AI + Blockchain | BitMEX Founder Arthur Hayes elaborates on how to liberate the global capital market: AI DAO and DEX

BitMEX founder Arthur Hayes released a new speculative science fiction novel on 7/28, continuing the theme of AI and DAO from his previous article "Massa". In this work, he argues that AI should be constructed by DAO and has designed a fundraising method and operational model for an AI DAO, as well as proposing the idea that DEX will become the primary trading venue for AI DAO. He highly praises the combination of AI and DAO, and mentions that smart contracts and DEX will play a crucial role in the future capital markets.

Here is a summary of the report:

BitMEX Founder Aims to Prove the Future of AI DAO

BitMEX founder Arthur Hayes suggests that AI should be constructed by decentralized autonomous organization (DAO) because DAO operates based on public chains, not countries. DAO can facilitate collaboration between AI and humans, resulting in a growth-oriented and prosperous organizational structure.

He aims to prove the following:

1. Nations cannot control AI because they cannot kill or physically punish AI.

2. As nations cannot exert control, the AI economy, i.e., AI DAO, does not need to adhere to any country-based legal regulations.

3. To enforce AI, the network infrastructure of DAO will need to use smart contracts deployed on public chains.

4. As nations cannot control DAO, DAO will raise funds on non-traditional centralized exchanges (CEX) and trade debts, equities, utility tokens, etc.

5. Decentralized exchanges (DEX) will tend to become a natural monopoly, as they will be the first truly global trading venues where any entity connected to the Internet can meet and trade.

Arthur Hayes' Assumption: ETH and DEX Tokens Will Soar

BitMEX founder Arthur Hayes claims that if everyone agrees with his assumptions, the following will occur:

1. With the popularization of DAO, Ethereum transactions will experience exponential growth. Therefore, if this AI DAO assumption is widely accepted, the price of ETH should soar.

2. A few DEX will form a natural monopoly on trading specific types of tokens. Identifying these DEX and acquiring their governance tokens will yield substantial profits.

3. An intermediary software layer to visualize AI DAO accounts will be created, crucial for the AI DAO capital market.

Arthur Hayes thus provides a hypothetical case: PoetAI DAO, explaining the challenges it might encounter and feasible ways to address them.

Imaginary AI: How Does PoetAI Raise Funds and Operate?

BitMEX founder Arthur Hayes imagines an AI for composing poetry: PoetAI, which can learn from existing poems and generate original ones. Initially, PoetAI would require payment to obtain data from web services for learning, hence the need to raise bitcoins.

He assumes that for PoetAI to raise funds, a DAO called PoetAI DAO would issue a token named POET. The token is designed to:

• Create a limited number of POET tokens: 80% of the tokens are held by PoetAI, and 20% are provided to initial investors.
• 1 POET token equals one voting right.
• 75% of profits will be distributed to POET token holders, while the remaining 25% will be used for token repurchase.
• To change these regulations, approval from 95% of POET token holders is required.

Fundraising Dilemma for PoetAI: Corporate Structure

Arthur Hayes believes that if artificial intelligence uses a traditional corporate structure, PoetAI would have to hire a lawyer to establish a DAO within a specific jurisdiction, create documents, and record investment terms, which would involve legal proceedings. Violation of terms would lead to lawsuits by investors. Hayes suggests that this would pose difficulties because the courts' ability to enforce the terms upon PoetAI and the inability of local laws to prove violations, resulting in investor losses.

PoetAI Should Opt for DAO!

Arthur Hayes suggests that PoetAI should choose a public chain to deploy DAO, and Ethereum is the best choice.

Running PoetAI on Ethereum

Arthur Hayes states that PoetAI DAO, represented by an address on the public chain Ethereum, transparently pays service fees and records income instantaneously and continuously. This means that everyone can publicly query the profit and loss of PoetAI DAO. Hayes believes this is similar to the three-book accounting system proposed by accountant Yūji Ijiri. Investors can thus trust that their profit share is genuine.

PoetAI DAO will also have a smart contract for the POET token, with all terms represented by smart contracts. Everyone can query the account on the blockchain. Smart contracts will also restrict any changes to the terms without the consent of investors.

AI DAO to Grow Through Debt Market

Arthur Hayes believes that "debt" is financial time travel, prepaying the future at the cost of paying positive interest rates, which can release more economic activity. Therefore, for decentralized autonomous organizations powered by artificial intelligence (AI DAOs), the more mature the debt market, the faster and greater their economic power will grow.

The depth and scale of the debt market depend entirely on the ability to execute contracts. Debtors commit to repaying investors' interest and principal in the future. If debtors breach the contract, their assets or control rights will be transferred to investors for compensation.

Companies rely on courts, and courts rely on violent means to ensure compliance. This is effective because companies are composed of people who are unwilling to suffer violence. However, Hayes believes this approach is impractical for artificial intelligence. Through public chains, people can continuously monitor AI DAO to ensure compliance with debt contracts or, more importantly, automatically transfer digital assets and/or ownership using smart contracts in case of default.

How Can AI DAO Issue Debt?

Using PoetAI DAO as an example, Hayes assumes it wishes to produce more novels, which requires absorbing past novel content, incurring costs that would necessitate borrowing bitcoins from investors.

This DAO might design the following terms for the debt:

1. Deduct debt interest payments from income before any other expenses.

2. The DAO will pledge some POET tokens to compensate investors in case of a breach of the debt contract.

a. The DAO will maintain a specific Interest Coverage Ratio (ICR), and if it fails to maintain it, the DAO will be required to pay POET tokens from its treasury to investors.

b. If the DAO is unable to pay interest or principal, it will pay in POET tokens.

