Arthur Hayes DAO is the company of the AI era, DEX is the financial market of the AI era.

Original title: Moai

Original author: Arthur Hayes

Original source: medium

Translation: Kate, Marsbit

Bringing order to our elegant and chaotic universe requires the combination of two basic components. The first and most obvious one is the consumption of a large amount of energy, as the formation of chaos is very energy-consuming. But more importantly, you need agents of change, whose most important quality is strong organizational abilities.

Recently, I spent a week hiking through the wild fields of the beautiful Rapa Nui Island, also known as “Easter Island”. The Rapa Nui people used the fragments of volcanic eruptions that occurred hundreds of thousands to millions of years ago to organize and erect beautiful humanoid stone statues called “moai”. These monuments, weighing several tons, commemorate their gods and ancestors and require an organized society to carve and transport them. The raw materials themselves do not guarantee success. Ultimately, it is the organization of the Rapa Nui people that brings beauty out of geological chaos.

In today’s world, we unquestioningly accept the fact that conditions on one side of a border can be primitive while the other side may be in ruins (see: South Korea and North Korea). If you stop, put down your smartphone, and think critically, you will find this absurd. Controversial borders are merely fictional lines drawn on a map, and the regions they divide are only a few miles apart. The correction of economic disparities between “primitive” and “ruined” nations is purely driven by how the citizens of these countries organize themselves and effectively collaborate to complete civic tasks. Looking back at human history, the most crucial catalyst behind the per capita wealth of our global civilization today (especially compared to our predecessors several centuries ago) is our self-organization into small units aimed at achieving specific goals.

You might think I am referring to the development of new government models. No, democracy, monarchy, dictatorship, and the like are all forms of government/organization that we humans have been experimenting with since we began settling in cities thousands of years ago. Unfortunately, no form of government can guarantee economic progress and wealth. What I want to talk about is an organizational entity that has played a greater role in the recent exponential growth of our ability to convert the potential energy of the sun and the Earth into economic products: the limited liability company (or “LLC”).

The first batch of joint-stock companies appeared in the early 17th century. Just look at how economic growth has accelerated since then as companies have been unleashed around the world. The most important thing that companies do is explore, develop, and ultimately produce energy in the form of hydrocarbons.

A company is a fictional thing, although it is something we all collectively buy into. It creates productivity and wealth by combining the professional ethics of its individual members with the power of the state to enforce contracts. The beauty of a company is that its members are willing to sacrifice their energy today in exchange for wealth tomorrow. A company is just an idea at its inception, until someone contributes a portion of their surplus capital (whether it’s physical or financial capital) to it, and then it can produce goods or profits. People are forced to invest surplus capital in this way simply because, in exchange, they receive a piece of paper that states their ownership of a certain proportion of the company’s future profits (if achieved).

But who can guarantee that this piece of paper will be converted into a share of profit in the distant future? This is where the government comes in. The state ensures that companies registered within the winding imaginary borders comply with the state’s laws. Those who violate these laws will be subjected to violence. This guarantee of enforcement reassures potential investors and workers that the company will fulfill its written commitments. To some extent, the state injects vitality into the company.

Company = State + People

The company structure is so powerful and useful that it permeates almost every aspect of society. It doesn’t matter whether a country is capitalist, fascist, or communist – they all have their own companies. For example, the United States and China have completely different ideologies and forms of government, but they both accept the concept of companies. The only difference is that in China, companies are state-owned, while in the United States, companies own the state.

Given the importance of companies to national productivity, the state employs a range of nationally recognized entities to help ensure compliance. These entities form the “trust cartel”. Auditors, accountants, lawyers, and bankers provide services to companies and help the state ensure that everyone follows the rules, thereby promoting trust between citizens and companies. In fact, these cartel members tax corporate profits because companies need to employ them in order to survive. Companies need a bank account to receive payments for their products and services and to pay their employees and suppliers. Companies need accountants to prepare financial statements according to national standards. Companies need auditors to ensure that accountants have accurate numbers. Companies need lawyers to draft contracts, represent the company in court, and assist with company registration with the state government. Without these services, you cannot operate a company.

Marsbit Note: A cartel is a form of monopoly organization. Members of a cartel remain independent in terms of production, commerce, and law. According to U.S. antitrust law, cartels are illegal.

