Are DAOs the Future of Company Structure?
Originally published on The Voyage newsletter on December 6, 2021.
If you’ve been paying attention to recent tech news, you’ve probably heard of a DAO. The DAO that most recently garnered all the headlines is ConsitutionDAO which was an attempt to buy a rare original copy of the Constitution of the United States of America. The organization impressively raised over $40 million, but in the end, was outbid.
This was essentially a crowdfunding campaign organized on the blockchain and through getting the word out on social media. Participants will get their money back minus the gas fees on the Ethereum network.
So what exactly is a DAO?
Let’s start with breaking down the acronym — Decentralized Autonomous Organization.
This is one of the most used and probably least understood terms in the whole blockchain space. In his article The Meaning of Decentralization, Vitalik Buterin, Founder of Ethereum, discusses decentralization in 3 types:
How many computers make up the system and how many can breakdown in a single moment without taking down the network?
How many individuals or organizations control the computers that make up the system?
If you cut the system in half, will both halves fully operate as independent units?
Blockchains are politically decentralized (no one controls them) and architecturally decentralized (no infrastructural central point of failure) but they are logically centralized (there is one commonly agreed state and the system behaves like a single computer).
This is essentially about decision making. In a DAO, the whole system is run through programmed rules and those rules are automatically applied and enforced when certain conditions are met by the software itself. Unlike traditional organizations where rules are interpreted and then applied by the appropriate authority.
In most cases, DAOs are created to allow individuals to perform tasks and receive compensation through software rules.
Imagine hiring a designer to create brand guidelines for your brand. Once the designer has completed and delivered the work, he confirms it. The person who hired the designer to do the task can either confirm its completion or disagree. Then the contract could call a third party judge to make the final decision on whether or not the work was delivered. Once they all agree, the funds would automatically be released and sent to the designer.
The blockchain has become the optimal system for this because:
- It can handle funds directly
- The software exists on a public and permissionless network so no one can change the rules
Traditional organizations have a hierarchy that’s usually designed around executives or for shareholders. A DAO does not concentrate power around those few individuals and instead power is distributed to the collective.
Until recently, automation has primarily been used to eliminate low skilled work, but DAOs show the possibility of eliminating managerial tasks such as recruiting, paying individuals for work performed and their contributions to the company’s overall mission.
In the wild, DAOs don’t all put equal emphasis on all three of these aspects of a DAO, but you can start to see the potential and why they have such a rising popularity right now. There are still many open questions about DAOs vs. traditional organizations in the process of on-going decision making. Overtime, individuals usually arise as louder voices or more trust-worthy and consolidate influence regardless of organization structure. Nonetheless, the concept is intriguing and new DAOs are launching everyday.
DAOs seem like a natural progression of the internet because they provide an even greater opportunity for people to organize around common values.
This post was created with Typeshare