A DAO: An Analysis of the Future of Organizations
This article compares the organizational structure & design of traditional companies to the structure and design of a DAO.
This article will look at a novel innovation that was born from the DeFi revolution, it is the concept of Decentralized Autonomous Organization (DAO) which has reimagined the way organizations are structured, designed and run. A DAO is basically a blockchain-based organization that uses the power of smart contracts to govern their communities in a decentralized manner. The smart contracts mediate the self-executing and self-governing nature of a DAO which enables transparent decision making, a formalized set of rules, the automation of operations, and the decentralization of power. There has been a lot of talk recently about how the economy of the future is going to be a creator economy/ownership economy which is community driven and there is no better way for these communities to organize themselves than through a DAO. But before we get into the finer details of a DAO, lets first look at the traditional organizational structures as a point of comparison.
Traditional organizational structure/design
Traditional organizations are hierarchical by design, each person has a defined role and as you go down the ladder your responsibilities and salaries decrease. Each person has a clearly defined job title and role and the name of the game (especially for bigger organizations) is to divide the people in the organization into subunits and figure out what linkages to create amongst them. These linkages can be vertical or horizontal. A vertical linkage is one where you report to your superiors and they take the information and allocate resources etc. from there. A horizontal linkage is one where you coordinate between subunits before moving information up the ladder. All in all, it’s a very top-down structure where the interests of those at the top represent the interests of organization therefore all the people in the organization have to align their interests with those at the top by default. On a side note, I assume that this structure is intentional because it’s what essentially keeps people in the corporate rat race, the urge to work your way up the ladder and then be in the position of power/control one day.
Let’s look at a few types of organizational structures. The first one is a functional structure where you have a CEO/founder at the top and the rest of the organization is divided into sectors such as sales, marketing, engineering etc. and within the sectors there is a hierarchy. This is usually used by organizations selling one product, an example of a company that uses this structure is Airtel. But say you have a bigger company with more products to sell across more regions, then a common structure used is the divisional structure where from the CEO/founder the organization is divided into regions such as one part for Asia and one part for Europe and then in the specific regions they follow the functional structure. Which means within the regions the organization is then divided into the various departments (sales, marketing, engineering etc). Companies such as Amazon and McDonald’s use this sort of structure. You then have a front/back organizational structure and a matrix management structure both of which are rarely used in real life which is why I will not dwell on them.
But what you can basically see from traditional structures are that they are very hierarchical, career paths for the employees are clearly defined leaving many of them stuck in the same company for years, coordination depends on geographic proximity, the interests of the minority in power outshine the interests of the majority, you need significant man power as you scale your organization, the bigger the organization gets the more difficult it becomes to maintain the morale of all the workers, and specialization of tasks is a key aspect to improve efficiency which basically after a few months makes your job boring and repetitive. So now let’s look at the alternative structure born from DeFi. The DAO.
The DAO
Before I get into this it’s important to note that DAO’s are still a very new concept, they’ve been around for about 5-6 years and while many of them do exist there are still a lot of unknowns in terms of how they will play out over the long term when they have to scale to meet the requirements of billions of people.
A DAO in terms of structure is much flatter, there is no real hierarchy and people organize themselves in a much more fluid way. A DAO typically starts off as a small online community filled with people who all have the same goal. In order to achieve this shared goal, they tend to use a number of online tools such as discord, twitter, telegram, and Reddit as a way to share their ideas with other members of this community. Through this the community attracts more and more like-minded people and they tend to naturally gravitate towards working on the certain aspects that they’re good at. So you will have developers who will working on building out the product, then the content writers will work on making the promotional content, while the front-end designers will build out the website. Through this time, you will see a lot of discussion and debate on the chat channels as people share their ideas and get feedback to constantly improve their work and provide the best product possible. After working out all the details of the product/service as a community, the DAO can be launched and it will be owned and managed by the community that helped build it.
Decentralized governance
In order for a DAO to successfully own and manage the organization by themselves they need a form of governance where updates to the product/service can be decided upon. This is what decentralized governance is. Much like how traditional organizations have board meetings where shareholders and company directors meet to discuss the plans for the company, a DAO has governance proposals. The difference here is that in a DAO this process doesn’t take place behind closed doors. The governance proposals are there for everyone to see are usually updates to the protocol proposed by community members and each proposal goes through a voting process and if the majority are in favor of the proposal then the protocol is updated instantly. This is a very simplified overview of decentralized governance, It’s a much more complex topic with its own set of benefits and drawbacks which will be discussed on a later date.
Governance tokens
You may have researched a few tokens before making your investment/trade and something you may have commonly seen listed as a tokens utility is governance. When a DAO is launched they usually launch a token with it. The community members can either buy this token or earn it through airdrops (airdrops are usually received by early user of the protocols, incentivizes people to be early adopters) and they can then use these tokens to vote on the governance proposals. In most cases, the number of tokens you own proportionately represents the weight of your voting power. So after proposals are made and discussed by the community, the vote determines the outcome. For most protocols they have voting times of up to a week to ensure everyone can vote but in the cases of emergency situations such as a detected bug or a hack, they have emergency 24 hour votes or different emergency response protocols in place.
