There is no central leadership in a decentralized autonomous organization (DAO). Community rules enforced on a blockchain so decisions made from the bottom-up.
The members of a DAO own and manage their organization collectively. Members can only access their treasuries with their approval. During a specified period, the group votes on proposals.
There are many purposes that can be served by a DAO without hierarchical management. It is possible with these organizations to form freelancer networks that pool their funds for software subscriptions, charitable organizations where members approve donations, and venture capital firms that owned by a group.
Types of DAOs
There are many different types of groups and businesses that DAO encompasses, so it’s important to understand that it is a broad term. Even though two collectives are vastly different, they are still both DAOs.
Listed below are a few well-known DAOs:
- In addition to collecting NFTs, PleasrDAO invests in other assets.
- HerStory DAO supports and collects projects created by Black women and non-binary artists.
- Women and non-binary crypto founders are supported by the Komorebi Collective DAO.
- Friends with Benefits DAO is an exclusive social club you have to join if you want to join.
- MetaCartel Venture DAO is a for-profit investment company that invests in decentralized applications in their early phases.
DAOs: How they work
In order to understand DAOs, you must first understand their underlying technology. DAOs often use blockchain technology and smart contracts, which are code collections that run on the blockchain.
Blockchains are digital ledgers that are decentralized. Blockchains are mostly known for documenting transactions of cryptocurrencies, such as bitcoin, and other digital assets, such as NFTs. However, they can also be used for a number of other purposes. A blockchain can serve as a backbone for DAOs, allowing them to keep their structure and rules.
There is typically a hierarchy in traditional organizations. The formal board of directors, executives or upper management determines the structure and has the power to make changes.
Decentralized autonomous organizations are, on the other hand, not governed by a single entity. All DAO rules and governance are codified in smart contracts on the blockchain and cannot be altered without the permission of the DAO’s members.
A DAO’s members may vote on decisions together, usually on an equal footing, rather than a select few having the majority.
PleasrDAO members, for example, collectively decided to purchase the Wu-Tang Clan album. A deed of ownership to the album then created via a NFT. PleasrDAO members own the NFT deed and, therefore, the album.
Occasionally, in larger DAOs, teams formed to tackle different aspects of the organization with leaders chosen. In this way, every nuance does not need a vote from every member.
Turley says transparency is a key aspect of DAOs. Within the DAO, every decision pitched, discussed, voted on, and documented publicly.
DAOs: why do we need them?
The internet-native nature of DAOs offers them several advantages over traditional organizations. DAOs have the advantage of requiring no trust between participants. The people behind a traditional organization require a great deal of trust – especially from investors – but with DAOs only the code needs trust.
It is easier to trust that code since it is publicly available and extensively tested before launch. All actions a DAO takes after being launched, approved by the community and are fully transparent and verifiable.
A hierarchical structure is absent in such a company. While its native token controlled by stakeholders, it can still accomplish tasks and grow. Regardless of the stakeholder group’s hierarchy, any idea put forward by any stakeholder and will consider and improve by the group as a whole. As a result of the pre-written rules in the smart contract, internal disputes often easily resolved through the voting system.
Additionally, DAOs offer investors the chance to invest in decentralized startups while sharing the risks or profits they may accrue.
Dilemma of principals and agents
Principal-agent dilemmas resolved by DAOs mainly by offering a solution. A dilemma caused by a conflict between the priorities of a person or group (the principal) and those acting on their behalf (the agent).
A CEO’s relationship with stakeholders can contribute to problems, which is a common occurrence. Agents (CEOs) may act in ways that do not align with the principals’ priorities and goals, acting instead in their own interests.
Taking excessive risks because the principal is responsible for the burden is another example of the principal-agent dilemma. An employee can, for example, use extreme leverage to chase a performance bonus, knowing the company will cover any loss.
Through community governance, DAOs solve the principal-agent dilemma. Members of a DAO not forced to join and can only join after understanding the rules that govern it. Instead of trusting any agent acting on their behalf, they should work within a group whose incentives aligned.
As a DAO, token holders’ interests aligned as they incentivized not to be malicious. As stakeholders in the network, they have a vested interest in its success. They would be acting against their own self-interests if they opposed it.
The disadvantages of DAOs
Organizations with decentralized autonomy aren’t perfect. As a relatively new technology, they have attracted much criticism due to questions regarding their legality, security, and structure.
MIT shared its thoughts on DAOs back in 2016, but the organization does not appear to have changed its stance – at least publicly. The DAO hack has also raised security concerns, since smart contract flaws difficult to fix even after they have spotted.
There is no legal framework for DAOs, and they distribut across multiple jurisdictions. Those involved with legal issues may have to deal with a variety of regional laws in a complicated legal battle.
The U.S. Securities and Exchange Commission determined, in a report issued in July 2017, that The DAO had sold securities in the form of tokens on the Ethereum blockchain without authorization, violating portions of United States securities law.
Before moving on, let me explain the difference between a DAO, an internet-native organization, and The DAO, one of the first such organizations ever created. DAO, a project launched in 2016 that ultimately failed and led to a dramatic split in the Ethereum network.