What are Decentralized Autonomous Organizations (DAOs)

DAOs are self-managed organizations where voluntary participants own, operate, and govern a shared corporate treasury. DAOs are distinct from traditional corporations in that they essentially eliminate the need for managers or traditional business hierarchies since the rules are stored in the blockchain. This allows the organization to operate as a fully decentralized entity. Most projects begin when a DAO issues a token utilized for governance and utility reasons beyond whatever venture the DAO is attempting to establish. As the token community expands, projects introduce on-chain governance, allowing token holders to propose and vote on operational tasks required for the firm to function.

DAOs Could Define the Future of Corporate Governance 

DOAs aim to eliminate the shortcomings of shareholder-first focused centralization corporations of today. For instance, no one can modify a DAO’s rules due to its public and transparent nature.

DAOs are more democratic as members can make organizational choices collaboratively and independently through a decentralized governance process as opposed to typical centralized companies. In these structures, CEOs and wealthy shareholders can wield a disproportionate amount of power. Services carried out in a DAO are handled automatically by triggering smart contracts and removing human error from organizational governance.

While centralized corporations have functioned extremely well, they are built on governance structures that date back to the 1600s. These companies have focused on maximizing shareholder value at the expense of employee benefits and quality of life. Other factors like sustainability and increased income inequality have also drawn more focus publicly in recent years. DAOs aim to address the shortcomings of the shareholder-first focused centralization of corporations today. Just as blockchain technology and cryptocurrency look to upend the traditional financial system by prioritizing the interests of a collective instead of a few, DAOs aim to do this for companies.

Could DAOs Replace Corporations? 

The dot-com boom that started over two decades ago has created significant internet marketplaces that have a shared-economy model where users can participate both as buyers and sellers. Companies such as Amazon, Uber, and Airbnb have popularized the model. While these corporations have created a platform for individuals looking to sell, drive and host, they have mediated the relationships with the buyers, riders, and guests through a centralized system. At the same time, they are willing to only be partially responsible for any concerns from both parties, despite extracting profits for connecting the two-sided market. DAOs aim to replicate the rich & connected experiences seen today without needing a central gatekeeper, thereby enabling market participants to freely set pricing and quality while allowing workers to choose and profit directly from their work. 

DAOs have the potential to improve and address several challenges that have commonly plagued traditional organizations, including benefits for both investors and workers. For instance, since the barrier to participation is low, DAOs are far more accessible to the average investor. This is in contrast to today’s model, where only well-networked and wealthy individuals can participate and reap most of the financial gains. Thus, DAOs aim to make companies globally accessible and available with a lower barrier to entry. Another critical innovation introduced by DAOs is the flexible structure, which allows for improved compensation to members working on the project. For instance, some DAOs have offered share-based memberships, which would enable prospective members to submit a proposal to join the DAO in exchange for work, which improves the current system of stock-based compensations that vest over time. 

Bottom Line 

DAOs envision a collective entity owned and governed by its members and aim to improve over the centralized organizations that have preceded them. These types of organizations continue to rise in popularity due to the alignment of interests with workers, customers, and investors, compared to the companies of today, which aim to maximize value for a few. In many ways, DAOs remain in uncharted territory, with their potential benefits yet to be fully realized by the business community.

Innovations currently taking place in the DAO space are centered around systems of governance, role definitions, and expanded legal compliance. Since DAOs tend to be mostly borderless there are limited methods to do some simple tasks such as: how to invoice a DAO, how to handle international and/or crypto income, and more. These problems have mostly been handled currently by 3rd party companies that provide compliant payroll and employee management systems.

DAOs are interesting in that they could end up being extremely important for the future of crypto, or a passing organizational fad. Although there are good arguments for both sides of this argument, it is unclear if DAOs will be able to innovate within the current, international regulatory landscape.

Frequently Asked Questions

What does DAO mean?

Decentralized Autonomous Organization

How does a DAO work?

Although a DAO can have few, or many members; the most popular DAOs tend to have a multi-sig system with an example being five of ten members might need to sign a transaction to make a major decision or send tokens to another wallet. Treasuries are almost always multi-sig systems in DAOs.

How to create a DAO?

There are many DAO frameworks, and management dApps; some current popular methods are Aragon.org for Ethereum blockchain, or Realms, and Squads for Solana.

How to join a DAO?

Every DAO has different membership rules, and processes. The best way is probably to just reach out to your chosen DAO’s social media accounts.