In the last webinar on Geek Estate Masterminds, Dave Conroy gave a presentation on blockchain, crypto, NFT and DAOs. Dave is not only a true expert on all things blockchain, he is also the Director of Emerging Technologies at NAR and a real forward-looking thinker. Proof? Here’s Dave writing about blockchain’s impact on real estate… back in 2019, before it became the hype train to derail all other hype trains.
He actually discussed an area of blockchain that most people in real estate don’t really address: DAO. DAO stands for Decentralized Autonomous Organizations, and it’s made a bit of news of late because of things like ConstitutionDAO that tried to buy a copy of the US Constitution. I’ll touch on DAOs briefly in this post, though the topic deserves in-depth examinations.
During the presentation, Dave talked about DAOs, then said that it was very new and that it wasn’t as if he was telling Katie Johnson that NAR should be run as a DAO. Well, during Q&A, I asked Dave why not, since the REALTOR Association is the perfect use case for a DAO, and we had a good chuckle.
This is where I turn the good chuckle into a real suggestion/recommendation.
Membership associations of all kinds should be a DAO. Obviously, this means that REALTOR Associations in particular should be reorganized as DAOs. If there are arguments as to why they should not be a DAO, I’d like to hear them. As I say often, I have strong opinions weakly held, so I’m happy to change my mind.
Let’s get into it.
Decentralized Autonomous Organizations, In Brief
This is not the post for in-depth investigations into DAOs, and the legal and financial issues surrounding them. Operational issues, we’ll tackle, since that’s directly relevant to my thesis.
I think this article from CoinTelegraph is a pretty good overview of what a DAO is and how it works. Right at the start:
A decentralized autonomous organization (DAO) is an entity with no central leadership. Decisions get made from the bottom-up, governed by a community organized around a specific set of rules enforced on a blockchain.
While most commentators like to say the DAO is owned by its users, which leads to a bunch of issues vis-a-vis securities law and such, I think the more important aspect of DAO is governance. CoinTelegraph:
As mentioned above, a DAO is an organization where decisions get made from the bottom-up; a collective of members owns the organization. There are various ways to participate in a DAO, usually through the ownership of a token.
DAOs operate using smart contracts, which are essentially chunks of code that automatically execute whenever a set of criteria are met. Smart contracts are deployed on numerous blockchains nowadays, though Ethereum was the first to use them.
These smart contracts establish the DAO’s rules. Those with a stake in a DAO then get voting rights and may influence how the organization operates by deciding on or creating new governance proposals.
This model prevents DAOs from being spammed with proposals: A proposal will only pass once the majority of stakeholders approve it. How that majority is determined varies from DAO to DAO and is specified in the smart contracts.
DAOs are fully autonomous and transparent. As they are built on open-source blockchains, anyone can view their code. Anyone can also audit their built-in treasuries, as the blockchain records all financial transactions.
Basically, as a member of a DAO, you would receive “governance tokens.” These tokens give you voting rights, and depending on the DAO rules (set by the DAO creators, and put into smart contracts), they also give you the right to make proposals.
The key feature of a DAO is that it has a treasury. People will describe a DAO as a “message board with a treasury” as it allows for the users to make decisions that have real financial consequences.
DAOs can hire people, buy assets, invest, and do everything that a corporation can do (again, we’re not going into cutting edge legal issues for now). So the discussions and the voting in a DAO actually matter. This isn’t just a committee meeting, who forwards on recommendations to actual decision makers. The community is the decision maker.
It is direct democracy, like ancient Athens perhaps. Technological limitations of the past made direct democracy undesirable; communicating issues and counting up votes took a lot of time and effort, and one always had to worry about fraud and abuse. Corporate proxy battles are called “battles” for a reason, with lawyers and accountants watching everything like a hawk. The blockchain and web3 technologies remove that barrier: voting is instant, can be counted real-time, and the blockchain makes voting fraud basically impossible.
Advantages and Disadvantages of DAO
The advantages of a DAO are:
- Eliminating the Principal-Agent Problem
- Community Engagement
The main advantage is that a DAO doesn’t have a small number of people making decisions for the whole. Corporations (for profit or otherwise) are governed by a Board of Directors; the DAO is governed by all users voting their tokens.
The DAO also provides unparalleled transparency. All proposals are wide open at least to the members of the community, and smart contracts are written to a blockchain and can be viewed and audited by anybody. There is no such thing as “executive session” in a DAO, nor are there secret committee meetings. All decisions are proposed in the open, debated in the open, and decided in the open.
