DAO Governance Models: A Beginner’s Guide
When the word DAO comes up in casual conversations about blockchain, it’s often followed by “whaaat?” The reason for this is that most people are still struggling to understand what DAOs even are.
The truth is that DAOs are not exactly the same across all orgaisations. There are different kinds of DAOs with different governance models. Some DAOs have a single code execution while others have multiple layers of control. In this article, we’ll explore various types of DAOs and their governance models.
DAOs, or decentralized autonomous organisations, are organizations that run on smart contracts and don’t have any single point of failure. DAOs are different from other types of organizations because they cannot be controlled by a single individual or entity. Instead, they are completely transparent and operate autonomously based on pre-coded rules.
With the increasing popularity of blockchain technology, more and more projects are using smart contracts to build their businesses and fund them directly with tokens.
So if you’re looking to start a new project that uses blockchain to get funding, what do you need to know about DAOs? In this blog post, we’ll go over the basics of DAOs, their pros and cons in different circumstances, different governance models for DAOs, and common examples of DAOs in action today.
As of May 2018, there are over 1,200 known decentralized apps (dapps) built on top of various blockchain protocols such as Ethereum, NEO, and Cardano. Each of these dapps addresses a specific problem within existing centralized organizations or networks by introducing the principles of decentralization in some form.
If you take a step back and look at the big picture, it’s clear that we are currently experiencing a revolution in how organizations are structured and managed. This revolution is commonly referred to as “the decentralization movement”.
The common thread behind most decentralized systems is that they tend to operate using principles of decentralization; meaning that decision-making power is vested in individuals or groups rather than intermediaries or central authorities.
Why run your business using a DAO?
A DAO is an autonomous organization that has no central management or stakeholders; it runs as an automated program on a decentralized network. As a result, it has significant advantages over traditional businesses including a much lower risk of fraud and greater transparency.
If you run a traditional organization, you’re responsible for everything from the creation of the product or service to its distribution and marketing. The only way to grow the business is to hire new people — which is expensive and can be very difficult if the business is already mature.
For example, let’s say you want to build a decentralized Uber that is owned and operated by the drivers that use it. The first step is to create the product — a decentralized ride-sharing app. Next, you need to hire drivers, which is a very difficult and costly process. You also need to manage the relationship between the drivers, the riders, and the companies that provide insurance and financing. Are you ready to take on these responsibilities?
Disadvantages of DAOs
DAOs can become unstable if the network is not large and decentralized enough. The larger the network, the more decentralized it is and the more resilient it is to attacks. This also applies to DAOs, with the added nuance that a certain amount of centralization is necessary to run the organization.
If the network is too centralized, it can be taken over by a hostile takeover. This is a very real threat in the world of DAOs. There are many examples of hostile takeovers like the DAO hack, where $50 million was stolen from the DAO due to smart contract vulnerabilities.
There are also examples of unwise investments that have led to significant losses for DAO investors, like TheDAO, which led to the Ethereum fork.
What is DAO Governance?
DAO governance is the system that drives the decision-making process within decentralized autonomous organizations (DAOs). The governance model determines how the DAO source code is updated, who has the ability to update it, and how token holders can influence the decision-making process.
Any given DAO governance model has four core components: - Source of funds - How are funds for running the DAO collected? - Decision-making process - How are decisions made? - Contractual relationships - How are service providers compensated? - Token ownership - Who owns the tokens?
Examples of DAOs in action today
Stellar - A decentralized payments network that allows users to send and receive money across borders at a low cost. People Power - A political organization that is looking to transform political engagement through blockchain technology.
DAOstack - A decentralized collaboration platform aiming to help large organizations transition to more decentralized models. - Origin - A decentralized peer-to-peer network that is aiming to disrupt the sharing economy.
Types of DAOs and Governance Models
There are dozens of different types of DAOs, each with their own governance model. The four core components of the governance model are what separate the different types of DAOs. - The source of funds - How are funds for running the DAO collected? - The decision-making process - How are decisions made? - The contractual relationships - How are service providers compensated? - The token ownership - Who owns the tokens?
Mergers and Acquisitions
When two DAOs come together as partners, this is called a merger. Similarly, when a DAO is acquired by another DAO, this is called an acquisition. - In a merger, two DAOs come together to form a new DAO.
For example, if DAO A and DAO B are partners, they can merge their code into one single DAO. - In an acquisition, one DAO buys another DAO and then acquires all of its tokens.
For example, if DAO A buys out DAO B and then acquires all its tokens, the holders of DAO B can redeem their tokens for DAO A tokens.
DAOs as Co-operative Organizations
Co-operatives are organizations that are owned and managed by their members as a collective unit. They operate on a “one member, one vote” basis, and their aim is to serve the interests of their members rather than generate profit for shareholders.
Co-operatives have a long history, with the first co-operative being established in Rochdale, England in 1844. Co-operatives are particularly well suited to decentralized organizations because they can be run on any DAO governance model.
DAOs as Asset Management Companies
DAOs can be structured as asset management companies, which are organizations that invest in different assets and distribute the profits among investors. The key distinction between DAOs and asset management companies is that with an asset management company, token holders are able to redeem their tokens for ownership in the assets being managed. For example, if there is a DAO that is managing solar panels and shares of renewable energy, token holders are able to redeem their tokens to receive ownership of these assets.
DAOs as VC Funds
A Venture Capital Fund (VC fund) is an organization that invests in early-stage companies and equips them with the resources they need to grow. A key distinction between VC funds and DAOs is that VC funds are centralized organizations, whereas DAOs are decentralized organizations.
Venture Capital Funds can be structured as DAOs, where the fund is managed by a smart contract. In this scenario, token holders are able to redeem their tokens for ownership in the companies being funded.
Final words: Should you build your project as a DAO?
If your project requires decentralized governance and the trustless nature of blockchain technology, building your organization as a DAO is a great idea. However, it is important to consider the challenges of managing and operating a decentralized organization.
Successfully managing a decentralized organization requires a great deal of skill and leadership ability. In addition, it requires a significant amount of time and effort. If you’re thinking of building your organization as a DAO, we recommend starting with a pilot project first. Building your project as a DAO is a complex process, and it is essential to get it right the first time around.