Smart Contracts
Smart Contracts are the backbone of a DAO. You may be wondering; how can an organization be run so loosely with no rules? With random people on the internet who you’ve never met before? These are valid concerns and this is where the power of smart contracts comes in. For a DAO the smart contracts codify the rules of the organization, these rules can be changed and updated through the voting mechanisms mentioned above, but the code is essentially the law. Smart contracts allow the instant execution of updates but they also allow trustless coordination.
Trusting the people in an organization used to be a crucial element of being successful, but that’s a thing of the past. With smart contracts running the DAOs the code is open source which means everyone can see it, even if you aren’t a part of the DAO. Since the rules are the code, all you need to trust is the code which you can look at yourself and verify. You do not need to trust every participant in a DAO and you certainly don’t need to trust one CEO or one CFO who can make decisions by themselves based on what the shareholders or they themselves want. Moreover, this removes geographical barriers to work, all that matters is that the people in your community are like-minded. The country they’re from, or where they live doesn’t matter anymore. It is true borderless and trustless coordination.
Alternate DAO formation
Now that you know what a DAO is and how its structural design differs from traditional organizations. Let’s look at an alternate way DAOs are established. This is the method of progressive decentralization. Consider this scenario, you and two of your friends come up with an idea for a DeFi product and want to immediately start working on it, y’all have the expertise to do all of it yourself and you start building the product. After the product is built and is live on the mainnet it starts to gain traction and attracts millions of dollars. At this point the project is still controlled by the 3 of you which means the control is centralized, there is no community or DAO that is managing it. That is fair because it was easier for y’all to do it yourself, but eventually you start building a community around your product and when the project has reached a point where it is stable and established you make it into a DAO and it is governed by the community and you have as much of a say in the protocol as any other user does. This is the process that most teams tend to take nowadays. An example of this is compound. Compound protocol was built by a small team of founders and developers from compound labs known as the core team. This team built out the protocol themselves and launched it, and after a year or so the compound protocol was turned into a DAO and now it is run and managed by the community and compound labs has as much of a say in the protocol as anybody else. Many teams have started taking this approach of starting off with a core team who build the product, launch it, build a community around it, and then gradually become more decentralized over time. Some projects just find it easier to have a small team at an early stage and then move to a community owned DAO at a later stage.
What are the other reasons to choose a DAO?
One good reason as to why DAOs work is to do with incentives. The structure of a DAO allows it to solve the principal-agent dilemma. This dilemma is one where there is one individual/entity (the agent) who makes decisions on behalf of another individual or identity (the principal). The dilemma is that in most cases the agent will make decisions that cater to their self-interests which is likely to negatively impact the principal who make up the majority. The best example of this is the 2008 financial crisis and how the heads of the banks and rating agencies chose to act in their own self-interests without any consideration for the impact it would have on the rest of the population. A DAO solves this through collective ownership, everyone in the DAO has something at stake which means that their interests and incentives are relatively aligned which will lead to better coordination and collaboration. Nobody in the DAO will want to see it fail or benefit from it failing. Collective ownership facilitates superior coordination.
Additionally, it’s so much more efficient than traditional systems, a core team of 20 people can take around a year to build a product which is then managed by a DAO, and still be earning the same revenue as an equivalent traditional financial institution that has 5,000+ employees coming in day in and day out. Furthermore, it means that no physical spaces are required. Your only cost is a computer and an internet connection. You do not need to worry about buying or renting an office space, paying for electricity and other fixed costs. Everyone can work and contribute remotely and anonymously (if they choose to).
Lastly it promotes a pure meritocracy. You can join a DAO with ease, but to become a recognized individual within the DAO and to make key contributions all that matters is the value you provide. If you give good ideas, provide value, work hard, and show a genuine passion then you can work anywhere in the crypto space, whether it is a DAO or not. There are no formalities and extras, if you’re good then you’re hired, it’s as simple as that.
NFTs and DAOs
This is a bit of a digression, but it’s an important tangent that I think needs to be looked at. You may know about NFTs through the recent mania phase where NFTs have sold for ridiculous prices. But what few people understand is the power of NFTs in an ownership economy. It represents true decentralization and true ownership. Up until now, everything you owned was simply strings of data on the databases of trusted third parties (TTPs) and it has worked so far mainly because of social consensus. Everyone agrees that you own it because the TTP says so. However, it only takes one bad actor to take control of all that data and do as they please. With NFTs you have you true ownership of everything represented by a digital signature of authenticity on-chain which everyone can see but nobody can forge or replicate. DAOs are a way for decentralized communities to effectively coordinate and govern themselves. Hence, when NFTs and DAOs go hand in hand you will see a bunch of communities that have true freedom to do as they please while completely owning everything, no need for intermediaries or TTPs. Musicians, influencers, content creators, even businesses can harness the combined power of NFTs and DAOs in many different ways to be true owners in the ownership economy of the future.
Concluding thoughts
Rethinking how organizations are structured and run is a critical element for the digital and decentralized future that is upon us. Every generation brings along with it their own innovations to contribute to the world and this generation has made significant innovations that completely change the way our lives are lived. The goal is to give power back to the people, give access to everyone and hope that everyone can not only survive in the new world but thrive.
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