DAOs: The Future of Human Organization?
Decentralized Autonomous Organizations, or DAOs, are the primary type of blockchain-based organizational structure and have been hyped by some as the future of companies. However, they remain niche and have yet to be adopted outside of the blockchain industry. Let’s look at what DAOs are, why they are essential, and if they can still be the future of human organization.
A DAO can be considered a legal structure comprised of members who all act in the best interest of their organization. This is similar to a company, however there is no central authority like a board, and members share responsibility for decision-making. DAOs use smart contracts and blockchain technology to create a more trustless system, wherein specific parameters could be automatically executed after a vote, treasuries are held in multi-signature wallets and publicly visible, and voting can be secure and digital.
The concept of the DAO has been around for several years, and the first instance of a DAO, aptly named ‘The DAO,’ was created on Ethereum in 2016. Its purpose was to be a decentralized venture capital firm or hedge fund where The DAO’s members could vote to fund projects in exchange for tokens or equity. While a sound idea, The DAO unfortunately fell victim to a technical exploit that drained the treasury. Since then, protocols like MakerDAO, Uniswap, Aave, and Tron have adopted the DAO model for their governance system and have had much greater success. DAO token holders are naturally incentivized to vote in the best interest of the protocol, as it will increase the token’s value.
DAOs appear to be a fantastic tool for organizations due to their transparency, decentralization, and trustlessness. However, in practice, some issues arise with this governance model. First, though democracy seems like a great idea, there are issues with voter apathy and lack of knowledge. The benefit of a traditional corporate structure is the specialization and expertise of its leaders, who can create and lead a company in a specific direction. Additionally, many DAOs only have a small fraction of token holders actively voting on decisions and struggle to create an incentive to govern the platform.
Even though DAOs are not the perfect solution to humanity’s organizational problems, they have several significant use cases that increase structural efficiency. For example, decentralized applications and protocols can use a DAO structure to sustain their decentralization while providing a structure to improve and govern their platforms. In addition, since DAOs are based on a blockchain and not associated with a specific country, they benefit from neutrality and the concept of being purely internet-native. Any sort of platform designed for sustainability and longevity can benefit from a DAO. As Ethereum founder Vitalik Buterin has noted, entities like the Ethereum Name Service, which provides users with the ability to get a readable Ethereum address like Bitpush.eth, are best governed by a DAO due to their desire to be credibly neutral and resistant to rapid change. Furthermore, DAOs provide a way for smaller groups to organize without going through an official legal structure like an LLC, which can be lengthy and expensive. A DAO with a treasury can provide all the same benefits as an LLC without requiring trust or legal protections, which significantly lowers the barrier to entry of pursuing a startup idea.
Over time, the concept of a DAO will evolve, and new definitions, smart contracts, and ideas will provide even more options for DAOs to adapt and expand to our needs. Even though DAOs may never replace the traditional corporation, their simplicity, flexibility, and security provide many applications and individuals with the tools they need to create an organization that suits their purposes. In a future article, we’ll look at different types of DAOs and DAO structures and determine which ones are best for different use cases.
By Lincoln Murr