Decentralized autonomous organizations, or DAOs as they are better known, are new-age organizational structures that run as codes on a blockchain. The owners of DAO companies are members who hold tokens that determine authority for making business decisions and economic rights in the organization.
In 2021, the participation in DAOs grew manifold. From 13000 people, the number of participants in DAO companies grew to 1.7 million worldwide. There are still several doubts, such as accountability, governance, and the broader implications of following this business model. However, their growing importance in the business world has aroused great interest in DAO companies, and millions of people are eager to explore the viability of a decentralized autonomous organization.
DAOs are collectively-managed businesses backed by blockchains. Members from across the world pool capital and code the rules for how they would like to allocate their capital. Governance is automated by code and decentralized. Automated code-based governance eliminates any possibility of tampering or rule-breaking.
DAOs have built-in treasuries, and members vote for it’s allocation. DAO treasury management is based on what the community of members wants for the company. Proposals are also voted upon in a democratic process. The concept of DAOs is theoretical as governance smart contract technology is yet to be perfected.
Why are DAOs Crucial?
Decentralized autonomous organizations are a new form of organizational structure that offers an opportunity for seamless collaboration in the digital and global space. DAOs are crucial as potential native entities for creating value in cyberspace. As more and more blockchain protocols are built to enable global collaboration, a trustless, decentralized collaboration by coding governance rules can soon be established.
As crypto wealth grows year-on-year, investors readily invest in tokens over equity. Entrepreneurs are chasing funding opportunities in the digital space by converting their businesses to DAO companies. Significant investors, too, are setting up funds as DAOs. Some good examples of DAO funds include Orange DAO, VC3DAO, and Bessemer DAO.
DAO vs. Traditional Organizations
In principle, the difference between traditional organizations and DAOs is decentralization. In a DAO environment, anyone may buy governance tokens to participate in running the company. Tokens are bought the same way as you would buy Bitcoins. Anyone who holds these tokens may vote on proposals and funding allocation. A member’s decision-making power depends on the tokens they hold.
Here’s a look at three critical factors influencing the running of a DAO company –
Organizational Structure
Starting a DAO company is similar to starting a crowdfunding campaign, a business, or a charity. The organization’s goals are diverse and unlimited. As your contribution rises, the value of your vote also rises with it. As opposed to traditional corporate structures, there are no organization levels. Any member can vote for critical business decisions and improvements. But the decision-making process in DAOs is time-taking and may cost valuable business opportunities.
Centralization
In a decentralized business model, one member alone cannot control the blockchain. The blockchain runs as per the rules set by developers. Therefore, members may gain influence but never control it. Decision-making is a democratic process based on the following three factors –
- Staking Quantity: Members may put their tokens at stake for the proposal they wish to support. Depending on the number of tokens staked in favor and those staked against a proposal – the decision is made. Once the decision is made, the tokens are returned to the members.
- Staking Length – DAOs may make rules that reserve staking spots for older members even if they hold lesser tokens. That means, if members stake for long enough, their opinion will be prioritized in the decision-making process.
- Randomness: The nature of the DAO ecosystem prevents members from gaining influence by unfair means. No member may gain organizational dominance by taking advantage of loopholes or paying money. Randomness guarantees that even if a member has strong influence – they cannot win 100% of the time.
Legal Definition
A decentralized autonomous organization is unclear about the legal definition of the risks and liabilities in the business. In cases of business uncertainty, market volatility, or fraud, a program may not be able to account for all factors in the business environment. DAOs are self-governing organizations backed by a community of members operating on smart contracts or coded rules.
Should We Care About DAOs?
As a natural economic entity of the digital era, decentralized autonomous organizations are here to stay. DAOs enable entrepreneurs to raise funds on a global platform and establish impactful businesses quickly. One of the best examples is Vietnam’s DAO company Axie Infinity. They launched a blockchain-based game that achieved multi-billion-coin capital by engaging members worldwide.
Another noteworthy DAO is Astana International Financial Center in Kazakhstan. They have a national-crypto strategy hailed as an innovation for setting up the world’s first investment DAO incorporation framework.
DAOs have yet to receive legal recognition, but some states and countries are beginning to introduce laws to bridge the gap. In 2021, Wyoming became the first state in the United States to legally recognize DAOs and granted them rights equivalent to limited liability companies. The Marshall Islands have also passed a similar law in the recent past. It is clear that DAOs are a space where technology has surged ahead of regulations, and legislative systems are trying their best to fit DAOs into an existing company registration framework.
Digital autonomous organizations may hold the key to new opportunities in digital entrepreneurship. And it would be best if technologists, regulators, and entrepreneurs collaborated to create a regulatory framework around this business model.