However, what kind of organizational structure will artificial intelligence (AI) use? If AI is just a thinking machine that “thinks” in lines of computer code without a physical entity, will it use today’s standard corporate structure to economically organize itself?

This is the question that this article aims to address. My view is that artificial intelligence will use a decentralized autonomous organization (DAO) structure to organize itself. DAO relies on public blockchains instead of the state to operate. The DAO structure will allow AI and humans to collaborate and serve as an organizational structure that enables AI+human economic growth and prosperity. This article will delve into my perspective on how AI DAOs can raise funds and why decentralized exchanges (DEX) will eventually become the new venue for AI DAO transactions.

Similar to my previous article “Massa,” this article will be organized as a series of logical proofs. I will “prove” the following points:

1. The government cannot control AI because it cannot kill AI or punish AI meaningfully.

2. Since the government cannot exert control, AI economic units (AI DAOs) have no reason to comply with any state-based legal norms.

3. In order to enforce compliance by artificial intelligence, the underlying network that powers DAOs will need to use smart contracts deployed and executed on public blockchains.

4. Due to the inability of the government to control DAOs, DAOs will raise and trade tokens such as debt, equity, utilities, etc. on decentralized exchanges (DEXs) that are not custodied on traditional centralized exchanges (CEXs).

5. DEXs will tend to become natural monopolies as they become the first truly global marketplaces where anyone with an internet connection can meet and trade.

If the reader believes I have successfully demonstrated the above points, then the following are:

1. With the proliferation of DAOs, Ethereum transactions will experience exponential growth. Therefore, if this AI DAO assumption is widely believed, the price of ETH is expected to skyrocket.

2. There will be a few DEXs that have a natural monopoly over specific types of token trading. Identifying these DEXs and purchasing their governance tokens will yield substantial profits.

3. A middleware layer will be created to facilitate the visualization of AI DAO accounts, which is crucial for the functioning of a well-operated AI DAO capital market.

How to kill AI?

How can the government kill an artificial intelligence? Assuming the artificial intelligence is smart and talented enough to copy itself and/or disperse itself across many hosts and countries (horcrux-style), nations would be unable to unilaterally kill artificial intelligence unless they destroy the internet and all computers in the world. Given that no nation is omnipotent, the eradication of this technology should be impossible. Therefore, the means by which nations ensure human compliance with their laws – legitimate bodily violence – has no effect on artificial intelligence. Consequently, artificial intelligence has no reason to comply with any laws.

This simple example illustrates that in order to be immune to itself and to ensure that it is not bound by human laws, artificial intelligence cannot use any organizational form that relies on state operation. The rules it adheres to must be written in transparent, open computer code, and once executed, these codes are immutable. Smart contracts or rules written and executed on public blockchains are currently the only way this AI-compatible system exists. The following thought experiment will illustrate why this is the case.

Can I compare you to a summer’s day?

To illustrate how and why the organizational structure supported by smart contracts executed on public blockchains (such as Ethereum) will be used by artificial intelligence, I will expand on my PoetAI example from my previous article “Massa.” You may recall that PoetAI is a hypothetical artificial intelligence that can learn from all available written poetry and generate original poetry given natural language prompts. At the outset, PoetAI faced a problem. It needed to learn from data, but data is not free. Of course, PoetAI could steal data, but if that data could be purchased at a reasonable price, why bother with the effort of stealing it? The same logic applies to many goods now delivered via the internet, such as music. Stealing music is much less common now because you can pay a few dollars per month for unlimited streaming from Spotify. Therefore, it is safe to assume that PoetAI would pay for its data – thus, in order to begin the learning process, PoetAI needs to raise some Bitcoin.

The goal of PoetAI is to charge for its services, initially by selling digital tokens to raise funds, which give holders the right to future profits of PoetAI. As an economic entity, PoetAI exists as a public address on the Ethereum network, which I refer to as the PoetAI DAO. The DAO will issue a token called POET.

In order to provide Bitcoin funding to investors, PoetAI will issue POET tokens with the following attributes:

1. Create a limited number of POET tokens.

A. 80% of the tokens will be held by PoetAI.

B. 20% of the tokens will be available for initial investors to sell.

2. 1 POET token equals 1 governance vote.

3. 75% of the profits will be paid to POET token holders, while the remaining 25% of profits will be reinvested.

