Decentralized organizations are a newer concept, but one that is growing in popularity. The idea of a DAO is to make a company or organization as democratic as possible. This goes against traditional hierarchical structures where managers and leaders have more power. But it's not just about the power shift. It's also how it rewrites the paradigm of organizing humans, with the potential to spread beyond cutting-edge crypto communities and impact social structures from the micro to the macro level.
DAOs will entirely change the way we do business, run social groups, and potentially even run countries. They will allow us to create incentivized and decentralized systems that automatically reward contributors and distribute tasks and responsibilities to workers based on their individual strengths and needs.
DAOs are an important part of the business world because we live in a society where trust is being eroded.
According to a Cambridge University report, in the United Kingdom, three out of five people – 60.3% of the voting population – are dissatisfied with the current democratic function.
The people question the way they are governed and feel that their government does not listen to or work for them. A perfect example of this is in a recent U.S. presidential election where millions of eligible voters did not vote at all.
For the first time in history, a majority of Americans do not trust their country's democratic system. That decrease has been rapid and recent. Before the financial crisis, three-quarters of Americans were satisfied with US democracy; today, over half are dissatisfied (55%). Around 57.5 percent of people around the world are unhappy with the democratic process.
DAOs will eat the void that this trust erosion is creating.
In the last decade, technological advancements have allowed us to create decentralized systems without relying on a trusted third party. This new trustless system will revolutionize many industries and allow many small players to compete against big corporations.
A DAO, in essence, is a decentralized entity that allows a group of people-a non-profit, fund, company, and so on to operate without an overseeing authority. Such equal members may work together and self-govern with complete transparency due to the absence of a top figure of authority. They are given money, time, and code to work with so long as they can prove their worth. These structures are incredibly empowering within decentralized applications where funds collect for a common goal or project. On the Ethereum network specifically, these projects may be achieved through smart contracts that take submitted data, distribute it out to the necessary parties, and then distribute funds accordingly.
For example, a DAO can raise funds for a new blockchain project through contributions from members. The smart contract would then hold the money in escrow until some goal is met or time runs out, at which point it releases the money to the developer. Once finished, the blockchain product could be released on top of Ethereum, and a new token could be created using a smart contract.
Another use case for this structure is decentralized governance, where all members contribute ideas, some are selected by popularity or chance, and others are selected through voting.
Organizations creating metaverse land plots, Reddit-style communities, art collectives, DeFi protocols, and fashion brands are among the many that are deploying DAOs to take their communities to the next level.
Creating a DAO requires 3 key phases/elements
The code for the underlying rules must be written and embedded in a set of smart contracts before a DAO can be formed. The creation of a decentralized organization has the potential to increase collaboration and bring about radical transparency. Because future changes to the DAO'sDAO's operational procedures, governance structure, or incentive structures will have to be authorized via voting, this phase is the most crucial component in establishing a sustainable DAO.
Funding: To function, a DAO requires financing. The smart contracts for a DAO must include creating and distributing some type of internal property, such as a native token that can be spent by the DAO, used in voting mechanisms, or utilized to incentivize certain activities. Individuals or entities wanting to join the development of the DAO will need to buy in to contribute to the DAO'sDAO's operating costs and liquidity.
All decisions of the DAO are made via a consensus vote once it obtains enough funding to be deployed. Consequently, all token owners become stakeholders who can propose future policies and how funds should be spent. The interests of the DAO'sDAO's stakeholders will naturally lead them to work for the best possible result for the entire network if its token distribution.
Giving your consumers a vested interest in the operation of your business encourages them to engage and become loyal to your brand. And they're probably more likely to become brand advocates or ambassadors, bringing their friends, followers, and other people along with them.
The foundation of decentralized, trustless systems is built on the idea of cryptographic proof-of-work. This concept is the backbone of cryptocurrencies such as Bitcoin and Ethereum. The argument goes that if you can prove ownership over a certain amount of computational power, you are given authority over some part of your system or network.
Proof of work is the idea that you can prove how much computational power you own by running an algorithm. And if your system needs consensus, then it's best to distribute that power as equally as possible. This original model wasn't intended for organizational purposes but rather to decentralize trust with cryptocurrency systems.
Blockchain technology will allow DAOs to be deployed at scale, but there are still challenges to overcome. Some of these include:
• How the members interact during the early stages before reaching core consensus
• Determining voting power and critical decisions made through votes
• Allocating initial funds raised by the team that is initiating the DAO structure
Transitional DAOs as a board function
For companies with an existing formal corporate structure, moving to a DAO structure will be difficult at best, and in some cases, both illegal and impossible. There are ways to create a transition between the trad structure and a DAO - the most prominent being to set up a DAO as an external organization and provide it with voting rights as a member of the board, with the position itself being held by a DAO elected representative, who votes only according to the DAO vote.
This approach could be applied to existing political structures, too. There is room for a DAO that could be provided with voting rights in senatorial positions, or within electorates, to restore faith in individual candidates. The practicalities of that are still being discussed and researched - but the potential is there.
Digital voting and the Blockchain make it easy to manage the process of electing and removing board members. For instance, crowd-favored candidates increase their chances of being selected for a position on the board through their exposure to engagement, while unpopular candidates may have difficulties being voted in or even removed from their work should they perform poorly.
Structuring a DAO in the offline world is a developing problem.
The legalities of a DAO will differ according to geographical location; we are a long way from a fully decentralized global network. The anonymity of a DAO structure could potentially hide its members from local and international governing bodies, but the appearance of DAO-related benefits in tax and administrative documentation will show the organization's existence through its absence. The owner of the DAO from a legal perspective could lead to significant legal hurdles.
One proposition would be to create a chain of LLCs as nodes in the network, with a common interest in decentralized governance. In this structure, each LLC represents a team member or support company that is developing the DAO. The main benefit of a node-based LLC chain is the distribution of risk among the various LLCs, giving the DAO itself more sustainability and more capacity to withstand legal threats to its existence.
Many people who join decentralized organizations are more comfortable keeping their finances completely separate from any single project they're involved in. A feature of decentralized companies that aligns with most people's financial preferences is creating a DAO where one LLC in the node structure is created, with the LLC in charge of splitting ownership of that entity—and thus decision-making power—equally among all members.