How DAOs will reshape the future of work and organizations
DAO is an abbreviation for “Decentralized Autonomous Organization.” These crypto-native organizations are transparent communities whose core principles are hard-coded in the blockchain.
DAOs vs. Traditional Organizations
DAOs have gathered a lot of pace in crypto recently. For many blockchain enthusiasts, the explosion is only the start of a wider trend that will see global organizations exist in decentralized form in the future.
Where traditional organizations require a great deal of trust between members on different hierarchical levels, the core rules and governance for DAOs are handled by smart contracts. Similar to how DeFi protocols automate the necessary trust between financial actors in the traditional world, you don’t have to worry about a self-interested CEO or a dishonest CFO in the world of DAOs.
DAOs are Internet-native financial organizations collectively owned and managed by their own members. Instead of traditional top-down businesses, DAOs reward participation from all members in a proportion decided by the DAO’s founding code. That code can be consulted at all times by anyone on the blockchain.
In the traditional world, organizations have always required trust to function, especially when bigger sums of money are involved. DAOs don’t need trust to function as all the rules are in the open, and any changes require a majority vote. Such votes also happen on the blockchain, so no third parties or intermediaries are necessary.
DAOs power
The greatest strength of DAOs lies in their global, permissionless nature. Modern corporations are some of the most closed organizations in history. To join a company, individuals have to prove that they’ve extensively studied a certain subject, show experience in a related field, and complete several interviews with existing members.
However, there are no physical limitations to joining a DAO. There may be a conscious choice to limit participation on a geographical basis, but true to crypto’s Internet-native nature, DAOs are typically international organizations. This allows them to grow much faster than companies as they’re both more horizontal and open to access. To join a DAO can be as simple as joining a Discord server or buying a governance token.
Most DAOs have their own governance token for rewarding good behavior that favors the DAO’s growth. These tokens, often labeled as “worthless” by their creators, give their holders voting power on the future of the protocol or organization. These DAOs can be focused on many different domains, NFTs being one of the fastest-growing categories.
As very active secondary markets exist for tokens, they’re often traded like shares in a traditional company. In many cases, users can receive a token simply by interacting with a protocol. This system creates a positive feedback loop for both user and protocol.
Governance tokens align incentives for both present and future contributors to the DAO around the growth of the organization and its future prosperity. These tokens can also act as a sort of reputation system, letting those with the most skin in the game have the most important voice in its governance.
DAOs are often natural extensions of DeFi protocols as the builders’ protocols seek to decentralize governance and go from team-led to community-led, while still having built-in incentivization mechanisms in play to reward both core contributors and users of the protocol. Those systems reward participation and gradually increase the financial incentive to participate actively in the growth of DeFi protocols.
Teams distribute governance tokens to incentivize early participation. Tokens then create a financial incentive to further the growth of the protocol from helping development, to simply evangelizing the project to other DeFi users. This is also an important way to guarantee innovation and fair competition between incumbent protocols and new ones.
For example, a new exchange will always have less liquidity in its pools than, say, Uniswap. DeFi projects need deep liquidity to function effectively; for decentralized exchanges, lower liquidity leads to higher slippage and less favorable prices for users. To compete with Uniswap, a new exchange could offer governance tokens in exchange for using the protocol (SushiSwap took this approach to launch at the height of the “DeFi summer” of 2020).
In essence, the protocol proposes voting power in the future of its governance against comparatively worse prices in the present. Very often, protocols focus on incentivizing liquidity providers, as they’re the key element to providing the best prices.
The Future of DAOs
DAOs empower online communities to do much more than was ever possible before. Trust in online, sometimes anonymous, people has been a bottleneck to greater cooperation. Hard-coded rules over control of the treasury of an online community allow much better financial cooperation in a world where money is digital.
Smart contracts provide an immutable structure that allows for better transparency and control than many modern organizations. For example, charities are one of the best candidates for DAOs. One of the key issues charities face is the misappropriation of funds and inefficiencies in distributing funds. DAOs can help immensely in these areas.
The transparency guaranteed by an open blockchain allows for a level of control that’s never previously been possible with organizations. Perhaps more importantly, the control doesn’t come from an overarching supervisor. Anyone in any organization can check their boss’ salary and whether the agreed allocation of funds is respected.
Other key candidates for DAOs could be grant programs where anyone can propose to offer part of the DAO’s treasury to a team developing a specific project the DAO wants to encourage. Today, DAOs have emerged for play-to-earn model, which have a much more robust infrastructure to handle their fast-growing treasuries.
Today, token-based DAOs are an essential feature of DeFi. The most famous example is MakerDAO, the organization controlling the issuance and management of DAI, the crypto asset-backed stablecoin. Participation in the DAO is open to anyone who owns the platform’s governance token, MKR.
DAOs are already raising big money from some of the most important figures in tech, and it looks like their story is only just beginning.
One day your child and next-generation may be working for a DAO..
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