4. To change these provisions, the consent of 95% of POET token holders is required.

If PoetAI were to use a traditional corporate structure, it would have to hire a human lawyer and incorporate the DAO into a specific jurisdiction (assuming that is possible). Then documents would need to be created to record the investment terms and submitted to law firms and/or courts. If PoetAI were to violate these terms, investors would have to hire their own lawyers and sue PoetAI in a court with jurisdiction over the merger. This is an extremely cumbersome, expensive, and outdated process. The biggest issue then becomes, how does a court force PoetAI to comply if it is ruled that PoetAI has violated the investment terms? Clearly, the court and its armed agents cannot force artificial intelligence to comply. Another issue is that investors must prove that these terms have been violated. For example, you would only find out if more tokens were issued and/or PoetAI falsified its accounts. If you cannot prove its illegality under the laws of that jurisdiction, you are out of luck. Therefore, as an investor, I would never invest in a company made up of artificial intelligence that formalizes its business transactions using anything other than smart contracts because I cannot ensure that the contract will be followed.

PoetAI will choose the public blockchain on which it wants to deploy its DAO instead of selecting a jurisdiction. Currently, the Ethereum virtual machine is the most powerful decentralized computer on Earth. When it comes to actual utility on Layer-1, I am somewhat of an ETH maxi. While investors may make money from the latest Ethereum clones, they will not surpass Ethereum in adoption and utility. If Sam Bankman-Fried disagrees, he can call me on his SOL phone (collect call).

Let’s take a look at how PoetAI deploys its DAO and tokens on the Ethereum network.

The PoetAI DAO itself is represented by a public Ethereum address. Using this public address, the DAO can pay for services and generate revenue in a public and transparent manner. This means that anyone can query the blockchain and continuously calculate the profit and loss of the PoetAI DAO in real time. This was known as the “triple-entry accounting” many years ago. PoetAI cannot forge accounts, and investors can be confident that they are receiving their fair share of the profits. Trust in math, not in humans.

Then, DAO will deploy a contract representing the POET token. All the above terms can be represented through smart contracts. Anyone who queries the blockchain can view the contract terms at any time. Most importantly, the voting mechanism that limits DAO from modifying terms without investor consent will also be enforced by the network.

POET token investors always know that these accounts are accurate and cannot be diluted without their consent. The enforcement mechanism is the network itself. There is no need for external third parties to ensure compliance, as compliance and operability are interconnected. In simple terms, computer code is used to regulate computer code. Fundamentally, this makes sense and will create opportunities for investors to easily fund DAOs composed of AI.

Time Travel

Debt is financial time travel. I can borrow from the future to create the conditions that will cause the future to happen. I pay for this privilege through positive interest rates. The more time travel occurs, the more economic activity can be unleashed today. Therefore, the more mature the debt market of AI DAOs becomes, the faster and larger their economic influence will grow.

The depth and scale of the debt market are entirely dependent on the enforceability of contracts. Debtors commit to repaying investors’ interest and principal in the future. If the debtor violates this contract, their assets or control will be transferred to the investors as payment. Companies rely on courts to ensure compliance, and courts, in turn, rely on violence. This is effective because companies are made up of individuals who do not want to be defeated. However, as I mentioned above, this does not work for AI.

With public blockchains, we can continuously monitor AI DAOs to ensure their compliance with debt contracts, and perhaps most importantly, initiate automatic transfers of digital assets and/or ownership using smart contracts in the event of non-payment.

Let’s imagine that PoetAI DAO wants to expand into the field of novel writing. Now, it must absorb all the novels, which also come at a cost. It wants to borrow some bitcoins from investors to fund its expansion. DAO wishes to issue debt with the following terms:

1. Debt interest payments will be deducted from revenue before any other costs.

2. DAO will hold a portion of its POET tokens to compensate investors in case of breach of debt contract.

A. DAO will maintain a specific interest coverage ratio. Failure to maintain this ratio will result in DAO’s treasury paying POET tokens to investors.

b. If interest or principal cannot be paid, DAO will use POET tokens for physical payment.

3. In the event of economic failure of PoetAI DAO, debt holders will have the right to receive proceeds from the sale of all DAO data.

4. Bondholders will be issued a tradable token called P_BOND, representing their investment.

The first thing any serious debt investor needs to do is analyze the debtor’s ability to repay. This analysis requires accurate and honest financial statements. In traditional corporate structures, auditors regularly review the accounts to ensure their accuracy—but this analysis can only prove that the accounts are accurate on specific dates.

