A decentralized autonomous organization (DAO) operates autonomously on blockchain protocol under rules governed by smart contracts. DAO is among the most important innovations that Blockchain has brought to the business world, which can create “super entities” or large entities that do not have a central authority but are instead managed in a decentralized manner.
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Understanding a decentralized autonomous organization
The blockchain-centric model of a decentralized autonomous organization seeks to address a problem present in almost every business – regardless of industry or size.
This is sometimes referred to as the principal-agent dilemma and occurs when an individual or entity (the “agent”) can make decisions on behalf of another individual or entity (the “principal”). Under this system, the needs and priorities of the agent often differ from those of the principal. This causes the agent to make self-interested decisions, even if they had been originally tasked with looking after the principal.
DAOs are one way to bypass or at least reduce the need for centralized, hierarchical decision-making in organizations. Using blockchain, a DAO ensures that information flow and incentive structures are properly aligned in a codified format. Indeed, organizations of the future will have their systems, management, charters, and performance bonuses written into smart contracts.
One of the primary goals of the DAO is the automation of all essential and non-essential processes, which has obvious benefits to the organization in terms of efficiency and cost. Blockchain also mitigates the potential for fraud and as noted earlier, directors acting according to their own self-interest.
How does a decentralized autonomous organization work?
While each organization will have specific needs, establishing a DAO using blockchain requires some important groundwork:
Smart contract set up – initially, the underlying rules of each smart contract must be defined and encoded. The organization must reach a consensus on governance, operations, and incentivization before proceeding with smart contracts. This enables the DAO to become truly autonomous and sustainable and avoids potentially destabilizing changes from having to be made in the future.
Funding – in other words, what will power the DAO? Smart contracts must create and distribute some form of internal property that allows the organization to establish a voting mechanism and incentivize activities. Native tokens are one such form of property, giving interested individuals the right to vote among other things.
Deployment – a decentralized autonomous organization reaches critical mass when it has secured enough funding for deployment. Moving forward, strategic decisions are made by token holders who automatically become stakeholders in the organization. Provided that the token distribution policy and consensus mechanisms are robust, these stakeholders will make decisions that result in beneficial outcomes for the business.
DAO builders and infrastructure platforms
Several service providers exist to provide the tools and platforms necessary to create a decentralized organization.
Following is a look at some of the best-known platforms:
DAOstack – providing a large coordination platform for DAOs with a focus on solving the problems associated with large-scale decentralized decision making. Decision-makers can use the native token GEN to promote proposals they deem important.
Aragon – a dApp on the Ethereum blockchain allowing the creation and management of a range of organization types. These include companies, NGOs, hedge funds, and open source projects. Members who hold ANT native tokens have the right to be involved in decision-making proposals regarding smart contract upgrades and fiscal and token policy.
Colony – ideal for the community-led organization that wants to utilize “plug-in style” payment and collaboration tools. Colony is web-based and as a consequence is more open than organization-based platforms like Aragon.
Key takeaways:
A decentralized autonomous organization is any organization run autonomously using smart contracts on a blockchain network. Instead of the centralized, hierarchical decision-making model, power resides with those who own native tokens.
Moving to decentralized and autonomous management requires important groundwork. Robust smart contracts and a native token system must be created before the management model can be deployed.
Depending on the needs of a business, there are several DAO service and platform providers. These include DAOstack, Aragon, and Colony.
Key Highlights of Decentralized Autonomous Organizations (DAOs):
Concept of DAOs: A DAO operates autonomously on a blockchain protocol under rules governed by smart contracts. It represents a significant innovation of blockchain technology in the business world, enabling decentralized management without a central authority.
Addressing Principal-Agent Dilemma: DAOs tackle the principal-agent dilemma, where decision-makers (agents) might prioritize their interests over the organization’s (principals). DAOs align incentives and information flow through blockchain technology.
Automated Processes: DAOs aim to automate both essential and non-essential organizational processes, enhancing efficiency and reducing costs. This automation is achieved through smart contracts that encode management rules, charters, and performance bonuses.
Smart Contract Setup: To establish a DAO, foundational smart contracts must be defined, incorporating rules for governance, operations, and incentivization. This ensures the organization’s autonomy and prevents destabilizing changes later.
Funding Mechanism: DAOs require a funding mechanism to function. Internal property, often in the form of native tokens, empowers stakeholders with voting rights and incentivizes active participation in the organization.
Deployment and Decision-Making: Once funding is secured, the DAO becomes operational. Token holders automatically become stakeholders and contribute to decision-making. The robustness of token distribution and consensus mechanisms influences beneficial outcomes.
Infrastructure Platforms: Various platforms facilitate DAO creation:
DAOstack: Offers a coordination platform for large-scale decentralized decision-making, using the GEN token for promoting important proposals.
Aragon: A dApp on Ethereum, enabling the creation and management of diverse organizations. Holders of ANT tokens participate in decision-making regarding upgrades and policy changes.
Colony: Suited for community-led organizations, offering flexible payment and collaboration tools through a web-based interface.
Key Takeaways:
DAOs operate autonomously using smart contracts on blockchain networks.
Power and decision-making authority lie with native token holders.
DAO establishment requires well-defined smart contracts and a native token system.
