start asking for basic info. And now in 2021, it’s almost like you’re kind of getting ahead of the curve even more. What are you doing today? Shifting back to your roots?

Voorhees: In 2018, we implemented KYC systems — which is a euphemism for just financial surveillance of innocent people. We implemented that because we believed we had to. We were at that point the counterparty when someone would do a trade. It would send us an asset and we would send them a different asset from our own wallets.

So ultimately, earlier this year, we stopped doing that service entirely. We no longer trade with customers at all. And instead we’ve allowed those customers to trade directly between themselves with their own keys and these decentralized trading protocols. So that means we are no longer involved in their transaction at any step, means we are not at all a financial intermediary or financial institution. And therefore, financial regulations do not apply to us because we’re not providing a regulated service. So that was our change earlier this year. And I think it’s a testament to how powerful this technology has gotten, that as it’s developed, we’ve been able to change our model to use that to bring in better service to our users.

Lau: It is actually a very interesting trend that we’re seeing in DeFi and now migrating to essentially registered companies, of which you were one. Now you’re actually just dissolving as a corporate entity and you’re shifting to pure decentralization. You’re turning into a DAO.

This goes back to your roots, as you said. What are your intentions? What do you think you’re trying to achieve here and potentially lead the pack in potentially a trend that we’re starting to see?

Voorhees: First, what we’re doing — that we announced on July 14th — is that we are decentralizing ShapeShift. So that means that we will be dismantling the entire corporate structure, so the entity itself will ultimately go away. This is a process that starts now. We have not completed this yet.

And while the corporate entity goes away, the product, the software that people use becomes open source and becomes a community-governed project. So this is a process that will play out over several months.

Ultimately, we’re doing it both for competitive reasons and for ideological reasons. This allows us to align ShapeShift with the ethos of crypto, which is about being truly borderless, being truly immutable, being decentralized and being open for everyone in the world. And that just cannot be done as a centralized company.

So there are a lot of tools now getting built for decentralized autonomous organizations or DAOs. It’s definitely a very new type of economic organization, and I think it is going to be increasingly utilized by global digital companies that want a model that is more open and in which their users can become part of the economic engine. So instead of us being based around shareholders and equity, we will be based around the FOX Token and an open source governance model.

Lau: So tell us a little bit more about that, you say competition, I get the ethos — but competition — how do you remain competitive by dissolving a corporate structure? When we think about competitiveness in capitalism, we think about making money, revenue and growth. By decentralizing and dissolving that corporate structure, how do you still align with those things? Or can you?

Voorhees: Good question. So, we start with first principles and what we’re trying to ultimately build is an open-source crypto platform that anyone in the world can use to access their assets, do trades and hold and control their wealth. And so by decentralizing, we allow anyone in the world to be involved in that project.

And from what I’ve seen in the DeFi world, decentralized finance is projects which are moving faster, which are open to integrating with each other. And because they are open source, they are composable and they are just growing far faster and innovating faster than any of the centralized alternatives. So there is something special in that model, and those of us who are pursuing it are just trying to figure out how far that can go. And it’s very new. There’s no rulebook on how this works, but there’s a lot of companies that are trying it. We want to do that as well. And I think ultimately this aligns ShapeShift with cryptocurrency broadly. And that can only be good for a project which cares about the principles on which this stuff was started.

Lau: So do you think that both can live aside each other, that you can have ethos, you could have principles that live still alongside what essentially is economic value and upside? Can we still all benefit on the revenue side, on the economic side, and still uphold the philosophies that are original to Bitcoin and cryptocurrency?

Voorhees: Yeah, ultimately, Bitcoin, cryptocurrency is a hyper-capitalist system, in which everyone can pursue their own self-interest free of restrictions, and all that matters is what the code says. It’s an incredible tapestry of creativity. So decentralizing as a company doesn’t mean there’s no revenue necessarily or no economic gain. Indeed, Bitcoin itself is decentralized and has created more economic gain in 10 years than any other investment in all of history.

So it’s just a different way of organizing. Instead of there being a formal corporation tied to a certain geography, there is a product and a token that represents the economic value and governance over that project. I think it’s actually a more distilled and pure way of building something that is economically meaningful between people.

Lau: So you currently own — correct me if I’m wrong — about a third of FOX Tokens. But through the decentralization process, you’re eventually just going to hold about 5% of FOX Tokens?

Voorhees: I own about a third of ShapeShift. So as a shareholder, I own roughly a third of ShapeShift. And of the FOX Tokens, I own far fewer. So 5% of all the tokens. So, yeah, my ownership and influence of the project goes down considerably through this.