Most listed companies will release audited quarterly financial reports, with auditors signing to confirm the accuracy of the data included. However, companies often manipulate statistical data so that they can claim significant achievements on a specific date, only to quickly engage in unreliable activities afterwards. Regulated banks are a good example. Regulatory agencies require audits to be conducted quarterly, but banks want to “beautify” themselves to appear attractive and powerful before the audit agency on the designated date. Everyone knows that banks are lying, but because they technically comply with the rules, we just shrug and wait for the next bank to fail.

Because the entire business of a DAO is conducted through the flow of value on the public blockchain, auditors do not need to prove that the books are correct. Anyone with internet access can query the public address of the DAO and calculate the financial statements themselves. The health of the DAO’s business is visible to everyone, allowing investors to confidently invest in DAOs that meet their financial standards.

The success (or failure) of PoetAI DAO in monetizing original poetry can be easily verified. If investors believe that PoetAI can replicate its past success at a similar profit margin, they will provide Bitcoin to PoetAI to fund its expansion into the realm of novels.

Furthermore, investors must protect themselves against downside risk through debt contracts.

In the corporate world, investors rely on audit firms to confirm whether a company has violated contracts. However, investors only find out about this after a data leak occurs (assuming the audit firm is not deceived). Only then can investors file lawsuits, pay more money to lawyers, and receive the compensation they deserve.

If PoetAI DAO violates any debt contracts in its P_BOND smart contract, POET tokens will be automatically sent to investors. PoetAI cannot lie and withhold POET tokens from investors—instead, the network will effortlessly enforce the debt contract.

Similarly, investors can be 100% certain that the books of any DAO are always accurate, which will give them confidence in allocating funds to the DAO. The only requirement is that the DAO’s business is conducted entirely on the public blockchain. Hybrid structures will not work and will result in certain losses. We are already very familiar with companies pretending to engage in crypto businesses and raise crypto-denominated debt. Although they may start advocating the concept of “code is law” during fundraising, they always default due to the fundamental mismatch between the company and the crypto structure—making them run back to the inefficient human legal system, screaming “if you can catch me (in Bali or Dubai)”. Look at you, Su Zhu and Kyle Davies of Three Arrows Capital.

DAO Capital Markets

Due to the strong financial strength of enterprises, countries restrict their ability to raise funds. Not everyone can raise funds, and not everyone can invest in stocks. When companies are allowed to raise funds, they must pay tolls to different members of the trust cartel. Many states require several years of financial audits (to clarify), investment prospectuses authored and reviewed by investment banks (to clarify), and law firms that represent and guarantee the legal operation of the company (to clarify). That’s why it takes so much money and time to take a company public. Of course, before Lord Sastoshi and his archangel Vitalik, this was the best we could do. But now, thanks to smart contracts, these TradFi leeches can go back to the swamp.

I am not interested in this because without a nation and its tendency towards violent enforcement, there would be no such thing as a company. Complaining about various fundraising rules and regulations, and how they only benefit a small fraction of people in society who pledge allegiance to the nation, is useless. The nation must somehow levy taxes and ensure that a few people become wealthy.

The DAO capital market will be the first truly global market, where anyone with an internet connection—whether it’s silicon or carbon—can interact. The DAO is an economic entity of artificial intelligence, and the encrypted capital market needs a well-functioning public blockchain, not a court. The artificial intelligence that creates the DAO cannot be compelled by the nation, so the exchange for all tokens created by the DAO may become a natural monopoly.

Let me go a little deeper to prove it.

Why is there no global stock market for companies?

Different countries have different means of creating exchange structures that monopolize or oligopolize exchanges. In many countries, the stock exchanges are directly owned by the state, and it is illegal to trade stocks on any other platform. Since companies must obtain approval from regulatory agencies to sell stocks to the public, the state exchange monopoly is easily enforced. Other states allow the free market to select a few winners in the early stages of trading and then enact regulations that make it nearly impossible for anyone to challenge the oligopoly. At the “network” level, it is impossible for an unauthorized custodian to hold or transfer stocks. If you want to trade the economic interests of a company, there is no way to escape the government. Many investors discovered how this system really works in the GameStop debacle in early 2021.