Because of that, DAO drives user engagement. If every member can make proposals to everyone else (with sufficient tokens, staking them, etc.), and every member has voting rights via governance tokens, then participants have more “skin in the game” if you will. They feel empowered, and they feel much more connected to a DAO than they do to a faceless corporation.
The disadvantages of a DAO are:
- Slow decision making
The slow decision making is fairly obvious. The more you add people to a decision-making body, the slower the decisions will be. A sole proprietorship has one person to make decisions; a partnership requires a few people to agree. A Board of Directors gets slower and slower the larger it gets. So allowing every single person in the community to have a vote and to have a say will naturally make decisions slower.
Bikeshedding is best explained in this article from Web3 University:
The community-driven effect of DAOs can be both a blessing and a curse. While DAOs allow for more users to participate in decisions equally, it comes at the cost of what’s known as the bikeshed effect.
As the DecisionLab explains, “Bikeshedding, also known as Parkinson’s law of triviality, describes our tendency to devote a disproportionate amount of our time to menial and trivial matters while leaving important matters unattended.”
The example given is that a committee will spend very little time discussion a $10m nuclear power plant vs a $350 bike shed. This happens because most people know more about trivial things and have opinions about them. From Farnam Street:
Bike-shedding happens because the simpler a topic is, the more people will have an opinion on it and thus more to say about it. When something is outside of our circle of competence, like a nuclear power plant, we don’t even try to articulate an opinion.
But when something is just about comprehensible to us, even if we don’t have anything of genuine value to add, we feel compelled to say something, lest we look stupid. What idiot doesn’t have anything to say about a bike shed? Everyone wants to show that they know about the topic at hand and have something to contribute.
With any issue, we shouldn’t be according equal importance to every opinion anyone adds. We should emphasize the inputs from those who have done the work to have an opinion. And when we decide to contribute, we should be putting our energy into the areas where we have something valuable to add that will improve the outcome of the decision.
One of the reasons why membership organizations and associations tend to go towards a centralized “representative” model of governance is that most of the members don’t know, don’t care, and don’t have opinions about important and complex topics.
The Unique Aspects of Associations
The negatives of DAO are why few companies are organized as strict DAOs. Bikeshedding is a real problem if you’re trying to develop the latest in fintech software. Coders and developers will have vastly different opinions than some random guy walking in off the street, because they have expertise that the random guy does not. The slow speed of decision making is a problem for any company who might need to react to market conditions, or some emergency like… oh, I don’t know… the possible breakout of a land war in Europe?
But associations are different from these kinds of companies. The whole point of an association is not to build some product, sell some service, or to react to markets. The whole point of an association is to bring people together who share a common interest and face similar problems to pursue goals that they all have.
Associations are also different from other kinds of nonprofits. If your organization is trying to feed the homeless, there’s a specific goal where expertise (like logistics, nutrition, etc.) really does matter, and time may be of the essence. But an association is engaged in trying to build relationships within the community of people who have same interests and same challenges.
In other words, associations have as their primary motive the creation and maintenance of the community, while other entities often have products or services as the primary motive. Furthermore, since associations often impact the members first and foremost with their decisions and actions, there is a greater benefit to having the members themselves be directly involved in decision-making.
Example 1: The Homeowner’s Association
Think about the HOA. It is an organization of all of the homeowners in a given development. It has to make decisions that affect the homeowners directly and indirectly. It makes rules that all homeowners must follow, and spends money that is supposed to benefit all of the homeowners.
But just about every HOA is governed by a Board of Directors, which can lead to real problems. It isn’t as if we are strangers to stories of some HOA president abusing her power in all sorts of ways. I found this article from a law firm titled “Homeowner Legal Options Against HOA Abuse of Power.” Key grafs:
Homeowner Associations (“HOAs”) are intended to operate in the community’s best interest, making the community a more pleasant place to live while also maintaining property values. Unfortunately, HOAs sometimes become a source of disputes and disagreement that hinder rather than help to achieve these community goals. Disagreements are common between homeowners and HOAs regarding community issues. Common examples of such disputes include the unequal enforcement of community rules, disagreements over the interpretation of rules, and disagreements over enforcement actions against neighbors for alleged rule violations.
Homeowners often perceive that an HOA is abusing its powers for a number of reasons. Personal disputes between neighbors can sometimes boil over into HOA disputes, whereby the HOA’s resources are marshaled against disfavored residents. This can lead to a community belief that the HOA is no longer operating in the community’s best interest and changes must be made for the HOA to function properly.
