Overview:
Decentralized autonomous organizations, more commonly referred to by the abbreviation DAOs, are organizations that use smart contracts maintained on block chains to govern interactions between users, group incentives and outputs, and membership conditions. DAOs represent a departure from traditional hierarchical organizations in that control and decision making need not be highly centralized, and decisions among group members are largely facilitated via governance token ownership and voting. DAOs have been created for a variety of purposes such as crowdfunding, gaming, and investment, each channeling the ethos that participation and ownership should be democratized. As of mid-March 2022, almost 5,000 DAOs with a total treasury of $9.5 billion were in operation, 86 of which held AUM of more than $1 million.
Technologies and Processes:
It is important to note that DAOs, as with other block chain innovations, are highly nascent and subject to change both conceptually and in technical structure. Despite this, at least three central DAO components are likely to remain constant no matter how the landscape shifts
Smart contracts
Every DAO is underpinned by a series of smart contracts that automatically facilitate pre-set rules and conditions of DAO membership and interaction. Smart contracts are lines of code stored on a block chain that automatically execute when certain conditions are met. In the context of a DAO, smart contracts can be used to distribute profits according to a specific formula, or transfer voting rights and governance tokens, among other possibilities. Given that the smart contract code is replicated across multiple nodes of a block chain, it benefits from being secure and immutable, increasing trust among DAO members. Moreover, its automated nature helps to expedite interactions that otherwise would traditionally rely on a third party.
Governance and funding
Once the rules of a DAO have been agreed upon by its founding members, and enshrined via smart contracts on the block chain, the rules and any updates to them are permanently transparent to all. This transparency is something that could make DAO membership appealing to new members, who would have a complete view of the risks and rewards that buying in would assume. In order to run the DAO, many organizations hold a token sale, which has the dual purpose of raising money for the organization and distributing voting rights to token holders. While some DAOs may distribute voting rights on a 1:1 basis, others may give members equal voting power above a certain threshold; it’s all in the smart contract. Once the DAO is officially launched, any changes to the organizational structure must be proposed and then voted on according to the structure laid out in the original smart contract. DAO tooling DAOs require significant software infrastructure to run effectively. The core functionality of writing smart contracts to a block chain is simple enough, but the follow-up tasks of keeping members engaged, managing treasuries, and crucially ensuring effective governance all rely on various software tools and plugins. Start-ups have arisen in this area to help connect DAO members via collaboration tools, handle dispute resolution when smart contract rigidity breaks down, and help secure and manage DAO treasuries, which can balloon into millions of dollars.
Opportunities:
In the past year alone, DAOs have emerged for a variety of use cases, some more realistic than others. BitDAO, one of the more highly capitalized projects, aims to use contributor funds to support the rapidly expanding decentralized finance (DeFi) ecosystem. On the opposite spectrum of credibility, DAOs have been formed to buy and control assets such as an unreleased movie script, the NFL franchise Denver Broncos, and even the US Constitution. What these efforts have in common is the belief that DAOs represent a fundamentally new type of ownership paradigm that can be positively disruptive to traditional types of ownership.
Democratized participation and economic rents
As with most democratizing initiatives, DAOs are appealing precisely because they enable communal governance and a shared stake in any revenue. To frame it another way, there is an increasing belief among DAO acolytes that participation in a given ecosystem should not necessitate the forfeiture of a user’s economic rights. Social media is often used as the canonical example. Perversely, to critics, the users who create economic value through posts and engagement do not share in the ability to formulate policy or share in revenue garnered from advertisements. DAOs, by contrast, would enable users to be true participants in both a governance and commercial sense.
Crowdfunding with agency
Though organizations such as GoFundMe, Patreon, and Kickstarter have already proven themselves as effective vehicles for crowdfunding, the gains from such fundraising campaigns are typically limited to a small group of creators. While this dynamic remains perfectly reasonable for many of the types of projects hosted on those sites, it is less appealing for other types of assets.
Constitution
DAO, the aforementioned attempt to purchase an original copy of the US Constitution, wanted such an important document to be at the mercy of thousands of members, not one ultra-rich individual. While the project ultimately failed, the effort sparked additional interest in DAOs. As a general premise, DAOs could be a useful structure for projects in which contributors are likely to want an additional say in how an asset is used or governed. Activist DAOs, which see groups raise money to support a social or environmental cause, could be an area to watch. Traditional crowdfunding campaigns that vest authority in a central expert figure or group should remain unaffected. A case in block chain utility Skeptics of block chain have long lamented that its degree of usefulness does not justify its myriad trade-offs. While DAOs have yet to pass this threshold, they are getting much closer. Indeed, the chief obstacle to DAO proliferation doesn’t appear to be technological but sociological. Though better tools will help, current DAOs are focused on experimenting with the right governance structure to match the group’s intentions. A successful and enduring DAO, if possible, would represent a fundamentally new organizational structure separate from what exists today—a win for block chain utility.
Risks and Considerations:
Unwieldy governance
Hierarchies, for all their problems, do have some distinct advantages. As any political scientist could confirm, highly centralized systems don’t always produce the best results for participants, but can adapt and implement new policies with great speed given that relatively few stakeholders need to consent. DAOs, by contrast, risk stalling decision making through an over-democratization of voting power. Innovative but potentially risky decisions may be foregone for the more risk-averse preferences of the majority. In fairness to DAOs, this type of governance challenge need only be as bad as is allowed with a clever set of rules. Nevertheless, no smart contract can predict every edge case, and inevitably contentious decisions will have to be made.
Lack of standardization
A DAO may very well only be as good as its rules. Given that DAOs are in an experimental phase, it is hard to say with any certainty what “template” works best and in what situations. The flexibility that smart contracts offer could just as easily work against DAOs, making it challenging to understand when to use DAOs and which policies are most effective. In other words, there are a lot of confounding variables in understanding why a DAO may be successful. As long as this dynamic remains in place, building and operating a DAO requires a significant amount of expenditure in time and money for an uncertain payoff. Only after proven models— templates—prove their viability will DAOs increase adoption.
A compromise to absolute adoption
Increasingly, the key question for organizations is not “DAO or no DAO,” but rather “how much DAO?” For most businesses, a centralized leadership structure offers many benefits, in particular, the agility to handle unforeseen challenges. Despite this, a DAO framework that still democratizes aspects of user engagement could serve to attract consumers uncomfortable with the monopolistic power that Big Tech firms increasingly hold. The challenge for entrepreneurs will be in deciding how much control to relinquish to DAO members, and how.
An idea ahead of its time?
Users will only migrate to DAOs when they offer a level of consistency, stability, and utility above and beyond what traditional organizational structures already provide. Even for those sympathetic to the democratic ethos built into the tech, issues of convenience and expense reign supreme. Moreover, adopting new forms of social organization is uncomfortable, even to the most enthusiastic. The main challenge for DAOs might not be technological, but rather in convincing already comfortable, if not marginally dissatisfied, consumers into new membership frameworks. Unsurprisingly, DAOs have mainly attracted the most fervent. With more mature infrastructure, refined organizational templates, and a little luck, DAOs could attract a whole lot more.