You may have heard the term D.A.O. surrounding the recent Web3 boom. In this guide for business leaders and block chain enthusiasts we are going to pinpoint this buzzword.
Summary
DAO’s are a technology that automate the management of organizations. These programs can be useful tools in helping to increase efficiency, they do this by facilitating the automation of redundant and common tasks. These organizations lack a traditional business structure and instead opt to utilize a voting system amongst its members to solve issues and propose changes.
What is a DAO?
A decentralized autonomous organization – commonly referred to as a DAO – is a program acting as an organization that is able to execute various predetermined functions automatically. These functions are stored in a set of rules that are enforced on a blockchain. A blockchain is a publicly available log that records all actions and transactions. These records are difficult to change, allowing for the system to preserve records and guard against tampering. DAOs are completely open source, their code and actions are fully available to anyone curious enough. These types of organizations are decentralized, and are controlled by their members through voting, not influenced by a central authority like a CEO or private board of directors.
As the name suggests, these organizations act autonomously based on the rules embedded in their code. These rules outline how the organization runs, allowing the program to act as a basic automated manager. DAOs follow these rules to dictate the structure of the organization and work within the guidelines automating workflow. They are able to do this by using what are called smart contracts. Smart contracts accomplish tasks generally relying on an If-Then format, for example:
IF: the stock of a product drops below a specified amount
THEN: the smart contract would trigger the DAO to automatically order and pay for a new shipment of that item.
These smart contracts are essential to the autonomous nature of a DAO, allowing for an automated process the organization uses to complete essential functions. Using an automated management system drastically increases organizational efficiency by eliminating the unnecessary downtime and slow processes that plague traditional organizations. Utilizing automated processes save organizations money by eliminating redundancy. Through this automation and their inherent transparency, these organizations can ensure trust from investors. Smart contracts cannot be changed unless voted on by the members of the organization. DAOs are different from traditional companies with traditional hierarchies, with the program running the operation there are no bosses or primary decision makers. The decision making process for DAOs are democratic with any and all changes being voted on by the members of the organization. All members have the opportunity to put forward new ideas that can be voted on by the rest of the organization which if passed, are automatically put in place. DAOs are revolutionary in this aspect, creating a unique way to collectively work towards a common goal. How each individual organization handles the voting and implementation process depends on its internal rules and structure.
How do I get involved?
Token based membership DAOs are generally open, meaning that anyone can purchase tokens easily. Referred to as governance tokens, they grant you ‘membership’ in the organization and these tokens translate into your voting rights. Governance tokens could either simply allow you the right to vote in the DAO or could be structured to where one token could be one vote. This means that depending on the organization, more tokens could mean you have could mean more influence when voting. These DAO types rely on a broad user base to help influence their decisions. You can think of this like buying stock in a company gives you a Share of the company just like tokens give you a share of the DAO.
An example of this kind of DAO would be MakerDAO. Its token (MKR) can be purchased on multiple DeFi exchanges giving easy access to anyone wanting to join and influence the DAO.
Share based membership DAOs are more selective in who they allow into their organization. Aspiring member can submit an application to join these organizations. Their proposals evaluated by the current members, and it is determined if their contribution benefits the needs of the organizaiton.
Each DAO has its own unique differences and a specific protocol for joining. Although most organizations resemble these forms of membership, individual requirements vary from org to org.
DAOs being such a new technology, governments have not yet created regulations surrounding the new tech. Because these organizations are not regulated, DAOs fall under a sort of regulatory grey area. However earlier this year Wyoming became the first U.S. state to recognize DAOs. This bill allows DAOs to receive legal status as a company in Wyoming. We will surely see more of these types of regulations across the world as DAOs continue to grow in influence.
Why Should You Care
“The future of corporations could be very different as DAOs take on legacy businesses. It’s the ultimate combination of capitalism and progressivism.” -Mark Cuban
DAOs are an important leap into a future where corporate overhead and inefficiencies are a thing of the past. DAOs allow for the creation of transparent, efficient, and overhead free organizations that have the potential to outshine and outperform traditional organizations in the coming future.
Unlike traditional organizations DAOs are on a blockchain, all of their transactions and code are open to the public. The transparent platform that DAOs are built on ensures complete trust between the members. All activity: source code, transactions, as well as any changes made, are available for the public to access. This results in a completely transparent organization that gives investors peace of mind significantly reducing the overall risk of fraud and embezzlement from organizational treasuries.
