GETTYI have always thought that one of the most important innovations of the human race was the creation of a company incorporated by shares. And now, due to an important innovation emerging from decentralized finance and blockchain technologies in the form of distributed autonomous organizations (DAOs), the structure and fundamental premise of a company are looking to become significantly altered. I believe DAOs have the potential to reinvent how we think about companies.
The roots of the incorporated company go back almost a millennium. After this, the next, major iteration on the concept of an incorporated business was the addition of limited liability. First occurring in the 1500s, limited liability was more generally enacted by law in various countries by the mid-1800s. This is more or less the form most entrepreneurs use today.
In my last article I wrote about crypto and blockchain adoption risks. DAOs are a phenomenon that first appeared in 2016 as a part of this decentralized movement.
In a limited liability company, there is a structured division of tasks. The shareholders appoint a board of directors and then a CEO undertakes the day-to-day administration of the affairs of the business. Certain decision powers are afforded to the board and some to the CEO in a cascade of responsibility and authority. There is no rule to say this is the only way to run a business—and many alternatives exist—but by trial and error over the centuries, it has become the popular and effective way for a company to be governed.
It is not perfect. A company can be hijacked for a singular, awful purpose, or it can result in those in power acting with malicious intent. But the LLC, organized by shares, is currently in my opinion, probably the best method we have.
The DAO Governance Model
Enter the DAO, which is one of the first attempts I’ve seen for building a flat, decentralized governance structure encoded in a software program. The original DAO was supposed to be an owner-lead, token holder-directed venture fund first launched with an ethereum-based crowdfunding campaign. It was an open-source code project, published on GitHub and primarily written by Christoph Jentzsch, a German with a background in mathematics and theoretical physics, and his brother Simon Jentzsch.
At its peak, the Jentzsch’s DAO raised about $150 million. However, the DAO was immediately hacked, and on June 17, 2017, approximately $50 million worth of tokens were stolen. This was not a great start to the future structure of organizing modern businesses, but it did generate wider interest in the concept.
So, what is a DAO exactly? It is an entity led by a community, which facilitates the management of common resources. It is autonomous and transparent. This means that all software and governance rules are published so that all members or potential members can explore what mechanisms are encoded to manage the DAO. So-called smart contracts are coded on a blockchain in order to rule what happens. Community members can create proposals about future functions or rules, and they are typically voted on by members in proportion to the number of tokens each community holder owns. This is not unlike a shareholder vote in a limited liability company.
A DAO is, in essence, a collaboration that performs the function of a company, but it is managed and appears very differently from an ordinary LLC. Since 2016, many types of DAOs have emerged, and their governance model is evolving rapidly.
So, what are DAOs used for? Collective investment activity with cryptocurrencies, shared ownership of digital assets (such as art NFTs and in-game items), layer 2 protocol applications (code that runs on Ethereum, for instance), organizing grants and much more.
Much of the development of how DAOs function has focused on how to govern and incentivize token holders to participate and contribute. Those challenges have been hotly debated and experimented with, but the utopian dream of full, broad decentralization, where every member is equal and contributes and participates in an altruistic manner, seems to have given way to a more pragmatic approach, which I think is better suited to our nature as human beings.
DAOs In Business
So in what ways could DAOs become mainstream? Shared, or fractionalized, ownership of assets is a good example. Individuals with a shared interest in say, a prime piece of Paris real estate, could raise financing to buy a commercial building. Each token holder would be receiving distributions of the income according to rules encoded on the chain, and each token holder could freely, in a matter of seconds, sell their holding should they so choose. No cumbersome legal documentation, no stamp duties. Just an opportunity to participate in a real estate market otherwise inaccessible to normal consumers.
For established companies, DAOs could be an effective way to set up subsidiaries, organize transfer pricing and much more. Your imagination is the only limitation to the uptake of DAOs. As the rules are encoded on the chain, it is typically a very efficient way to operationalize business processes between participants.
I believe many observers are underestimating the importance of the DAO structure, which is super-efficient and transparent, even if the motivation and activity among participants need to be examined. As with a normal company, it is a question of how resources are managed, allocated and distributed.
The DAO invention, materially done by coders and engineers, has divided the world into the DAO fundamentalists and the DAO pragmatists. The first group touts the DAO as the tool to overturn the rule of nation-states and sovereign governments and the second works on making our everyday services and functions more transparent and efficient. I think transparency and efficiency seem like a good place to start, even if human nature and behaviors remain.
