What is a DAO?
If you aren’t yet familiar with the concept, DAOs are self-managed organizations that are defined by a transparent set of rules encoded as a computer program. The unique aspect of a DAO is that they reduce the need for managers or traditional hierarchies, as the rules are embedded into the code, allowing the organization to function independently from the organization’s members.
They can therefore make organizational decisions collectively and autonomously through a process of decentralized governance, different from traditional centralized organizations where executives and large shareholders can often hold a disproportionate degree of control.
The potential benefits of DAOs
Because of their unique structure, DAOs offer the promise of enabling a focus on community, rather than just profit, and might offer a more socially-conscious structure; one designed to help individuals everywhere prosper instead of focusing only on the desires of a few large shareholders. This could have ramifications not only for businesses, but also in terms of how we address the causes that are important to us today as a society.
While DAOs are not without their own challenges, they have the potential to improve upon a style of corporate organization that hasn’t meaningfully changed in hundreds of years. In fact, most US corporations today are structured in essentially the same way as they were in the 1600s: companies accept investor funds in exchange for the responsibility of maximizing shareholder value as their primary (and sometimes only) mission.
It is this profit-minded directive that has been the fuel of capitalism – both the good and the bad. The good has led to significant improvements in business efficiency, while the bad has frequently manifested itself in the pursuit of profits above all else; even at the cost of employee benefits and quality of life, increases in income inequality, and damage to our environment.
The shortcomings of this shareholder-first focus have led, in part, to the emergence of alternative structures, such as B Corporations, that attempt to take into account more than just the most powerful shareholders. But despite such efforts, we are still moving too slowly on behalf of important issues that corporations could be doing more to solve, such as a planet that is still warming, and the many workers are without health care and a livable wage.
Why DAOs could be the answer
When blockchain technologies and cryptocurrencies were being developed, their creators focused on the potential benefits of transparency and decentralized cooperation. Those aspects were critical to ensuring that a certain level of independence and neutrality was maintained, and that the interests of the whole group were prioritized, rather than just those of a small group of powerful interests. The format also helped prevent manipulation and allowed for actions to be taken in real time, rather than at the slower pace of traditional business.
But if you can run a global financial platform through a collective, why not an organization? The prospect is both interesting and innovative; and much like blockchain and decentralized systems, the notion of a decentralized independent organization can help us re-think how we organize ourselves to better enable impactful results.
In closing, an example. We have watched, benefitted from, and even participated in shared economy platforms since 1995 with eBay, and more recently ride-sharing and hosting with Uber, Lyft and Airbnb. These services activate individuals to sell, drive and host, but these relationships with the buyers, riders and guests are mediated: centralized through a platform host that is only somewhat responsible (see section 230 of Title 47 of the United States Code) yet happy to extract substantial profits for the benefit of connecting this two-sided market. And worse, even manipulating an opaque platform to maximize profits for shareholders who are different from the sellers, buyers, drivers, riders, hosts and guests who make the connected commerce experience happen.
It is possible to have a rich, connected experience without a central operator: enabling markets to set pricing and quality, and enabling the participants whose labour and choices support the experience to profit directly. This is one benefit of a DAO.
The hurdles DAOs face
While DAOs show incredible promise and present a real opportunity to move businesses into a better future, we are still far from DAO nirvana. Although many important structural decisions can be placed in a DAO’s code, and token-holders in a DAO may have certain voting and participation rights, the DAO structure will still need to take into account the important connections to real world activity that haven’t been completely addressed yet. And even though we can leverage technology to operationalize many interactions, our actual lives don’t take place solely in the metaverse. We are still very much in the physical world.
So DAOs will have to establish some method of dealing with a number of real-world questions and liabilities. If a DAO is alleged to have caused injury (whether through a code vulnerability or a malicious actor), participants will need to have some way of legally pursuing remedies for those injuries. If the DAO purchases a physical good (like a copy of the Constitution), that physical good will need a custodian, insurance and a tax accountant. A DAO in code doesn’t avail the online organization of real-world protections and benefits. The very aspect of its structure that makes a DAO nimble and autonomous also creates challenges that will need to be addressed in order for DAOs to realize their full power in affecting the real world. Because even with coded processes and protections, the unexpected can always happen.
DAOs are, in many ways, uncharted territory. And realizing their potential benefits in the real world will require overcoming some significant hurdles. But the motivation to organize companies differently exists, and the potential benefits are undeniable. By considering these new structures now rather than simply taking a wait-and-see attitude, we will start making our businesses reflect the full range of desires of the people involved, rather than just making money for a select group.
With so many pressing societal needs that need to be addressed sooner rather than later, now is the time to start heeding the call to organize differently. If we embrace this innovation and put the legal structures in place that will make it viable, we can use this game-changing technology to evolve an arcane system that isn’t serving everyone’s needs into a new system that can.