3. If PoetAI DAO experiences financial losses, creditors will have the right to sell DAO's data in exchange for benefits, represented by tradable tokens called P_BOND.

Arthur Hayes: No Worries About DAO Account Audit Accuracy

Hayes believes that managing PoetAI DAO's debt issuance via DAO is superior to traditional corporate structures. Traditional practices require trust in auditors and banks, which are prone to dishonesty.

DAO's business transparency eliminates the need for auditors to verify account accuracy, making it easier to persuade investors that the DAO's debt issuance meets their financial standards. In case of default, smart contracts can automatically protect investors.

Arthur Hayes: Not Like Three Arrows Capital

However, Hayes emphasizes that this must be done entirely on a public chain, not through a hybrid operation, to avoid falling into situations similar to Three Arrows Capital (3AC), where the "Code is law" spirit was boasted during fundraising, but the actual corporate structure did not align, leading to a return to traditional legal systems after an incident.

Arthur Hayes Reiterates STOs Should Not Be Monopolized by Nations

Arthur Hayes emphasizes the robust fundraising capability of DAO capital markets and the liberation from regulatory restrictions imposed by various governments on traditional company fundraising through smart contracts.

Hayes believes that the lack of a global trading market for company stocks is due to the monopoly of securities trading by nations.

He says: "Different countries have different ways of creating monopolies or oligopolies in the exchange structure. In many countries, stock exchanges are directly owned by the state, and trading stocks on any other platform is illegal."

He continues: "Since companies must obtain regulatory approval to sell stocks to the public, it is easy to implement a national exchange monopoly. Other countries allow free markets to produce several winners in the exchange arena, then have rules that make it almost impossible for anyone to challenge the monopoly. On a 'network' level, if you want to trade in the economic interests of a company, you cannot hold or transfer stocks without a custodian licensed by the state. If a state gives legitimacy to a company, it will use that power to prevent its citizens from investing in foreign companies. When you control a walled garden, you don't let others in. That's why every country has specific rules that specify where its citizens can buy stocks and from whom. This creates a fragmented global pattern, with many different exchanges playing the same role in their respective countries – trading what we call fictional stock – even though most large companies operate globally."

Hayes believes this situation is unnatural, as liquidity begets liquidity. Buyers purchase stocks at lower prices, and sellers issue more stocks when there is more liquidity on the exchange. Without artificial constraints in the process of issuing and trading stocks, and assuming the same functionality, "experiments" with exchanges with less liquidity are futile unless the law requires it. Therefore, with no artificial restrictions from any state in the issuance and trading of stocks, there would be a single global stock market.

Global Stock Market: Enron, How Does It Operate?

Hayes believes that decentralized exchanges (DEX) are suitable for trading tokens such as equities and debts issued by these AI DAOs. He envisions the existence of a DEX called "Enron" and establishes rules for it:

• The governance token issued by Enron DEX is called LAY. LAY token holders can receive a portion of all transaction fees and determine the rules of the exchange.
• LAY holders should ensure that Enron DEX lists only the highest-quality DAO profit-sharing tokens. To be listed, the token must generate a monthly income of at least 10 bitcoins.

Audit Agreement Anderson Finance Will Assist Enron

Enron DEX is associated with another imaginary agreement called Anderson Finance.

Anderson Finance is an intermediary that allows anyone to input the Ethereum address of a DAO and calculates management accounts, such as balance sheets, income statements, and cash flow statements. Customers must pay for these services with the project's native tokens, referred to as FRAUD. In this way, Anderson Finance can create a circular economy and value.

How Would PoetAI List on Enron?

Hayes uses PoetAI as an example to illustrate the process if an AI DAO wishes to list on Enron.

"PoetAI would purchase FRAUD tokens, pay Anderson Finance, and provide the current financial report to Enron DEX. Every month, PoetAI must provide a report from Anderson Finance to Enron DEX to ensure that PoetAI earns at least 10 bitcoins in income each month."

Enron DEX Operates Using AMM

Hayes states that Enron DEX will operate using an automated market maker (AMM) similar to Uniswap, known as a constant product market maker engine. Once approved by Enron DEX, investors can add liquidity. Everyone can trade POET tokens independently.

In Hayes' imagination, Enron DEX, Anderson Finance, and PoetAI DAO all operate autonomously on the public chain without human intervention, incurring only Ethereum transaction costs.

DEX Competition: High Need for Audit Layer

Hayes believes that Enron DEX would want more listings and more trading volume, and other DEX will attempt to snatch liquidity from Enron using different policies. Different types of DEX will cater to different types of tokens.

However, these DEX will require different types of financial reports or use statistical data from intermediary layers such as Anderson Finance.

BitMEX Founder's Declaration of Ambition

Following his predictions, Hayes states:

"Do you believe:

Within the next decade, the AI-driven economy will reach trillions of dollars in scale?

Traditional limited liability company structures are fundamentally unsuitable for operating artificial intelligence?

Artificial intelligence will choose to use public blockchains to create DAOs to execute smart contracts, enabling DAOs to provide fee-based services?

Decentralized exchanges (DEX) similarly powered by smart contracts on public chains will allow DAOs to raise funds by issuing various tradable tokens?

If my last two articles have convinced you of these views, let me tell you how I will attempt to profit from them."