Blockchain Lemons & SwiftDao

“There are many markets in which buyers use some market statistic to judge the quality of prospective purchases. In this case there is incentive for sellers to market poor quality merchandise, since the returns for good quality accrue mainly to the entire group whose statistic is affected rather than to the individual seller. As a result there tends to be a reduction in the average quality of goods and also in the size of the market.”

Replace “buyers” with blockchain investors and “sellers” with blockchain founders and the above quote could easily be about the current state of blockchain investment. But this quote isn’t from 2019. It’s from George Akerlof’s famous 1970 paper, “The Market For Lemons” about the used car market. A sad state when many blockchain projects are run more like used car lots than high growth powerhouses.

George Akerlof identified 5 conditions for a lemon market to form. Applied to blockchain investment, they are as follows:

  1. Information asymmetry - managers know more than investors,
  2. Incentive for managers to fake the quality of their project,
  3. No disclosure technology that investors trust,
  4. Quality of projects varies with a low average,
  5. Lack of or no regulation providing public quality assurances.

With all 5 steps in power, the ICO market crashes, fake founders run away to low cost countries to blow their cash, and the SEC steps in to regulate the mess. But do we really need the SEC, a centralized agency, to regulate the madness, or is there a better way? Akerlof believed that while centralized regulation was one answer, he also noted:
“Governmental intervention may increase the welfare of all parties. Or private institutions may arise to take advantage of the potential increases in welfare which can accrue to all parties. By nature, however, these institutions are nonatomistic, and therefore concentrations of power - with ill consequences of their own - can develop.”

Thankfully these ill consequences of power can be avoided by creating smart contracts that enforce cooperative behavior. MolochDao is one such example. An exit-driven DAO, MolochDao combines investors and managers into one role. If you disagree with the values of the other members, no problem! Just exit and get your capital back.

The SwiftDao standard takes the concept a bit further. First, just like MolochDao, you can exit at any time and have your percentage of the capital returned. But what if the Dao invests heavily in projects that aren’t directly valued in tokens? With a SwiftDao, there’s a monthly auction where members who exit can sell their tokens. The member gets whichever value is higher; their percentage of the capital, or the auction rate. The auction also easily allows the SwiftDao to raise new capital. It is a multiunit double Dutch auction modeled on the US Treasury auction – a tried and true method that gets the best rate possible for the organization while treating all purchasers fairly.

The SwiftDao standard also tackles the information asymmetry problem with standardization. All tokens are valued in Dai. All SwiftDaos have an identical legal structure. All SwiftDaos have an identical set of smart contracts. Proposals, payments, and revenues are tracked in the same way, allowing the automatic publication of standardized financial statements. These standardizations allow easy comparison between Daos, allowing members to easily determine which Daos are meeting their mission and which are falling behind.

Developing new governance technologies in the blockchain space is critical to the future success of decentralized technologies. If we are to solve the lemons problem without falling into the Akerlof’s centralization trap, new innovative solutions with appropriately backed capital will be the key to building the future.