What Makes DAOs Special? Human Organizations in the Age of Machines.
What is a DAO?
DAOs, short for Decentralized Autonomous Organization, are often characterized as online forums with a bank account void of most hierarchy and organized democratically. Often DAOs evoke dreams and fantasies of a Cyber Punk future and are inseparable from Crypto.
While some DAOs are indeed mere online forums with a bank account or rather a wallet, other DAOs go much further. To understand why DAOs differ significantly from traditional organizations, let’s examine the abbreviation.
- Decentralized: Decentralized power is the underpinning principle of the organization. However, it also indicated that the underlying infrastructure of the DAO is hosted in a decentralized way, meaning no single person can turn the switch and put a DAO offline.
- Autonomous: The word comes from the Greek roots auto meaning “self”, and nomos meaning “law”. Autonomous can be understood as self-governing; however, this understanding alone would be incomplete. The smart contracts living on the blockchain and underpinning all DAOs are the law governing the world of Crypto. Smart contracts are self-executing and thus self-governing. This point is critical to understand: DAOs are machines living on the blockchain governed only by code.
- Organization: A organization is, of course, a group of humans that work together based on a social contract of splitting work, authority and return among themselves. In the case of the DAO, this group of humans is organized around a machine, the computer program, which is the central aim that ought to be created and maintained.
What makes the Organization behind DAOs special?
The Machine is the Center
Bitcoin is the archetype of all DAOs, a machine surrounded by a human organization. Countless people distributed worldwide are working to keep the network online, void mostly of hierarchy and yet working together towards the same goal orchestrated by the machine’s rule book.
Bitcoin is kept alive by miners and node providers without the need for central organizing power. Instead, they follow the underlying rule book, also called protocol which coordinates all of their efforts. The computers providing hash power can only change this protocol if 51% of the participating computing power in the network agrees to a change.
With the advent of other Crypto Currencies such as Ethereum and Cardano, new forms of DAOs have emerged. The ability the create decentralized applications (dApps), protocols within a protocol, made DAOs shroom everywhere. It is important to note that a dApp must not be built and maintained by a DAO. However, since good DAOs are digital infrastructures (like bitcoin), the gold standard for dApps is to become a DAO too.
The ability the create decentralized applications, protocols within a protocol, made DAOs shroom everywhere.
A new form of DAOs that has emerged is the investment DAO. In this form of DAO, retail investors come together and pool their crypto liquidity. Even though these DAOs appear more like traditional investment clubs, they have a machine in the center: the DAO treasury.
The DAO treasury is the minimum viable machine every DAO needs to be able to claim to be a DAO. The treasury of a DAO is a wallet on the blockchain. Using a wallet and the right tools, create a system where all in-flow and out-flow value is traced transparently. This transparency allows people from different backgrounds to cooperate trustless. Such investment DAOs are quickly set up using tools like ADAOs Roundtable or XDAO templates.
Calling an investment club on Solana and the Bitcoin-Network both DAOs shows how widely the concept can be applied. However, both of these organizations accepted a radical underpinning idea: The code on the blockchain is unchangeable law.
The code on the blockchain is unchangeable law.
A Machine Governed by Tokens
Usually, a dApp created by a DAO has a token. Tokens can be about everything, but they will usually be either a governance token or a utility token (or both).
- A governance token provides the right to govern a dApp/DAO through voting; this voting should transparently happen on the blockchain. In the case of the investment DAO, this can be as simple as voting on how funds are spent.
- A utility token is a token a user can exchange for a utility within a dApp.
Such tokens are sometimes confused with securities; this, however, is a strong misconception. Securities provide you the right to benefit from an operation passively. Tokens grant you the right to participate in a system actively.
Tokens grant you the right to participate in a system actively.
Tokenomics is a word that emerged to describe this new form of economy. A dApp with good tokenomics uses its tokens to incentivize users to do a specific task. Therefore, the token task should be essential for the dApp.
One example of excellent tokenomics is the Proof of Stake system of Cardano or Polkadot. In a PoS system, the token holders’ job is to decide which “Stake Pool Operator” is trustworthy and should have the right to mint blocks for the network. The job of the token holder is to protect their interest and thus the network. When evaluating a Crypto token, keep this in mind. If the job you perform with the token is not essential for the protocol, it is likely not a good token.
If the job you perform with the token is not essential for the protocol, it is likely not a good token.
DAOs in Contrast with Traditional Business
DAOs are confused as an alternative organizational form for Startups. However, a startup cannot be born as a DAO as the nature of the DAO includes a decentralized working machine. Therefore, a startup can aim to build a DAO; however, it can only become a DAO on its growth trajectory.
A startup cannot be born as a DAO as the nature of the DAO includes a decentralized working machine.
In the classic view of a business, we have shareholders owning a business and hiring managers to maintain the business. The management guides workers to create value paid for by the customer. We see four distinct groups: shareholders, management, workers, and customer.
Comparing this to Bitcoin as the archetype of all DAOs, we see that we only have two distinct groups. First are the miners, who contribute hash power to keep the bitcoin network running. Secondly, we have the users that hold bitcoin in their wallets for whatever purpose. No shareholder, central management, or subscribing customers are part of this ecosystem.