That’s OK with me. My ultimate goal here is to build something that lasts and gets massive, and it wouldn’t really be very decentralized if I continued to own a third, and the current shareholders of ShapeShift own 100% of the project going forward. So that couldn’t be how it worked.

Lau: So what’s your vision ultimately to kind of design yourself out of a job and design yourself out of the stake of ShapeShift as it evolves into something that you hope to see? What’s your vision?

Voorhees: I want to be clear that I won’t be out of a job. I won’t have a W-2 paycheck anymore, but my job, my passion, the project I work on when I wake up remains — and will remain — ShapeShift. But there’s just no pay stub from an employer. So it’s just a different model.

The vision here really is to build a multi-chain, self-custody crypto platform that the whole world can use. There’s not really any of that today. It’s kind of a niche that doesn’t exist. It’s hard engineering because we’re working with multiple blockchains, whereas most DeFi projects exist only on one, primarily Ethereum.

So, yeah, it’s a grand vision. And we need people’s help. We’re open-sourcing this thing so that everyone in the world can contribute to this platform. Certainly, many of the people that are on the ShapeShift team today will continue working on it. They all have a strong incentive to do so. They all have a lot of FOX Tokens unlocked to them over the next three years. But ultimately, we need to build a community around this. That’s what we’re starting to do.

Lau: So for those people who are just joining this conversation now, in the time of our industry where we are, in real life, if they were to engage as a FOX Token holder in this world, that you’re describing, how does it actually functionally work? The day-to-day, everyday use case that I might apply this vision to?

Voorhees: Essentially, there are forums and ideas get discussed, and so in that situation, there’s lots of noise. If there’s an idea that people start taking seriously in which there seems to be support for it, and there’s a formal governance process in which a proposal is ultimately made, which details what’s going to be done, what money is going where and those kind of things. Ultimately, a vote happens. The vote is a smart contract that looks at the FOX balance of each person voting at a certain block height in Ethereum and you can vote yay or nay on a proposal. And ultimately, based on the rules that we’ve set up, a simple majority will win that. And then if that occurs, funds will actually move on chains from the DAO to the address specified in the proposal.

So this can work for some small developer that found a bug and wants $1,000 to fix it. Or you could get like a professional marketing agency that says, ‘Hey, ShapeShift DAO, give me $2 million, and through the next year, I will use my team of people to help grow your user base.’ So any kind of structure like that can happen. A lot of the tools that we use are built by other DAOs as they’re figuring out how to do this effectively.

Lau: I guess if we’re using real-life metaphors or examples, it’s kind of like Kickstarter or crowdfunding in its most general form. In other specific instances, it could be you are a traditional shareholder of a company. It would be akin to your annual general meeting that you have with management. They might ask the shareholders to vote on specific things that they want to pass in terms of corporate governance. 

Increasingly we’re seeing crypto firms consider public listing through SPAC, IPO or direct listing, like we saw with Coinbase and potentially others. Is this, decentralized autonomous organization, a new way of also defining the space where the stakeholders, those who are the shareholders, potentially the people who are holding the tokens, actually have a direct say in the direction of this protocol, of this company?

Voorhees: Yeah, you got it. It’s really about access and openness. A [public] company is owned by shareholders and ultimately governed by those same shareholders, and that’s expressed through them selecting the board, who then chooses a CEO who builds a management team. 

In the token model, everything is governed by the token holders. The main difference is that anyone in the world can become a token holder because it’s a fluid market. Someone in any country in the world can go buy 100 FOX Tokens and suddenly be part of the community. And if the next day they don’t like it anymore, they can sell those tokens and they’re out of the community. Completely different to how shares work, where it’s very gated, it’s very restricted to certain people, in certain circles and only of certain amounts.

Like when we started ShapeShift, we raised investment capital. There was a minimum of like $50,000 of some of the early angels that invested. Well, that’s cool if you’re an angel investor and you can invest $50,000 in a project, but that excludes the vast majority of people in the world. And so in these token models, you can get people that have like $10 of the token, but they are passionate. And to them, that’s a lot of wealth and they can even be involved in building something great.

So I think it’s really cool to be able to have that kind of openness with the entire world. The degree of fluidness on the token level, it’s going to be seen as more and more powerful. And I think ultimately for some companies, not all, a superior model to a centralized shareholder-based structure.

