Dermot O'Riordan
September 15, 2022

Investment Thesis for Colony Network

Eight Minutes
In 2014, Jeremy Heimans and Henry Timms published a piece in Harvard Business Review called Understanding “New Power". Heimans and Timms explained how society - empowered by the internet - was moving away from an era of passive consumption to a new generation of more active participation.
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Heimans and Timms framed this impending change in terms of “New Power” versus “Old Power values:

“New power models are enabled by peer coordination and the agency of the crowd—without participation, they are just empty vessels. Old power is enabled by what people or organizations own, know, or control that nobody else does—once old power models lose that, they lose their advantage.” Understanding “New Power"

This idea of “New Power” taps into people’s growing capacity - and desire - to participate and achieve greater agency in their personal and professional lives. 

Fast forward to 2022, and the ideals of Web3 appear to epitomise this idea of “New Power”.

However, new models of governance and power will always have limited influence and impact unless they are operating within a system designed to play to their strengths. 

DAOs: organisations native to New Power and Web3 values

“...Those capable of channeling the power of the crowd must turn their energies to something more fundamental: redesigning society’s systems and structures to meaningfully include and empower more people...” Understanding “New Power"

What are DAOs? 

...legacy corporations tend to rely on information and resource competition to drive innovation and efficiency... Therefore, these corporations tend to follow siloed structures to maintain their competitive advantage while DAOs work at scale because of their natural open networked structure. Collaboration is the true advantage.” Amy Jung, “Working Session #3 - DAO Governance Best Practices

Decentralised Autonomous Organisations, aka “DAOs”, use a blockchain as a single-source-of-truth and smart contracts to program transparent rulesets to put a shared governance structure around a common resource, whether that be a Web3 infra protocol like Pocket Network, a DeFi platform like Yearn Finance, a digital collective like 1Hive, a pool of investment capital like Metacartel Ventures, or even a digital-first members club like Friends with Benefits

DAOs are an example of a networked firm: an organisational structure with an automated centre (standardised protocol) and human edges

Traditional organisations - or “firms” - are hindered from giving power to too many people due to their structure. The bigger the organisation gets, the more “management” they need. Consequently, it is theorised that there are decreasing returns to scale of employing more managers "due to the inefficiencies of centralized control", meaning that there are limits on the traditional boundary of a firm.

The opportunity for DAOs lies with the ability to leverage a blockchain as a neutral, independent monitoring and enforcement mechanism that can recognise the contribution and power of much larger groups of stakeholders without exponentially increasing coordination costs. This is really the core raison d’etre of DAOs. In the words of Tal Shachar, “the mission of DAOs is to have everyone who can be helpful be a part of the collective…

Why does governance matter? 

The governance system that yields the most utility for the largest number of users with the least overhead will ultimately manage the largest communities with the most valuable data.” Brad Burnham, Union Square Ventures

It’s only really since the start of DeFi summer that the Web3 ecosystem moved from concept to adoption. It was largely experimentation, theory, promise, and lots of speculation until then. 

Now, we have real users. And smart contracts managing 100s of billions of dollars of capital. 

[However] “not all [smart] contracts can be smart because the humans who write them are dumb... Human coordination institutions - firms, governments, and now blockchains - inherently contain contracts which are implicit (unspoken agreements) and incomplete (agreements with unforeseen outcomes) (Prysm Economics, 2018) because it is impossible for humans to predict and account for every contingency. The existence of such contracts means institutions will always need to adapt, contracts will always need to be rewritten. Governance defines the procedures by which this evolution takes place.Jack Laing, The Lean Governance Thesis

Who decides the parameters for smart contracts? And how will they evolve? When decisions like this need to be made by humans rather than smart contracts, we need governance systems that consider all stakeholder needs to ensure the legitimacy of the system in question.  This is why we need collective decision making that can scale.

Governance can be defined as the processes that control change within a given system. And the purpose of good governance is to create legitimacy in change through social acceptance and confidence in the processes that caused it. 

We, along with a growing number of builders, investors and thinkers, believe that transparent and decentralised good governance over shared resources is Web3’s “killer app”. As per Will Wilkinson, “a technological/economic/institutional architecture that can coordinate economic activity in a way that makes the firm superfluous, deconcentrates ownership and control over vital networks, and broadly distributes economic surplus to network participants according to transparent, fair and relatively fixed rules, is the killer app.” 

