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【Blockchain Basics】From the world on the chain to physical enterprises, towards the future governance mechanism - What is DAO?

2021/3/12

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Introduction: There are many exciting concepts on the blockchain, and DAO is one of them. Why has DAO attracted so much attention? A significant reason is its features: automated execution of unified rules, transparency, and stakeholders being able to express their interests. It represents a possible direction for organizational management. However, DAO's development is still in its early stages. Is its governance mechanism reasonable? How can it be beneficial for organizational development? There are many details to explore.

(This article is written by Delton Rhodes and translated by SIEN from the Blue Fox Notes community. The original article, titled "What is DAO?", has been authorized for reprint. Original article here)

Historically, the concept of organizations has always been centered around strict ownership structures. In the past few decades, companies have started to introduce open, flat organizational structures that allow more people in the company to voice their opinions. However, ultimately, decision-making for the entire organization is usually the responsibility of one person or a few individuals.

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When we look at large companies, clear hierarchical structures are the norm. After all, companies like Apple, Google, and Facebook have CEOs, CTOs, and CMOs, along with directors, managers, and their respective subordinates. Early-stage startups and large companies all have well-defined ownership and leadership structures. While it is possible to have ownership in a company and theoretically own a part of the organization, the influence is very limited.

For centuries, the dilemma of defining ownership, hierarchy, and rules has been a major obstacle to organizational development. But what if a company doesn't necessarily need owners? This question has been mostly idealistic throughout history. Today, the realization of distributed ownerless organizations has become possible, thanks to the emergence of DAOs (Decentralized Autonomous Organizations).

What is DAO?

DAO, sometimes also referred to as Decentralized Autonomous Organization (DAC), is an organization represented by rules encoded as computer programs. These programs are transparent, controlled by shareholders or token holders, and are not influenced by central authorities. DAOs utilize blockchain to verify transactions.

Everyone in a DAO can propose and vote on decisions. Cryptocurrencies are used to represent key values, with the highest amount of votes at the end of a specified period winning. This contrasts with other forms of voting where each person's weight is typically the same. Proposals are usually binary, such as whether company A should develop product X.

Why do people want this?

Quick, borderless business decisions

If someone in country A wants to start a business with founders from countries B, C, etc., the current process is very complex. Different jurisdictions have different requirements, and the time frame for decision-making varies. For example, if someone in country A can formally establish a business in just one day, while the person in country B needs 3 months to start. Clearly, the person in country B does not have the same resources as the one in country A.

DAOs offer a solution by allowing everyone to work on equal footing by adhering to a set of standard rules, regardless of their geographical location. Essentially, one of the main reasons for creating a DAO is to provide an equal system for the establishment and operation of organizations.

Voting within the organization

Many companies have boards of directors to make important decisions. The issue with this is that these organizations often only vote on select issues elected by a few and may not necessarily represent the majority of the organization. DAOs can change this by allowing anyone in the organization to vote on issues they care about. For example, A might care about issues A and C, but not so much about issue B.

Through DAOs, A can proportionally vote on proposals based on their level of interest. DAOs do not use systems that ignore or do not take into account input from members within the organization, but ensure that all votes are counted and visible to everyone. (Blue Fox Note: DAO ensures that stakeholders within the organization, i.e., token holders, have the opportunity to express their opinions.)

Immutable rules

Within any organization, policies and rules determine what can and cannot be done. For example, in a company, an employee who does not follow regulations may face penalties. If someone is late for work, this may or may not result in a corresponding deduction in pay. This decision can be automatically executed through timestamping, but not all organizations enforce it.

For instance, if the boss is late, it may change this rule by setting exceptions. In a DAO, it ensures that the rules apply to everyone through code. Once a set of rules is established within the organization, it cannot be altered unless the voting population agrees to do so.

Limitations of DAO

Many decisions rely on human activity, not automation

Smart contracts have automated many manual tasks. For example, smart contracts can determine if A can send funds to B based on a set of criteria. The issue is that many activities cannot be completed by simply clicking a button.

One case is about allocating work funds. For example, a DAO can use smart contracts to send funds for a development team to build an app. However, the DAO cannot guarantee that the development team completes the development or even confirm if the funds are used correctly. Mechanisms to minimize such issues may include requiring voting on whether major projects are completed through milestones.

Lack of legal support

Although DAOs are considered more efficient in organizational operations due to their borderless nature, this can also be seen as a flaw. As official laws related to DAO operations have not been established, the legal status of such organizations is at best ambiguous. While smart contract code appears to help protect individuals, courts have not formally recognized them.

Most Popular DAOs Currently

Dash DAO

The DashDAO is governed by masternodes (equity holders with at least 1000 DASH tokens). Masternodes can perform critical functions, including InstantSend and PrivateSend. They also vote on proposals using Dash treasury funds. Anyone can submit proposals to masternodes. A fee of 5 DASH is required as an anti-spam fee. If enough masternodes vote, funding can be provided for the proposal.

BitShares

BitShares, released in 2013, was the first platform to implement DAO through representative and witness election processes. Representatives submit updates and improvements to the platform. Witnesses validate transactions and publish them to the blockchain. Anyone holding BTS tokens, i.e., native token holders of the platform, can vote.

Aragon

Aragon has a DAO that allows its token holders of ANT to create their own DAO organizations and vote on decisions. Other features include mining new tokens, paying users in various tokens, and customizing permissions settings for individuals within the organization. Projects like Liverpeer, MyBit, and BrightID use Aragon.

MakerDAO

MakerDAO uses a DAO where holders of its native token, MKR, can vote on decisions affecting its P2P lending protocol. MKR token holders vote on annualized lending rates (stability fees), collateralization ratios required to open each CDP (collateralized debt position), and the ability to shut down the protocol in the event of an ETH flash crash or other unforeseen circumstances.

Moloch DAO

Members of Moloch DAO benefit from the improvement of public goods funded by the DAO. Moloch DAO is currently focused on funding the development of Ethereum 2.0.

DAOStack

DAOStack provides functionality for Alchemy, the first real-time decentralized application built on DAOStack. Alchemy is currently managing real-time DAOs for organizations like ETHGlobal, Kyber, and Polkadot. Those who predict correctly at the end of voting can earn profits from their staked equity. GEN is the native token of DAOStack, designed to help decentralized organizations scale efficiently without compromising their value.

Can Fortune 500 companies become decentralized organizations?

In 2017, Siemens became the first Fortune 500 company to use DAO internally. The concept of running large companies entirely on DAOs is intriguing but not yet practical. If a Fortune 500 company were to suddenly decide to shift all its governance to DAO today, numerous technical challenges (UI/UX, security, scalability) would need to be addressed to enable blockchain to support such organizational structures. The limitations mentioned above would also apply. There is a learning curve for participants.

Lastly, human factors need to be considered. If participation rates are too low, it becomes difficult to discern whether votes actually represent the true majority of the organization. Over-reliance on DAO proposals and voting could also lead to individuals continuously making many small decisions, fundamentally limiting the time voting participants must spend completing the assigned tasks. From a practical standpoint, creating small organizations that run on DAOs is more feasible due to the reasons mentioned above.

(Blue Fox Note: The author believes that running larger organizations on DAOs is currently impractical, hence Fortune 500 companies operating on DAOs are not yet realistic.)