Lau: This is going to be so interesting in the coming years. You’re certainly a part of this new move, for just how legacy and traditional firms might want to start thinking about how it defines their corporate governance definitions. And I’ll ask you this. You made a great point. If you hold a significant chunk of FOX Tokens, essentially you are one centralized voice or you have more influence than others.

Who’s to say that in a public marketplace, there wouldn’t be — if that person raises his or her hand, that they would amass a majority of FOX Tokens to have that kind of influence within the governance of the protocol. Have you thought about that? How have you designed for that?

Voorhees: Yeah, that can absolutely happen, and we haven’t tried to design that away to prevent it. Any number of people can hold the token base and it is even conceivable that in the future, some party would end up acquiring a majority of the tokens and end up sort of reprivatizing ShapeShift, and non-decentralizing it, or re-centralizing it again. That could absolutely happen.

So that’s sort of similar to when a company is out on the public markets and then a private equity firm comes in and buys it up and takes it private, again. We are decentralizing out to this community of token holders. But if someone ended up acquiring 51% of the tokens, they would have full authority over where this protocol goes. And I think that’s OK. It’s unlikely that that will happen. But if it did, that’s the rules of the game. And that’s okay, too.

Lau: How do you think people should be paying attention to what you’re doing in the DAO space, and how you are evolving from privately-held to decentralized?

Voorhees: I want to be careful that people don’t think we have succeeded in this yet. We’ve just started. So this is a journey that we’ve begun. And now that we’ve community-kitted it to people, they can watch how it goes. We’re certainly not the only decentralized organization out there, but I think we are the first kind of longstanding, established, VC-backed company that has decided to dismantle the entire entity and become fully decentralized with time.

It’s a story and it’s something of an experiment. And I think those of us who are in the crypto industry are used to pioneering and ultimately we are trying to push the bounds of human economic activity and how that can work. So, yeah, it’s fascinating to me and I hope people find it interesting.

Lau: It’s a fascinating story to cover, I’ll tell you that.  Predominantly what really seizes the headlines these days is Coinbase direct listing, Robinhood about to go to the public market, and this exponential growth of centralized exchanges. What you’re talking about is that might not necessarily be the future. In fact, the future of exchanges might all be decentralized.

Voorhees: Going public in public markets means that a company is going to be completely captured by securities regulation, regardless of any other regulation they’re dealing with. And the rules around what a public company can do, ranging from how they have to report on a certain schedule to how the information within the company can flow, where even certain meetings of certain topics become illegal because you’re not allowed to talk about things internally or if a new idea is happening, it has to unfold in a certain way.

And I know that a lot of these rules were put in place with good intention, but their effect often is to destroy the mechanisms by which creativity is able to happen and the mechanisms by which companies are able to change and adapt and be competitive.

So I think generally companies that are centralized and large become slow and bureaucratic with time. And a decentralized organization can potentially get very large and remain very adaptive and the innovative spirit can continue. That’s really what I am hoping ShapeShift can do, is maintain that spirit, even at a scale where a billion people in the world are using the platform.

Lau: It’s an interesting point to note, because therein lies the tension. Regulators — love ’em or hate ’em — were designed to protect an investor pool. Once upon a time, Ponzi schemes were exactly that until the regulators said that that’s illegal because it victimizes way too many people. And certainly, the rules, as they exponentially grow, really try to dictate and police the market.

Do you think, though, the growth of the industry today, some would argue, is as a result of regulators being here, having these conversations, sometimes antagonistic, sometimes collaborative, but in every case, people feel safer with rules around them than not. Do you think that that could potentially be something that people might reconsider in a decentralized, autonomous organization or in a DAO that it is not policed, that it’s the wild, Wild West? I mean, just take a look at DeFi.

Voorhees: The important point here is that rules are really important. And what crypto has done is remove rule-making from people and putting it into open-source mathematical code, so the rules are known, they are transparent and they can’t be changed. Everyone knows exactly what the rules of Bitcoin are. Anyone knows what the rules of the Uniswap protocol are. So it’s not like it’s lawless. It is more strict than traditional systems, but it is strict in a way that is fair and open, and transparent to everyone and which is completely voluntary. So nobody is forced into these systems and anyone who wants to step into them can see whatever level of detail they want. That’s a beautiful thing, and I would hope that regulators can at least appreciate that what crypto has done is bring transparency and immutability to rulemaking. That’s a fascinating phenomenon.

Lau: When we do speak to regulators, one thing is increasingly clear. It’s really hard to be in DeFi space, it’s really hard to be in a decentralized space when there is not one individual actor — or actors — to pursue. And indeed, it’s completely decentralized. Do you think that they’ll eventually end up in the DAO space, and how?

