DAO is short for Decentralized Autonomous Organization. It’s an organization which is represented by rules encoded as a computer program. It’s transparent, controlled by the organization’s members and is not influenced by a central government.
How can people who don’t know or trust each other, work together towards a common objective? How do you govern such an organization in an automated way, with transparency and fairness? Read on and we’ll explain the concept, the details and why DAOs are getting so much attention.
Before DAOs – the hurdles for traditional organizations
Historically, the concept of an organization has always been centered around a strict governance structure. For example, when we think of companies like Google, Apple, or Meta, we picture a clear hierarchy of president, CEO, CTO, CMO, VPs, directors, managers and employees –the higher the position, the more power the role has. Early-stage startups and large companies have clearly defined ownership and leadership structures. Although it’s possible to own equity in a company and theoretically own part of the organization, the influence over how that organization operates is still very limited.
In the past few decades, companies have started introducing open and flat organizational structures, such as holacracy – a system of corporate governance whereby business members form autonomous and symbiotic teams to accomplish tasks and reach company goals. It allows more people in the company to express their voices and be heard. However, in the end, the responsibility of making major decisions for the entire organization usually falls on one person or a small group of people.
For centuries, determining ownership, hierarchy, and rules has created hurdles in terms of organizations’ development. But does a company necessarily need an owner? Up to now, this question has been based mainly on idealism. However, thanks to the emergence of blockchain technology, it is now possible to realize a new kind of distributed, ownerless organization on the internet – its name is DAO.
How Does a DAO Work?
A DAO is a decentralized organization run on the blockchain. Its rules are encoded as a computer program, making it transparent, under the control of shareholders and token holders, and unaffected by a central agency. It’s like a company with no CEO, no employees, no entity, no jurisdiction, and no holders, but it can still operate via a decentralized token governance process.
Governance is shared in a DAO, which allows everyone in the DAO to bring forward proposals and vote to make decisions. The governance token of the DAO’s network is used to represent the votes in the voting process, and the option that receives the highest number of votes at the end of the voting period wins. Usually, the proposals are yes/no questions, for example, should DAO ‘A’ develop product ‘X’?
The rules for a DAO are written into the network’s codes and executed automatically according to the agreements. When a specific condition occurs, the corresponding rule will be executed automatically.
By this definition, the Bitcoin network is actually a perfect example of a DAO. It is an organization operating under the request of people who care about the development of Bitcoin. No one owns it, and everyone can participate in its governance. Like all other blockchain networks and Decentralized Applications (Dapps), the larger and more distributed the network is, the more flexible, reliable and powerful the DAO is.
All procedural rules and follow-up actions of a DAO are recorded on a transparent and secure blockchain ledger. With an unalterable timestamp and a record of messages distributed to network participants, it is almost impossible to tamper with it.
The rules governing a DAO can be very complicated, and are difficult to change after they’ve taken effect. Should a change occur, new codes need to be written and the network has to reach a new consensus to allow the new change to take place.
Why are DAOs Attractive to People?
Fast, borderless decision-making
Let’s say someone in Australia wants to start a business with partners in Japan and France. The current process of setting things up is very complicated. The different geographical locations mean different jurisdictions, laws, regulations and requirements, which requires much more time and resources to get the ball rolling.
In this case, DAO provides a solution to allow everyone to work under the same conditions by following a set of standard rules which apply to all parties, regardless of their geographic locations. Essentially, one of the main reasons for the creation of the DAO is to provide an equal platform for the establishment and operation of organizations.
Traditionally, important decisions in a company are decided by a board of directors. The problem with this decision-making structure is that only a few selected issues are put on to the table and the voting results may not fully represent the majority in the organization. However, the DAO changes this by allowing everyone in the organization to vote on issues they truly care about.
For example, John may care about problem ‘A’ and problem ‘C’, but not so much about problem ‘B’. Through DAO, he can vote on the proposals with a proportion of tokens, according to the degree of his concern. The DAO will not ignore or exclude the members’ input and will ensure that all votes are counted and displayed with a level of transparency.
Inability to tamper with the rules
Within an organization, policies and rules determine what can and cannot be done. For example, employees who fail to comply with in-house rules may be punished. If an employee is late for work, he/she may be issued with a late fine. In a traditional organization, the members are obliged to pay up and have no say on the proceeding, but if the boss is late one morning, he/she may simply change the rules by making an exception.
In a DAO, we can use codes to ensure the rules apply to everyone, without exceptions. A set of established rules within the organization cannot be tampered with unless the group of voters agree to do so, ensuring fairness, efficiency and transparency of the governance.
Limitations of DAOs
Many decisions still rely on human judgement, not automation
Smart contracts have been implemented to turn numerous manual tasks into automated execution using DAOs. For example, a smart contract can determine whether user ‘A’ can send funds to user ‘B’ based on whether or not a set of criteria has been met. However, there are many decisions out there that require a lot more thought than ticking checklists.
Let’s take the allocation of project funds as an example. A DAO can use smart contracts to send funds, and the development team can use the funds to build an app. However, the smart contracts and rules cannot determine whether the app is up to quality standards or whether the funds are used reasonably. Mechanisms for minimizing such problems may include periodic assessments of the project’s progress.
Lack of Legal Recognition
Although a DAO is considered to be more efficient in operating an organization due to its borderless nature, it can also be seen as a setback. Since there are no regulations or laws overseeing the operation of DAOs in any country at present, the legal status of such organizations is ambiguous. Smart contracts seem to help protect individuals, and yet no courts have formally recognized them.
The Future of DAOs
Despite the challenges, DAOs are widely deemed disruptive to traditional business structures. When DAOs start taking on legacy corporations, equities like shares may become a thing of the past. Instead, the ownership and governance of a company can be tokenized and represented as a DAO.
Although the DAO may not be the right fit for every type of business, its decentralized and trustless features may help companies improve their operational efficiency and productivity. The steady increase of mainstream investments in DAOs clearly reflects the potential for a more widespread adoption of such organizational structures. In time, we may see a decline in new LLC’s as more new businesses emerge in the form of DAOs.
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