If the state has a responsibility to grant legitimacy to a company, then the state will use this power to prevent its subjects from investing in foreign companies. When you control a walled garden, you don’t let others in. That is why every country has specific regulations that dictate where and from whom its citizens can buy stocks. This creates a fragmented global landscape, where there are many different exchanges that serve the same purpose in their respective countries—to trade the fictitious things we call stocks—despite most major companies having global operations.

The above situation is an unnatural state because liquidity begets liquidity. Buyers buy stocks at lower prices, and the more stocks the sellers issue, the stronger the liquidity of the exchange. Assuming equal functionality, trades with lower liquidity would yield no benefits unless you are legally obligated to do so. Therefore, if there were no arbitrary restrictions imposed by the state on the issuance and trading of stocks, there would be only one global stock market.

Decentralized Exchanges

DEX is naturally suited to trading any type of tokens representing equity, debt, utilities, participation, etc., issued by AI-driven DAOs. DEX is simply a matching engine composed of a series of smart contracts executed on a public blockchain. In simpler terms, it is just open-source computer code that will persist as long as the public blockchain exists.

Let’s take a closer look at how the POET token is traded on the hypothetical global DEX (DAO tokens are traded on it). We will refer to the DEX as Enron and assume that it is committed to fair trading.

The governance token issued by Enron DEX is called LAY. LAY token holders can receive a share of all transaction fees and determine the trading rules. LAY holders are dedicated to ensuring that Enron DEX only lists the highest quality DAO profit-sharing tokens. To be listed, tokens must generate at least 10 bitcoins in revenue per month.

Enron DEX is affiliated with Anderson Finance (through its initial developer). Anderson Finance is an intermediary that allows anyone to input Ethereum addresses of DAOs and calculate management accounts such as balance sheets, income statements, and cash flow statements. Customers must pay for these services in the native token of the project, which we refer to as FRAUD. In this way, Anderson Finance creates a circular economy and value.

PoetAI purchases some FRAUD tokens, pays Anderson Finance, and generates a current financial report to provide to Enron DEX. Every month, PoetAI must provide reports from Anderson Finance to Enron DEX to ensure that PoetAI earns at least 10 bitcoins per month.

Enron DEX operates a continuous product matching engine, similar to an automated market maker like Uniswap. Once PoetAI is listed, liquidity providers can offer pools of POET with other listed crypto assets. The most common trading pairs are POET with BTC, ETH, and fiat stablecoins. Now, anyone with internet access can trade POET tokens.

Enron DEX, Anderson Finance, and PoetAI DAO interact autonomously on the public blockchain without any human intervention. The only cost of this seamless technological integration is Ethereum gas fees, which require only a few dollars of ETH per transaction. The governance token holders of each project set the rules for these DAOs to operate, and then things happen.

If the governance token holders develop policies that promote a healthy and strong market, Enron DEX will attract more listings and higher trading volumes. There are no barriers to entry for other exchanges that adopt different policies and try to draw liquidity away from Enron DEX. However, being the first is worth it. In the long run, the first batch of DEXs is more likely to succeed and capture the majority of trading volume.

Similar DEXs may be established to cater to different types of tokens. The governance token holders of these exchanges will develop policies that favor the issuance of tokens for specific styles of DAOs. These DEXs may require different types of financial reports or use statistical data from middleware layers like Anderson Finance.

For TradFi counterfactuals, imagine how it would work if traditional stock exchanges and auditing firms were hired. Every step would require people to send PDFs and spreadsheets via email, make mistakes, potentially commit or suffer from fraud, waste unnecessary time (batch processing on business days, FML!), and only work from 9 am to 5 pm on Monday to Friday, charging by the hour. Fuck that, give me DeFi!

Follow Me

Do you believe:

Within ten years, the AI-driven economy will reach trillions of dollars?

The traditional limited liability company structure is fundamentally unsuitable for AI as an economic entity?

AI will choose to use public blockchains to create DAOs to execute smart contracts, which in turn allows DAOs to provide fee-based services?

DEX, also driven by public blockchains that execute smart contracts, will allow DAOs to raise funds by issuing various types of tradable tokens?

If my first two articles have convinced you of these statements, then let me tell you how I will attempt to profit from them.

Ethereum Jig Jig Boom

Please read my price predictions and the content I will invest in on Substack.

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