If the HOA were operated as a DAO, such a thing as “abuse of power” would fade away as an issue. Every rule would be the result of all homeowners collectively, not a small Board of Directors. There would be no such thing as a HOA President who has all kinds of powers to abuse in the first place. Enforcement actions would be initiated by smart contracts that cannot be bribed, can’t be influenced, and holds no personal grudges. There can be no such thing as a “disfavored resident” unless the majority of the community as a whole has a problem with the guy having loud ass parties deep into the night.
Decisions like spending on maintenance of common areas, or investing into common resources, would be made by the homeowners as a whole voting their HOA tokens.
In the age of blockchains, I can’t think of a better way to organize a HOA than as a DAO.
Example 2: The REALTOR Association
The obvious example for us, of course, is the REALTOR Association. I went with the HOA first because it clearly lays out the benefits of DAO governance for something not so close to home for many of us.
A REALTOR Association might be the ideal use case for a DAO, since membership is (theoretically) about voluntary adherence to the Code of Ethics and the higher calling of the profession. The REALTOR Association is a trade association, made up of people who practice real estate, who share ideas and best practices with one another, come together to lobby the government for good policies, and have social events to get to know one another.
There is no reason why only a small group of individuals on the Board of Directors or some Committee or another should be engaged and involved in decision making for a voluntary trade organization. In fact, the Board model actually hurts member engagement since the average member can simply assume that she doesn’t have to pay any attention whatsoever to issues since the Board will take care of them. Which means that the typical interaction with the Board is only when the Association has made some decision that the member dislikes enough to want to complain to somebody. The member isn’t involved in the good decisions that she likes; only in the bad decisions that she hates.
That isn’t an ideal way to engage your membership.
Far better would be the DAO model
The Positives of REALTOR DAO
Like other DAOs, the REALTOR DAO would be fully decentralized.
There are no Board of Directors, no Committees, no hierarchies. The Association staff can be hired directly by a DAO, by the membership nominating people and voting on hiring. After all, the DAO has a treasury, controlled by its members. Sure, contract terms will be public to the DAO members, but hey, every applicant will know ahead of time that such transparency is the cost of working for a DAO, just like developers who work for crypto DAOs know that their employment terms are public as well.
Every issue, every course of action, will be proposed by a REALTOR member, debated by all members who care to engage, and then voted on by all members who care to vote on it.
The REALTOR DAO is fully transparent. Every proposal is made on the blockchain, and the identity of the member who proposed it is public. The debate is in public for all members to see and to participate in, if they wanted to. The identity of the members who voted for or against the proposal is public. Contracts are public, at least to the members of the DAO, and the financials of the DAO Treasury are public to members.
Member engagement will increase dramatically under a DAO structure, since members have to propose, debate, and decide on all courses of action. At a minimum, the REALTOR DAO would find out very quickly who the real members are and who are MINOs (Members In Name Only) who could give a crap about anything REALTOR-related.
Any enforcement of rules — Code of Ethics violations, for example — is done by smart contracts, to remove personal biases and possibility of corruption and abuse of power. Since no one member has any more power than another member, there can be no “abuse of power” after all. To the extent that human judgment is required — for example, for ethics hearings — there is no Committee making decisions behind closed doors. The charges are brought to the entire community, and the entire community may vote to adjudicate.
Any spending done by the REALTOR DAO is the result of proposal, debate, and decision by the membership as a whole. There literally cannot be someone complaining that the Board voted to spend ridiculous sums on some party or another. The only entity who can vote to have a party and how much to spend on it is the membership itself. Losing a vote is not the same thing as having a small group of insiders make decisions. The complaints cannot be the same as they are today.
The REALTOR DAO would be more engaged, more united, more transparent, more democratic, and more fair to all members.
The Negatives of REALTOR DAO
The negatives are slower decision making and the Bikeshed effect. I have a few thoughts.
First, slower decision making can be addressed at least somewhat by having good quorum and governance rules.
Lower quorum = faster decisions. If making a decision requires 50% of members to participate, then yeah, decisions are going to take a long time to make. If it requires 5% of the members to participate, then decisions can happen faster. The 95% who didn’t participate cannot then complain that the decision was made when they chose not to take part in it.
