Are DAOs the future of enterprise?
The word “dao” has roots in Chinese philosophy and was defined in Latzu’s Dao De Jing to mean “the path or the way”. I always think of that before I think of “decentralized autonomous organization”, which the acronym “DAO” has come to represent. Whether the philosophical symbolism is intentional or not, DAOs and the broader crypto movement share much in common with Daoism. Both stand for resistance to control, encourage individual freedom, and flow above oppressive governance in a way that could destabilize the world order. With that, a DAO exemplifies a new technological structure that has the potential to disrupt the fundamental framework of the enterprise.
Put simply, a DAO is “a new way of building enterprises that are democratically governed by a community of users”, explains John Naughton in “Are blockchain-based DAOs really a utopian revolution in the making?”. A DAO is built on a blockchain and comprises smart contracts that its users enter into in order to take part in its governance. Without blockchain and smart contract technology, a DAO could not exist. A blockchain is a ledger that records transactions and tracks assets. A smart contract, much like a regular contract, is an agreement between two or more people that x will happen when y is carried out. Code in a smart contract allows this function to be carried out automatically rather than manually, making it a trustless mechanism.
Let’s break down the term “decentralized autonomous organization”. “Decentralized’’ refers to anything that isn’t governed or run by a central authority: one person is not allowed to execute decisions. Decentralization comes with huge benefits, such as helping a company make better choices and providing workers with more autonomy and authority. It’s embraced by crypto and web3 communities because of its collaborative and global networking potential.
The autonomous element can be interpreted politically or technologically. It’s the idea that the organization runs by itself without human governance. It parallels Daoism, which proposes that “the best government is one that barely exists” explains Eliza Gkritsi in “Did Laozi Dream of Blockchain?”. Code is central to the organization rather than a group of powerful individuals. A set of rules are coded into the smart contract and everyone trusts in the software to execute the outcome once conditions are met. While humans can interact with the contract, they cannot change it. Indeed, the DAO doesn’t start autonomously; it will be built by a team of developers. The aim is that over time it becomes autonomous and even if the whole founding team leaves the organization, the DAO still runs autonomously with interaction from its members.
DAOs were initially referred to as DACs (decentralized autonomous corporations) by the Ethereum community, whose founder Vitalik Buterin developed the original DAO, The DAO, in 2016. The shift was made when the Ethereum community discerned that not all decentralized and autonomous entities were corporations and that the more generalized term “organization” would be more suitable.
Membership of a DAO is comparable to purchasing a share in a company. The major difference is that corporate shareholders are driven by profit; you only purchase a share because you expect to make a return on it. The pursuit of profit has led to issues including inequality, global warming, and low quality of life. On the other hand, a DAO puts societal, environmental, and health issues above profit through egalitarian decision-making. DAO membership allows its members to suggest what the company does next. This is put to a vote and, if the majority agrees, these updates and changes are implemented.
A DAO and a typical corporation differ in structure. In corporations, executives can hold a disproportionate amount of power and execute decisions from a place of self-interest or profit-making over the good of the public. This is the principal-agent dilemma: “when the agent takes excessive risk because the principal bears the burden”, explains CoinTelegraph in “What is a decentralized autonomous organization?”. Take plastic production, for example, the profit from producing plastic goods is prioritized over the preservation of the environment. Sugary drink producers and obesity are another example: corporate greed takes precedence over public health.
How can the DAO principle be applied to real life? It can be used for creating new products or services, general voting activity, and crowdfunding. In 2021, ConstitutionDAO assembled a group that raised over $47 million in Ether (ETH) in a few days to buy an original copy of the United States Constitution at auction. Following the auction, contributors were offered their funds back or could accept governance tokens. Another example could be a music festival. Everyone who buys a ticket becomes a member of the DAO which will then hold a vote to decide who will play at the particular festival. A charity could set up a DAO where its contributors vote on how the funds are used. Essentially, anyone could set up a DAO with the help of a development team.
Hasn’t this sort of thing been done before? Indeed charities and music festivals have allowed votes to be cast to determine the direction of their activities. The major difference is that trust is required for these things to take place: you must have faith that the corporation is being honest. The DAO is trustless: users vote by signing a contract and software executes the outcome. The utopian beauty of the DAO is that it counters the “trust problem” we have with people, corporations and governments. Allowing code to execute decisions, DAOs deliver honesty.
A practical use of a DAO is to build something. A group with a socially-conscious goal can come together to achieve its vision. Shourov Bhattacharya’s “The Tao of the DAO” describes the DAO’s potential as a “network effect that brings in the right people and resources at the right time”. It’s driven by people passionate about building and kept organized by code. Much like the philosophical dao, it’s something that flows but isn’t forced. When people are permitted to work together autonomously, great things can unfold in a novel way. A DAO changes “how it feels to be an entrepreneur”, says Bhattacharya. The web3 movement, entrenched in decentralization and open source code, isn’t one person building something from the ground up but a collective of entrepreneurs fixing and building on the current systems.
DAOs aren’t without flaws. A counter-argument is that financial decisions should be left to venture capitalists — those who are educated and well-informed about business — rather than members of the DAO “who will be asked to make investment decisions based on far less information than VCs get. Many won’t be full-time or experienced investors,” advised the MIT Technology Review. What’s more, in some DAOs — though not all — the more tokens you hold, the more weight your vote will have. With some members more equal than others, the DAO’s egalitarian ethos somewhat falls apart.
DAOs do not have to be non-hierarchical. Members can elect groups of individuals to run parts of the organization. Tasks will be executed by smaller teams who are aligned with the organization’s values and missions. Essentially, DAOs can operate via “coordination across different levels of coherence and trust,” explains gnosis guild in “A Prehistory of DAOs”. “Effective DAOs start behaving much more like networks of teams,” they continue, which allows participants to collectively come together and build.
Bugs and hacks pose a threat to the DAO. This is precisely what happened to the first conceptualization of the DAO, Ethereum’s The DAO, in 2016. It raised $150 million in Ether (ETH); 14% of all ETH in circulation at the time, according to CoinTelegraph. Shortly after, a hack led to $60 million of ETH being siphoned from The DAO’s wallet. Despite the project being a failure, it pioneered the way for DAOs. TechCrunch described The DAO as “a paradigm shift in the very idea of economic organization. … It offers complete transparency, total shareholder control, unprecedented flexibility, and autonomous governance.”
For me, it’s clear that DAOs will push some enterprises to thrive and will be more successful in some industries over others. Web3, the latest iteration of the internet, is certainly an innovative ground that can embrace and experiment with the concept of DAO. Its aim to unite people in working towards a common goal while remaining in each participant’s best interest is a powerful one. There are many major obstacles for companies to overcome to achieve decentralized autonomy but the benefits could be worth the challenge. Will DAOs lead to a complete restructuring of enterprise as we know it? Let’s see.
Recommended further reading:
“A Prehistory of DAOs”, gnosis guild.
“The Tao of “The DAO” or: How the autonomous corporation is already here”, TechCrunch.
“The “Autonomous Corporation” Called the DAO Is Not a Good Way to Spend $130 Million”, MIT Technology Review.
Article by Lauren Mae.
