A decentralized autonomous organization (DAO) is a management structure that uses blockchain technology to decentralize aspects of voting throughout an organization & over its handling of transaction processing.
DAOs are a key component of Web 3.0 (Web3), a proposed architecture for the next generation of the web that relies on blockchain enabled decentralization. The initial vision for DAOs is that they could make it easier to launch decentralized organizations that protect the interests of stakeholders outside the control of any one party.
A New Way to Govern
DAOs have proven to be excellent systems to facilitate voting power. They are good at automatically facilitating shared votes based on a particular level of investment, support, or engagement.
They allow all members of an organization to have executable voting power over every matter of governance that comes before it in addition to the ability for any member to submit proposals of their own directly to a DAO for fellow members to vote on. DAOs allow everyone to have a say on everything at anytime!
This would be incredibly messy for a country such as the United States to implement & accurately track, at least with legacy technology from the Web 2.0 era. However, when using DAO technology from the Web3 era, the impossible becomes possible…
Trustless Autonomy
DAOs exist to replace the requirement of trust that’s often embedded in the process of executing business agreements. Trust is often based on personal relationships or a central authority and can often make it difficult or impossible for unknown parties to conduct business with each other.
Whether it is trusting an individual to control company finances, trusting a network not to enact malicious upgrades, or trusting a group of friends with a pool of their of collective funds, history has proven that trust can be a single point of failure for any operation. Operations such as payments, or even the enactments of salary increases, can all be automatically performed using on-chain scheduling tools or by triggering preset conditions.
DAOs seek to overcome the burden of trust in business operations by leveraging self-executing programs to perform certain business logic, decentralizing control over assets & upgrades using self-executing on-chain governance, and providing secure systems of shared ownership that can not be taken down unless a majority of its participants desire it.
Ubiquitous Access
Another revolutionary concept connected to DAOs is the ability for anyone, anywhere, at anytime, to have (the opportunity to) access to an organization — whether that be as a client, as a contributor, or as a voter.
Globalization is not just an inevitable evolution of the global economy, its a necessary process of human evolution — uniting talent & resources from around the globe to tackle humanity’s greatest problems. DAOs provide access to a sovereign economic environment. They allow anybody from anywhere to not just connect, as they can do over the internet today, but to collaborate & conduct business with each other even if these users are absolute strangers to one another.
DAOs exist on blockchain networks, which are (usually) public networks. When designed correctly, a blockchain or decentralized program running on top of it can not be stopped — they cannot be shutdown & there is always some method to access their protocols. Similar to how DeFi provides users access to unstoppable financial services & systems, DAOs provide users with access to unstoppable businesses & collaboration networks.
The Modern Shortcomings of DAOs
While there are some examples of large & successful DAOs, this is mostly in terms of the value of their treasuries & not so much the sophistication & range of their operations. DAOs are also still heavily disconnected from most legal systems around the globe, which brings confusion & concerns to DAO members.
Almost every DAO instance today is governed by a direct democracy voting system, which is open, but one that often comes with a struggle to coordinate across an organization in tandem with producing lackluster (often below 1%) participation rates.
Coordination, Accountability, & Incentives
Most DAOs suffer from a lack of leadership, an element that is all but universally accepted as a requirement for any successful operation. Without an organized structure of hierarchies, groups, and objectives, DAOs are likely to succumb to problems that have been overcome long ago through the creation of traditional business models.
DAOs, whether it be through governance or as a part of their automatically executing business logic, often lack any means to hold token holders accountable. Whether the desire is to punish a bad actor or a member who demonstrates a pattern of poor decision-making, or even to verify the completion of off-chain tasks & reward contributors, DAOs simply lack the means to ability to effectively & efficiently handle these matters which are necessary for any long-term & successful business.
The interests of most DAO members almost always derive from a desire for the value of their holdings to rise — viewing governance tokens as investments & treating the underlying project all the same (by not working for it). Additionally, for those who are interested in contributing to DAOs and interacting with them more akin to an employee of a startup or business, most DAOs lack a proper incentive structure to sustain high quality talent & encourage participation.
Unfortunately, when there are high instances of high turnout or participation, this is often correlated to a small number of individuals who hold larges amounts of tokens voting in governance. This has a tendency to underscore a misalignment of interests between a majority of members and those who hold a majority of power in a DAO, which resurfaces a problem that DAOs are originally intended to solve.