Governance rules like minimum token amounts to make proposals can help with reducing proposal spam. So for example, if 10% of the membership tokens are required to make a proposal, you are far less likely to get some random obsessed member constantly make proposals that the rest of the community rejects. Make that threshold 25% and now you only get proposals that at least one out of four members think are important.
Second, on the Bikeshed effect… it is true that the REALTOR DAO will have a more difficult time with complex topics than with simple ones.
Based on my experience, I think the solution is to divide the MLS and the Association and to operate only the Association as a DAO.
The reason is that the purely “REALTOR Association” topics rarely reach levels of complexity beyond the circle of competence of the average REALTOR member. Those pure Association topics typically come in three buckets: Code of Ethics, Education, and Government Affairs.
The Code of Ethics is not and should not be something outside the knowledge and competence of the average member. After all, the whole point of a REALTOR Association is to promote, teach, and enforce the Code of Ethics not only on experts and Code lawyers but on the average REALTOR member.
Education is also not beyond the knowledge and competence of average members. After all, they are the ones who will be taking the classes and learning from them. Average members either know or can evaluate who should teach a class on eminent domain or on marketing listings or on compliance with mortgage disclosure rules.
Government Affairs is the only topic where the average member might not be as informed as experts. Local zoning regulations, local ordinances, state laws, federal regulations — all of these have gotten complicated enough that most effective local REALTOR Associations have to hire professional Government Affairs Directors to help them with lobbying. However, Government Affairs is also the one area where you most want unity amongst the membership.
Suppose the local township wants to ban short-term rentals. If the REALTOR Association is going to take a stance on that issue, it should do so only if the majority of the membership supports that stance. Experts like the GAD, or other members who are really knowledgeable, can bring their views during the discussion, but it really should be the membership as a whole voting to take that stance at all. The worse outcome is for a REALTOR member to say to clients or friends, “The Association doesn’t speak for me; I had no say in the decision. The insider cabal of the Board decided to take this stance, and I’m completely opposed.” With a REALTOR DAO, that disgruntled member might still say she disagrees with the stance on short-term rentals, but she cannot say that she had no say in the decision. She had a say; she just lost.
Leave the MLS Out of It
The DAO model starts breaking down for real when it gets into areas that are more on the MLS side of the house: technology and data. That’s when the opinions of a REALTOR who doesn’t know the first damn thing about databases and copyright law do not help in making decisions about how to implement a particular tool or system.
Furthermore, there are times when the MLS actually has to make a decision quickly because of an emergency situation or another. The recent COVID pandemic and the government lockdowns in response is a case in point. MLSs had to decide quickly what to do about showings, about lockbox access, about virtual tours, etc.
The Code of Ethics, education, and Government Affairs were not affected in the same way. Time was not of the essence in Association-related matters as it was for the MLS.
Since speed and expertise are more important for the MLS, whose primary mission is not to create a community dedicated to the Code of Ethics but to offer data and technology services to real estate brokers and agents, I would advise not using DAO governance for the MLS.
The REALTOR Association, however, absolutely should be a DAO.
Power to the People
There are those who think the entire crypto/web3 movement is just all hype and no substance. I get it, because much of what we’ve seen so far from web3 technology in real estate are attempts to force fit existing models and existing paradigms into this new thing that few people understand.
If you can understand some of the first principles of web3, however, I think it is possible to see opportunities for transformation of existing models, rather than retrofitting them. Even Jesus Christ understood that you don’t put new wine into old wineskins.
One of those first principles of web3 is decentralization. It’s the whole point of web3, of blockchain technology. There’s no real reason to use web3 or blockchain if you’re not looking to decentralize that which is centralized. With real estate, most of what people want to decentralize are beyond our control: things like title records are controlled by the government, not by real estate agents. Payment systems are controlled by banks and Big Tech, not by the real estate industry.
But REALTOR Associations are most definitely controlled by real estate brokers and agents. This is one area where if the people wanted decentralization, web3 technology can make that a reality.
The key word, of course, is IF.
If the Association wants greater member engagement, if the members themselves want to have more of a say in how the Association is operated, if the REALTORS want to be a decentralized grassroots movement, then the Association will become a DAO. If the Association wants to keep all decision making in the hands of a few representatives, complain about the lack of member engagement, and constantly worry about lack of value to the membership, then it will continue as it is today: a centralized, top-down union.
I know what I would recommend. Give power to the people, and the Association itself will become far more powerful than it is today. Democracies as a whole are more powerful than autocracies, even if certain individuals in autocracies have more power.