Various platforms like DAOstack, Aragon, and Colony offer tools for building DAOs.
In a functional organizational structure, groups and teams are organized based on function. Therefore, this organization follows a top-down structure, where most decision flows from top management to bottom. Thus, the bottom of the organization mostly follows the strategy detailed by the top of the organization.
In a flat organizational structure, there is little to no middle management between employees and executives. Therefore it reduces the space between employees and executives to enable an effective communication flow within the organization, thus being faster and leaner.
Project portfolio management (PPM) is a systematic approach to selecting and managing a collection of projects aligned with organizational objectives. That is a business process of managing multiple projects which can be identified, prioritized, and managed within the organization. PPM helps organizations optimize their investments by allocating resources efficiently across all initiatives.
Harvard Business School professor Dr. John Kotter has been a thought-leader on organizational change, and he developed Kotter’s 8-step change model, which helps business managers deal with organizational change. Kotter created the 8-step model to drive organizational transformation.
The Nadler-Tushman Congruence Model was created by David Nadler and Michael Tushman at Columbia University. The Nadler-Tushman Congruence Model is a diagnostic tool that identifies problem areas within a company. In the context of business, congruence occurs when the goals of different people or interest groups coincide.
McKinsey’s Seven Degrees of Freedom for Growth is a strategy tool. Developed by partners at McKinsey and Company, the tool helps businesses understand which opportunities will contribute to expansion, and therefore it helps to prioritize those initiatives.
Mintzberg’s 5Ps of Strategy is a strategy development model that examines five different perspectives (plan, ploy, pattern, position, perspective) to develop a successful business strategy. A sixth perspective has been developed over the years, called Practice, which was created to help businesses execute their strategies.
The COSO framework is a means of designing, implementing, and evaluating control within an organization. The COSO framework’s five components are control environment, risk assessment, control activities, information and communication, and monitoring activities. As a fraud risk management tool, businesses can design, implement, and evaluate internal control procedures.
The TOWS Matrix is an acronym for Threats, Opportunities, Weaknesses, and Strengths. The matrix is a variation on the SWOT Analysis, and it seeks to address criticisms of the SWOT Analysis regarding its inability to show relationships between the various categories.
Lewin’s change management model helps businesses manage the uncertainty and resistance associated with change. Kurt Lewin, one of the first academics to focus his research on group dynamics, developed a three-stage model. He proposed that the behavior of individuals happened as a function of group behavior.
Airbnb follows a holacracy model, or a sort of flat organizational structure, where teams are organized for projects, to move quickly and iterate fast, thus keeping a lean and flexible approach. Airbnb also moved to a hybrid model where employees can work from anywhere and meet on a quarterly basis to plan ahead, and connect to each other.
eBay was until recently a multi-divisional (M-form) organization with semi-autonomous units grouped according to the services they provided. Today, eBay has a single division called Marketplace, which includes eBay and its international iterations.
IBM has an organizational structure characterized by product-based divisions, enabling its strategy to develop innovative and competitive products in multiple markets. IBM is also characterized by function-based segments that support product development and innovation for each product-based division, which include Global Markets, Integrated Supply Chain, Research, Development, and Intellectual Property.
Sony has a matrix organizational structure primarily based on function-based groups and product/business divisions. The structure also incorporates geographical divisions. In 2021, Sony announced the overhauling of its organizational structure, changing its name from Sony Corporation to Sony Group Corporation to better identify itself as the headquarters of the Sony group of companies skewing the company toward product divisions.
Facebook is characterized by a multi-faceted matrix organizational structure. The company utilizes a flat organizational structure in combination with corporate function-based teams and product-based or geographic divisions. The flat organization structure is organized around the leadership of Mark Zuckerberg, and the key executives around him. On the other hand, the function-based teams based on the main corporate functions (like HR, product management, investor relations, and so on).
Google (Alphabet) has a cross-functional (team-based) organizational structure known as a matrix structure with some degree of flatness. Over the years, as the company scaled and it became a tech giant, its organizational structure is morphing more into a centralized organization.
Tesla is characterized by a functional organizational structure with aspects of a hierarchical structure. Tesla does employ functional centers that cover all business activities, including finance, sales, marketing, technology, engineering, design, and the offices of the CEO and chairperson. Tesla’s headquarters in Austin, Texas, decide the strategic direction of the company, with international operations given little autonomy.
McDonald’s has a divisional organizational structure where each division – based on geographical location – is assigned operational responsibilities and strategic objectives. The main geographical divisions are the US, internationally operated markets, and international developmental licensed markets. And on the other hand, the hierarchical leadership structure is organized around regional and functional divisions.
Walmart has a hybrid hierarchical-functional organizational structure, otherwise referred to as a matrix structure that combines multiple approaches. On the one hand, Walmart follows a hierarchical structure, where the current CEO Doug McMillon is the only employee without a direct superior, and directives are sent from top-level management. On the other hand, the function-based structure of Walmart is used to categorize employees according to their particular skills and experience.
Microsoft has a product-type divisional organizational structure based on functions and engineering groups. As the company scaled over time it also became more hierarchical, however still keeping its hybrid approach between functions, engineering groups, and management.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