The Machiavellian Evolution of DAOs
Thankfully, DAOs are only getting started & further advancements are on the horizon. The insights from Machiavellian theories not only foresee the challenges in decentralized governance as seen in web3 but also offer strategies to manage these challenges effectively. These principles are elaborated on in the next sections of the article, but can also be explored more in the article below:
Organizing Organizations
Sub-organizations within a DAO, known as subDAOs, can be formed & tasked with specific responsibilities such as verifying member contributions, developing the network and protocol, managing the community, and fostering business development, among other roles.
Unlike traditional departments within a company, subDAOs can function with greater openness and decentralization. They can collaborate transparently with one another, mitigate the possibility of significant information gaps throughout an organization & among their members, and reduce operational costs by decreasing management needs.
Enforce Accountable Systems
Accountability can be enhanced across multiple layers of a DAO, and can include the use of subDAOs with specialized enforcement parameters. More competitive compensation can be provided to DAO contributors similar to how traditional businesses seek to recruit & incentivize employees. Clear & objective benchmarks being set for token holders to assess performance, which automatically execute rewards or penalties based on these metrics.
DAOs can feature specific conditions for governance access to potential members, including the use of semi-fungible tokens which can be administered & revoked through DAO governance by its members. Bad actors & poor performers can be voted out, either by all members of a DAO or through the governance outcomes of a subDAO specifically tasked with handling such matters. This would allow those who make beneficial decisions to separate from those who don’t, allowing a DAO to cultivate a workforce under similar conditions as traditional successful companies.
Govern & Trust Less by Using Rulesets
The concept of governance minimization emphasizes the need for protocols to decrease their dependence on decentralized governance by retaining only vital governance elements. The burdens of superfluous governance practices slow down a DAOs ability to operate at a pace comparable to a modern business.
One way to achieve this is to remove any human involvement in governance systems; however, unless controlled by an artificial general intelligence (AGI), human intervention is likely inevitable under any need to upgrade the DAO’s protocols or adapt to unforeseeable socioeconomic conditions.
Another, more dynamic, way to achieve this is by deploying custom rulesets throughout a DAO that involve setting automatically enforced permissions over its subDAOs, roles, and even individual members.
This can include limited access to certain executable functions, gated access over various funds, and will allow DAOs to operate similarly to how members within organizations are able to conduct their everyday work functions while being restricted or incapable of performing others.
Make Democracy More Liquid.
Direct democracies often struggle to effectively & efficiently coordinate in order to produce strong progress over problems. Representative democracy models improve this, and Liquid democracy can improve things even further by allowing token holders to freely delegate or reclaim their voting power to/from other members & representative bodies in the DAO.
DAOs have the capability to deploy various voting systems. They utilize different foundational elements to denote votes, including both fungible tokens (where one token equals one vote) and non-fungible tokens (with one NFT representing one vote). Moreover, DAOs have the unique ability to not just monitor the distribution of voting power among their members but also track the delegation of this power. By treating votes as versatile Web3 elements, DAOs can monitor and record them, along with their balances, on an immutable ledger that updates their status in real time.
Furthermore, voting power can be administered under certain conditions, such as proof of personhood & enabling one vote per person or proof of participation & ensure voting power is correlated with an individual’s contribution to a DAO.
The Polkadot network is the largest example of liquid democracy in action, which is applied across an open governance system. In fact, Polkadot token holders can not only delegate their votes to others, but also split their vote delegations across different governance tracks!
Holders of the $DOT token can vote themselves or delegate their votes to others, and use this system to not just govern the $9B+ Polkadot blockchain’s runtime, but also to manage its on-chain treasury of more than $2B!
Destined to be Evolutionary
To date, DAOs have been used to raise funds for decentralized projects & manage blockchain treasury funds, to govern decentralized finance (DeFi) protocols, and to facilitate upgrade proposals to blockchain networks. However, this is only the beginning!
DAOs have the potential to restructure virtually every pre-existing business model, realize a more economically aligned global economy that allows its members to share ownership over the systems that they contribute in, and bring transparency over how resources are managed & policy is set.
Businesses (from technology firms to marketing agencies), governments (such as school boards & local municipalities), institutions (like venture funds & non-profits) and even communities (from home-owner associations to NFT collections) are going to transform over the coming years.
The DAO Economy, an open & ubiquitous environment, is going to redefine what are considered common business practices, overpower the broken & unforgiving system that exists today, and transform the lives of billions for the decades that follow. With the right infrastructure in place, this inevitable future will become an unstoppable reality for all.
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