Did you know that there are companies that don’t have managers, bosses or CEOs? And they’re thriving. These companies ae known as Decentralised Autonomous Organizations (DAOs). DAOs run on smart contracts on the blockchain and are set up to run themselves – with no need for management. This may sound like some science fiction utopia, but DAOs are a genuine phenomenon currently gaining traction. In this blog post, we explore what DAOs are, how they work and their future implications for the way we work.
New digital collaborative operating models (also known as DAOs) are emerging. These decentralised, autonomous organisations are built on blockchain technology and operate without traditional hierarchies. They are set up to be trustless, removing the need for intermediaries and centralised control. These new collaborative organisations have arisen in response to the challenges of the digital age.
The “gig economy” means freelancers and contractors now outnumber permanent employees in the U.S., while increased teleworking, remote working, and virtual teams mean that distance no longer impacts work performance.
As a result, we are seeing a rise in more dynamic working relationships. Working with remote partners or team members no longer feels like an anomaly but normal day-to-day operations, which has strengthened the demand for new ways of organising businesses that don’t rely on existing structures.
Today, more than ever before, individuals and organisations are aware of the consequences of operating within centralised systems. In blockchain alone, over 2,000 decentralised applications are being developed by forward-thinking developers who understand the risks associated with centralisation and how DAOs could change the way we work.
A DAO is a decentralised autonomous organisation – or an organisation that runs autonomously (self-operating) and in a decentralised manner (no single entity has control). Typically, we think of an organisation as having a hierarchy: An organisation is controlled by one individual or group of individuals, who are answerable to other individuals or groups of individuals etc.
A DAO is instead made up of many different autonomous agents, which all have separate roles but operate as part of a whole once combined; there is no overarching controlling authority.
Today, more than ever before, individuals and organisations are aware of the consequences of operating within centralised systems. We see how centralised structures give specific individuals or groups unchecked power that can be used to manipulate outcomes in their favour. This new awareness has led to a resurgence in decentralised thinking.
In blockchain alone, over 2,000 decentralised applications are being developed by forward-thinking developers who understand the risks associated with centralisation and how DAOs could change the way we work.
A DAO is instead made up of many different autonomous agents, which all have separate roles but operate as part of the whole once combined; there is no overarching controlling authority.
What is a DAO?
A DAO is a decentralised autonomous organisation. It is an organisation that doesn’t have a central management structure. Instead, it is run by a set of rules written onto a blockchain. These rules are implemented in the form of a smart contract. You can think of a DAO as a company entirely controlled by algorithms, replacing a centralised management structure.
A DAO is often composed of multiple people working together to attain a goal. These people are paid for their work in a cryptocurrency token, which is usually related to the stated goal of the DAO. People can also invest in a DAO by buying tokens.
How Does a DAO Work?
Most DAOs are set up as a profit-sharing business model, whereby token holders earn shares based on their contributions towards the stated goal of the DAO. Token holders can also earn shares based on the profits made by the DAO by buying and holding the tokens.
The DAO itself is set up as a smart contract on the blockchain. Token holders can vote on changes or additions to the original agreement, although most of these votes are required to make changes to the system.
The DAO takes a percentage of the profits made by the business and distributes this profit to token holders. Token holders can also vote to decide how to reinvest the money made by the DAO. As this is all automated, the DAO requires no management structure.
Why are DAOs Becoming Popular?
DAOs make sense in the decentralised world that we live in today. It’s estimated that around 60% of the world’s GDP will be controlled by countries with some form of decentralised economy by 2030.
While companies that run on a decentralised structure have existed since the early 90s, they’ve never really taken off. This is likely because the technology wasn’t available to make them a feasible option.
With the advent of blockchain technology, decentralised companies have become a much more realistic option. Blockchain technology has made decentralised systems a reality by providing a trustless system where no one party controls the system.
This trustless system means centralised intermediaries, such as banks or governments, are not required for the companies that run on it. This makes decentralised systems much more scalable for businesses compared to the early days of the internet, where centralised companies were the only option.
Benefits of DAOs
With no central management structure, DAOs are less likely to fail as a result of the actions of one person. This is especially true when it comes to malicious actors, who would require the majority of the company to collude with them to cause damage.
In a traditional company, even if the harmful actions of one person are detected, the whole company can be affected.
In a DAO, the rest of the token holders can vote to kick the harmful actor out of the system. Removing a central management structure is likely to increase transparency as no one group holds all the power to decide what is reported.
This new transparency can also be used to help the DAO to scale as it can be used to enable token holders to make decisions. For example, transparency may show that the business is growing too quickly, and a cap should be introduced to prevent the system from crashing.
Potential Problems With DAOs
The most apparent problem with DAOs is the lack of central management. This means that if something goes wrong, there’s no one to fix it. This is especially problematic in sectors like healthcare and aviation, where safety is critical.
DAOs also face a challenge because most people are uneducated about blockchain technology and its workings. Businesses that run on a blockchain may face a lack of understanding from the general public, making it harder to scale.
Downsides of working in a DAO
You have to be computer savvy: If you have poor computer skills or are not comfortable with technology, working in a DAO is probably not a great fit. You must be comfortable using different blockchain applications and understand how to write smart contracts.
You have to be ready to take risks: A DAO's success is dependent on the success of the business it operates in. If you work in a DAO and an industry-specific event negatively affects the company, you may not be paid.
You’re at the mercy of the token value: If token sales fund your DAO, you’re at the whim of the token value and how quickly the investors sell their tokens. If you are an early token holder with a low token price, you’ll earn less per month.
The Way Forward
It’s still unclear whether DAOs will become mainstream or if they will be a niche product used by a select group of people. However, they represent a shift in how people view work and how they are compensated for their work.