Voorhees: Ultimately, regulators want to regulate. That’s kind of why they exist. Yet you have these crypto systems, they are immutable. They grow and they operate on rules that cannot be changed by any central party. So you have systems which cannot be ruled from the outside and you have rulers on the outside who want to rule them. And so this is a huge conflict. I mean, the whole rise of the industry is the expression of this tension.

So, how does this play out? I don’t know. It’s like you have an unstoppable force and the omnipotent being. It’s that kind of situation. The regulators, I think, will have to learn a lot about DeFi before they can even approach it. They are all years behind. Some of them understand Bitcoin a little bit at this point. The most advanced ones have heard of Ethereum and maybe understand it a little bit. But especially like the banks and people outside of crypto, they are so far behind the curve when it comes to this stuff.

And even myself as someone using it 24/7, I feel like I’m behind the curve. There’s so much stuff happening in decentralized finance that it’s intimidating even for me. But it’s also a beautiful expression of human creativity and entrepreneurship. And so I love being part of it. And I’m just happy to see it all growing so fast.

Lau: Well, I guess everybody at Forkast, at least a little bit of job security when the story keeps changing by the second, we’ll have a job for a very long time covering the space. That’s absolutely for sure.

Ultimately, I’ll have you kind of hop into your time machine way back when — I think it was 2012 — in pre-Covid world, Money 20/20 was one of the big international conferences. You, with BitInstant and Charlie Shrem and others took a booth right beside PayPal.

If you go back to that time, 2012, nearly 10 years ago, what were you seeing as a promise of the future? And have we achieved what you thought would happen?

Voorhees: Yeah, we are achieving it right now. From the beginning, what I’ve been most interested in, in my real audacious prediction about all this is that Bitcoin ends up being the monetary system of the planet, and replaces fiat and replaces banking. And we’re on that trail. I think that will happen. And it’s far more likely to happen now than it was 10 years ago, that’s for sure.

When we were at that conference, Money 20/20 in Vegas in 2012, yeah, we were right next to this huge PayPal booth. I remember the sneers and snickers of the people manning that booth. A couple of them had maybe heard of Bitcoin and they thought it was a joke. We’re just sitting in there. No one was coming up to talk to us. There was no one at that conference interested in Bitcoin or in BitInstant. We just stood there looking silly while all the professional money people of the world gathered and made their deals.

And it’s just amazing to see that none of those companies are relevant in the future of decentralized finance. All of them will have to adapt to crypto or they will go the way of Polaroid. And I think a lot of the banks are going to get really caught off guard by this. The fintech companies move a little faster and I think a lot of them will adapt. PayPal accepts Bitcoin now and cryptocurrency, but the banks are too entrenched. They’ve never had to innovate in decades because they are branches of the government. They have their special monopoly. They can all print money. That’s been a good business for them for a long time. They’re about to get steamrolled and I think the world would be better for it.

Lau: And so looking to the future for me. You’re seen as one of those who have seen the future that we’re realizing today. How would you define the financial system? How would you define transactions and processes in future? What do you see that perhaps many of us still don’t see even covering the space?

Voorhees: Language and mathematics are free and open systems that anyone in the world can use. You don’t need a license to use language. You don’t need a license to use mathematics. Anyone can send a message to any person on earth without anyone checking it, stopping it, censoring it if they want. Money should be no different from those things, it is as important to people’s lives and livelihoods as language and mathematics. And money, being borderless and open and immutable and apolitical is critical for human civilization to flourish.

So those of us who are into this space for a long time and who really care about cryptocurrency, that’s what we want to see. We want to see a financial system based on open, transparent rules that everyone in the world can access equally. I think that’s a noble goal and that’s what we’re trying to build.

Lau: Certainly, from our vantage point in Asia, we see that promise really changing the lives of people in emerging markets and helping them participate in a global economy where once upon a time they could not. That impossibility is now a possibility. It’s an exciting story to cover. You are one of the protagonists and we are following your story along with ShapeShift as it shifts, and marking the trends as you see them.

Erik, it was an absolute pleasure welcoming you to the show. Thanks so much for this conversation.

Voorhees: Yeah, it’s been great. Appreciate it.

Lau: And that was Erik Voorhees, everyone, CEO of ShapeShift that is now turning into a DAO and so much more. Well, thank you for joining us on this latest episode of Word on the Block. I’m Forkast.News Editor-in-Chief Angie Lau. Until the next time.