Colony: “making it easy for people all over the world to build organizations together, online”

Colony's long-term vision is of “trustless organisations; organisations in which members can safely collaborate and manage shared resources, without needing to know or trust each other.” 

Further, Colony seeks to “catalyse a 'Cambrian explosion' of previously impossible organisational forms.”

Why Colony is better than existing DAO frameworks

1. Complexity arises from simple building blocks 

"...Thanks to its thoughtful and flexible design, ShapeShift was able to configure Colony in a way that aligned with our intended structure better than any other available toolset." Willy Ogorzaly, Head of Decentralization @ Shapeshift Foundation

As per Gall’s law, “a complex system that works is invariably found to have evolved from a simple system that worked.” The simple structure of Colony’s system revolves around domains and the permissions that accounts may have in them. These two concepts jointly define the structure and security of a “colony” and provide a flexible framework to run any Web3 organisation effectively. 

Colony Business Lightpaper

Colony seeks to focus on the areas of the “DAO stack” - such as governance and reputation - where it can add the most value, leaving other platforms like Notion and Discord to focus on what they do best. 

Colony’s focus on simplicity enables new DAOs to be set up in only 90 seconds. Try it and see for yourself.

2. Decision making based on reputation, not wealth

Token-weighted voting has long been criticised for bribery, mental overload, narrow representation, plutocracy, voter apathy, amongst other issues. Yet weighting decision-making power based on the number of tokens each member holds and asking every member of a DAO to vote on every decision is still the status quo. 

Colony enables more efficient decision making through its reputation system, which incorporates measures of a DAO member’s contribution in terms of their work, how much that work was worth, and what their peers thought of it. Snapshot partnered with Colony to integrate its reputation system in order “to make DAO decision-making more equitable and transparent”. 

3. Perpetual rewards for participation

“stock-market investors have become, collectively, an extraordinarily unproductive force in business… In a system rewarding hard work, it makes no sense that shareholders be rewarded regardless of their productivity…” Marjorie Kelly, “The Incredibly Unproductive Shareholder” 

Colony’s reputation system includes a decay function, meaning that the reputation of each DAO member is never static. It either increases or decreases depending on their productivity. In other words, DAO members get rewarded or penalised for their participation or inactivity. 

This mechanism essentially incentivises early contributors to continue contributing. You may have provided a lot of capital and/or labour early on in a project’s life, but unless you continue demonstrating your value to the DAO, why should your decision-making power remain the same? Further, new contributors don’t have to feel like they’ve arrived too late to the party and that their voice will just never matter as much as OGs. All valuable participation increases reputation and decision-making power in the DAO. This incentive comes without causing existing token holders to be unnecessarily diluted and at no cost to the DAO’s treasury.

Reputation decay is an incredibly efficient and powerful new incentive mechanism in the DAO tooling arsenal. 

4. Hierarchy over anarchy

“...For everyone to have the opportunity to be involved in a given group and to participate in its activities the structure must be explicit, not implicit. The rules of decision-making must be open and available to everyone, and this can happen only if they are formalized…” Jo Freeman, The Tyranny of Structurelessness

Sushi has had many problems to deal with. Still, a lack of a formal hierarchy led to its own “tyranny of structurelessness”, with many different actors leveraging the absence of a formal structure to fight for power behind the scenes.

Notwithstanding the many examples of bad governance in crypto circles, hierarchy tends to have a bad name. Extremely flat - borderline anarchy - is often seen as a goal in itself. However, hierarchy is not something invented by elites to control the plebs. It’s inherent in biology and the world around us. Hierarchy does not have to mean suits and ties. And no brown shoes. Hierarchy is useful mainly as it can provide context. 

Colony’s system uses “domains”, a hierarchical system in which people work towards similar goals. Using domains means that the reputation earned by contributors has more context, meaning that a DAO can understand who is most relevant to opine on a decision without having to formally create a structure chart or appoint an official role for every contributor. This means that if someone questions a spending decision relating to a piece of smart contract monitoring software, this decision can be raised as a potential dispute to the “development” team, for example, instead of involving the whole DAO in the process. 

5. Lazy consensus versus low participation

“Lazy consensus” is a mechanism in Colony that enables payments and other proposals to proceed as long as no one objects. Other projects have since used this concept and renamed it “optimistic governance”. 

Lazy consensus is a very effective mechanism, given it enables fast and effective decision-making without sacrificing transparency or decentralised control. It also allows trust to quickly build in a community as contributors can start making decisions without fear of a lengthy approval process. And in the cases where a proposal is questioned, only the relevant people in that domain are required to arbitrate the decision. 