With no central management structure and the payments tied to the business's success, DAOs shift away from the traditional model of a company hiring someone to do a job and paying them a salary.
The challenge facing DAOs is that many people are still unfamiliar with blockchain technology. DAOs are currently being run on centralised platforms such as the Ethereum network. As blockchain technology becomes more decentralised, we may see more DAOs take off.
The implications of DAOs for the workplace
If successful, DAOs change the way people are hired and paid for the work that they do. The decentralised structure of a DAO makes it almost impossible to fire someone as there is no central management structure to decide such a thing.
This means that the work and pay a person earns are tied to the business's success. This could mean that someone who contributes to the company but has a skill that is not connected to the success of the company will earn less.
If a person is not successful in their work, they may earn nothing. This shift in how people are compensated for their work could significantly impact freelancers, contractors and other people who don’t work full time for a single company. These people could choose to contribute to DAOs as a way to earn a living while keeping their freedom to choose what work they do.
Let’s take a look at some examples:
Dividend Paying DAOs
The idea behind a dividend-paying DAO is that the organisation is structured and run so that it can distribute a portion of earnings back to the individuals who own and control it.
The first DAO to implement this model was the DASH network. DASH uses a decentralised governance system that allows Masternode operators to vote on projects to be funded, including the use of funds to develop the network.
If the projects are successful, the Masternodes will receive a portion of the revenue generated by those projects as a reward for their work. In the future, we will likely see many more DAOs adopt this model. There are many advantages to distributing a portion of the profits to token holders, including:
Creating a strong token economy: An organisation that pays dividends will likely see increased demand for its tokens. If the tokens are used to participate in the governance process, an increase in demand will also likely lead to an increase in price.
Fundraising: If an organisation has a strong token economy, it can use tokens to raise funds from investors, providing a share of the profits to the investors in exchange for their capital.
Reducing centralisation and increasing autonomy: The token holders have a real stake in the organisation's success and will be incentivised to act in a manner that benefits the entire organisation, not just a select few. This is particularly important for organisations that provide a public service, such as open source software projects, where you want to see a decentralised network of contributors to avoid a single government or organisation controlling the code base and potentially inserting malicious code.
Peer-to-peer Lending DAOs
Another type of DAO we will likely see is peer-to-peer lending DAOs. In the current economy, peer-to-peer lending platforms, such as Lending Club and Prosper, act as intermediaries, controlling the entire process from start to finish.
The platform connects borrowers and lenders and takes a fee for facilitating the transaction. This setup has its advantages but also has some severe problems.
For example, the centralised control model makes the platforms vulnerable to manipulation: If the platform has a vested interest in a particular loan being paid back on time, it may be inclined to overlook any issues with the borrower’s financial situation.
However, these issues can be avoided on a blockchain-based platform, using a decentralised autonomous organisation to run the platform. In this instance, lenders and borrowers come together to create a decentralised independent organisation rather than relying on a single entity to build and control the process. The result is a fairer, more decentralised lending process that benefits all stakeholders.
DAOs for Creativity and Productivity
We are seeing a massive rise in the use of AI for many different tasks, from driving cars to helping businesses with customer service. While these systems can be beneficial, they do pose some serious challenges.
For example, with the rise of autonomous vehicles, we are now faced with the question of who is responsible if an accident occurs. If the car is fully independent, who is held responsible and is there any way they can be held accountable?
An AI-driven DAO could be the solution to these problems. By creating an organisation where AI agents can contribute their skills to a central system that humans govern, we can ensure that the machines are fully accountable for their actions.
If a computer vision system identifies an object on the road and recommends that the autonomous vehicle swerve to avoid it, the humans would review the situation and accept or reject the recommendation. If the recommendation is received, the AI pulls the data from the blockchain and is held accountable for the decision. Humans can then review the data to determine whether the action was appropriate.
DAOs for Environmental Sustainability
As we become more aware of the consequences of our actions, we see companies and organisations take a more proactive approach to sustainability. While this is a step in the right direction, it can often be a case of “too little, too late”.
Implementing new policies and ways of working is much easier when a company is already well established. What we need is a way of incentivising businesses to be more sustainable from the get-go, instead of just paying lip service to the idea of “green business”.
A decentralised autonomous organisation can be the solution to this problem. In this example, we would see a group of individuals get together and create a decentralised independent organisation that would function as a virtual company, producing either sustainably produced or ethically sourced goods.
DAOs for Fairness and Equality in the Workplace
As more companies adopt the remote work model, we will likely see a rise in decentralised autonomous organisations that provide employees with work in the world of digital nomadism.
The essential advantage of this model is that it levels the playing field for everyone, including those who may be marginalised in traditional employment.
In an employer-driven decentralised autonomous organisation, the decentralised independent organisation provides benefits and a source of income to individuals who may not otherwise be able to find work.
The Bottom Line
DAOs are new organisations that are run autonomously and in a decentralised manner. They are designed to subvert the centralised governing authority we see in traditional organisations and distribute power among the many.
Since the global financial crisis of 2007, there has been a rise in awareness of the consequences of centralised systems, leading to a resurgence in decentralised thinking. While much of the discussion around decentralised organisations have focused on blockchain and cryptocurrencies, the benefits of decentralised autonomous organisations extend far beyond these realms.
DAOs are likely to become more and more common as the years go on. They represent a shift in the way companies run and are funded. The success of a DAO is tied to the success of the business it operates in, meaning that people who contribute to the industry but don’t have a skill that impacts the business's success are less likely to earn as much as others. The implication of this change in how companies operate is that people who don’t contribute to the business's success are less likely to earn.