The Future for DAOs
Unfortunately, not all DAOs are going to succeed just like not all businesses will end up succeeding. DAOs are only going to be as good as the service that they provide, just like more traditional business models. However if properly created and managed, DAOs can become an invaluable tool for businesses and organizations in the future.
DAO tech has the capabilities to securely organize people across the globe with a focus on specific goals. This technology has the potential to revolutionize the way we do business. Imagine major corporations in the future who utilize DAO tech to run or manage certain parts of their business structure cutting down on costs and eliminating corporate waste. These cut costs could result in a lower cost of products and a shorter & more efficient workweek for employees.
It is expected that further governmental recognition will come in the near future. This will add legitimacy to DAOs and will introduce this technology to the mainstream. With a growing user base and greater exposure, DAOs will be able to raise more capital to find their endeavors.
DAOs are certainly not the final solution to all of the world’s future business and organizational problems, however, they can be a useful tool in assisting with streamlining future operations. A growth in mainstream attention towards DAOs will place greater importance on this technology, alluding to a bright future for these types of groups.
Potential Problems
The open source nature of DAOs means that people who have less than good intentions have an easier time trying to exploit the system. However, their democratic nature and wide user base means it is likely that vulnerabilities can be patched and implemented in a safe and effective manner.
One instance where an attack occurred was with a DAO named ‘The DAO’. The DAO was a venture capital company that successfully raised over $150 million. There initially were bugs in its code that allowed for users’ wallets to be emptied. While programmers were working on a fix, hackers managed to make off with approximately $120 according to business insider. Vulnerabilities like this will continue to exist but through proper source code and frequent patches, these risks can be mitigated.
Hacks and issues with the code are not the only issue with DAOs, the practice of using governance tokens to grant voting rights is flawed and has the potential to be exploited. Some DAOs who utilize token based membership where each token represents one vote, although claiming to be democratic, some DAOs look more like an oligarchy.
DAOs that are set up in this way potentially allow for a small number of wealthy investors to control the majority of the votes. This system is easily exploitable and can easily end up with a one sided voting system. If an individual or corporation were to buy up a large amount of these tokens it would result in a system where only a handful of peoples votes actually matter. This means that to control a DAO with this membership system all that you would have to have is a lot of money. Big business and powerful investors have the potential to buy into DAOs pushing out individual investors for their own gain or to potentially eliminate competition. Ultimately ruining their decentralized and grassroots nature.
Notable DAOs
When looking into DAOs it is important to check out the many different types that are out there. These types of organizations exist in almost any category, from regulating DeFi to trying to buy the constitution. Trying to find one that both interests you, and is something that you want to be an active part in shouldn’t be too difficult. A shortlist of interesting and prominent DAOs that could get you started in your DAO journey.
BitDAO:
BitDAO is an investment DAO that started in 2016. BtiDAO is focused on investing in various DeFi projects with the goal of building a Defi economy. BitDAO is notable because it boasts an extremely impressive treasury. BitDAO self reports on its website that its treasury balance contains over $2.5 Billion worth of crypto.
PleasrDAO:
PleasrDAO is a DAO for art collectors. Members of PleasrDAO pool their funds together to buy up collectible items such as NFTs, real life pieces of artwork as well as many other collectible and rare items. Each member of PleasrDAO is a fractional owner in all of the art, NFTs, or other rare collectibles.
MakerDAO:
MakerDAO is a DAO that is focused on making a better form of currency. Marketing themselves as “the world’s first unbiased currency.” MakerDAO currently has $48 million in DAI that is backed by real world assets that the DAO controls.
CityDAO:
CityDAO is a group that has the goal of collective decentralized asset ownership and is attempting to buy land in Wyoming. CityDAO wants to revolutionize the way that cities are run, and create cities that are defined by technology.
DAOs are a relatively new technology that assist in facilitating the autonomous management of organizations on a decentralized platform. DAOs are transparent organizations that ensure trust between the investor and the organization. The implementation of these systems in traditional organizations can help to increase efficiency and reduce easily avoidable problems by automating actions using smart contracts.
These types of organizations lack a hierarchy and instead opt to utilize a democratic approach to solving issues and proposing changes. DAOs are not a perfect system to solve all of the worlds problems but implementing them into our organizations could potentially increase productivity while reducing errors.