6. DAO-owned infrastructure FTW

Colony Network is governed by the “Metacolony”, its own DAO. If your mission is “making it easy for people all over the world to build organizations together, online”, then it’s best if you can practice what you preach and eat your own dog food. This type of structure also directly enables users, partners, and any other interested party to contribute to the growth and development of Colony Network and get rewarded with part ownership of the network for doing so. 

DAO-owned DAO infrastructure just seems right.

7. Missionaries over mercenaries

Focusing on when you first got into crypto is thankfully passé at this stage. Instead, we all want to build an inclusive new open internet not dominated by insiders. 

However, sometimes being an OG is worth shouting about. For example, Jack du Rose, the founder of Colony Network, has been talking about the importance of DAOs since 2014 and first presented his ideas for Colony at Devcon1 in London in 2015. 

And he’s still here. It just took time for the rest of the world to catch up to him. Founders don’t get much more mission-driven than Jack.

How does Colony work? 

Shapeshift launched its DAO in the summer of 2021 and uses Colony Network to manage the ’Workstreams’ and ‘Individual Contributors/Squads’ sections of the chart below.

Shapeshift Organizational Structure

As Shapeshift is still in its progressive decentralisation phase, Shapeshift also leverages other DAO tools such as SnapShot for voting by all token holders - relevant while reputation builds up in the community of contributors - and Gnosis Safe as the treasury for the ShapeShift DAO and the admin - providing control via a multisig - of ShapeShift’s colony. 

In terms of how the key elements of Colony’s DAO platform work in practice: 

  • You start with a Colony, equivalent to any organisation - decentralised or centralised, just like the Shapeshift DAO.
  • The Colony then sets its domains, groups of people working towards similar goals. For example, domains can represent teams, departments, projects, etc. Examples of Domains for Shapeshift include ‘Progressive Decentralization’, ‘Marketing & Growth’, ‘Product’ and ‘Development’, and so on.
  • Smart contracts or human administrators holding the relevant Permissions trigger decisions, such as providing funding to set up new sub-domains consisting of individuals and/or squads, managing ‘tasks’ for such contributors, and allocating budget. 
  • And contributors earn Reputation for their work. Reputation is used to weigh a user’s influence in decisions related to the expertise they have demonstrated and to determine amounts owed to a colony’s members when rewards are disbursed.
  • Colony’s robust motions and disputes procedures enable new DAOs to “move at the speed of trust”, with the necessary failsafes in place should something go awry.

What’s the future for Colony? 

CLNY, the Metacolony’s protocol token, coordinates and incentivises the various stakeholders within the Colony ecosystem. CLNY holders have two primary roles: 1) to participate in Colony’s off-chain reputation mining process, and 2) management of the Colony Network itself, such as deploying new colonies, setting the parameters around any network fees, approving new versions of Colony Network contracts, and so on. 

As Colony grows to support more and more DAOs, the role of CLNY tokenholders to calculate reputation across every colony supported by the network, govern the growth and maintenance of the network and manage its treasury will become more and more critical. Given that the primary business model for Colony Network is to take a small fee on all payments from colonies within the network, we believe that CLNY has a unique potential to capture the upside from all types of DAOs. From protocol DAOs to service DAOs, social DAOs, creator DAOs, unique forms of investment DAOs, and others that we haven’t yet seen. 

We expect every best-in-class DAO tool - like Coordinape and Superfluid - to integrate directly with Colony over time. In this sense, Colony is an open source operating system for decentralised organisations, which can be easily extended using third-party applications and tools. This is very similar to how an app store works for personal computing devices. 

With this frame in mind, whether or not the launch of Colony’s protocol token in 2022 will be remembered as Web3’s iPhone moment, a digitally native, more open and collaborative world awaits. A world - when imbued with the right culture and values - that has the possibility to enable whole new types of organisations that were simply never possible before. 

New Power is spreading across the globe. And Colony Network is helping to conduct its energy.

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Disclosure: Eden Block is an investor in Colony Network

Nothing contained herein constitutes investment, legal, tax or other advice nor is to be relied upon in making an investment or other decision. This presentation contains the opinions of the author, and such opinions are subject to change without notice. Furthermore, it may also include data and opinions derived from third party sources. Eden Block does not accept liability for the accuracy or completeness of any such information or opinions which can be subject to change without notice.