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.
Aspect
Explanation
Definition
A Decentralized Autonomous Organization (DAO) is a blockchain-based organization that operates through code, smart contracts, and decentralized decision-making rather than relying on a centralized authority or management structure. DAOs are designed to be autonomous and self-governing entities, executing actions and making decisions according to predefined rules and the consensus of their members.
Key Concepts
– Blockchain Technology: DAOs rely on blockchain technology to record and execute transactions and smart contracts transparently and securely. – Smart Contracts: Self-executing contracts with predefined rules and conditions that automate actions within the DAO. – Decentralization: Lack of a central authority; decisions are made collectively by members or token holders. – Token-based Governance: DAO members often hold tokens that represent voting power or ownership stakes. – Transparent Governance: Decisions and transactions are recorded on the blockchain, providing transparency and auditability.
Structure
– Token Holders: Individuals who hold tokens representing their stake or voting power in the DAO. – Proposals: Members or token holders can submit proposals for actions or decisions. – Voting: Token holders participate in governance by voting on proposals, typically in proportion to their token holdings. – Execution: If a proposal gains sufficient support, it is executed automatically through smart contracts.
Use Cases
– Governance: DAOs are used for decentralized decision-making in blockchain projects, protocols, and cryptocurrencies. – Venture Capital: DAOs pool funds from members to invest in blockchain startups, with voting on investment decisions. – Collectives: Decentralized communities and collectives use DAOs for resource allocation and decision-making. – Decentralized Finance (DeFi): DAOs are key players in DeFi protocols, governing changes and managing assets.
Advantages
– Decentralization: Eliminates the need for intermediaries and central authorities, increasing trust and transparency. – Transparency: All actions and decisions are recorded on the blockchain, providing a transparent audit trail. – Immutable Rules: Smart contract rules are immutable, ensuring that the DAO operates according to predefined conditions. – Global Participation: Allows global participation without geographic barriers. – Trustless Governance: Trust is placed in code and consensus rather than centralized entities.
Challenges
– Smart Contract Risks: Vulnerabilities in smart contracts can lead to security breaches or unintended consequences. – Regulatory Uncertainty: Legal and regulatory frameworks for DAOs are still evolving, posing compliance challenges. – Governance Disputes: Disagreements among token holders can lead to governance disputes and potential forks. – Code Bugs: Errors in smart contract code can result in losses or disruptions. – Scaling: Scalability issues may limit the efficiency of some DAOs.
Implications
DAOs have the potential to revolutionize traditional organizational structures, enabling more democratic and transparent decision-making. They are a cornerstone of the decentralized finance (DeFi) ecosystem and have implications for governance in a wide range of industries beyond blockchain.
Examples
– The DAO: An early DAO project in 2016, which was a crowdfunding platform. It suffered a critical smart contract exploit, leading to a contentious hard fork of the Ethereum blockchain. – MakerDAO: A DeFi platform that manages the stablecoin Dai using a decentralized governance model. – Aragon: A platform for creating and managing DAOs with customizable governance structures. – MolochDAO: A DAO focused on funding Ethereum projects.
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.
Related Frameworks
Description
When to Apply
Smart Contracts
– Self-executing contracts with the terms of the agreement directly written into code. Smart Contracts automatically execute and enforce agreements without the need for intermediaries, providing transparency, security, and efficiency in various transactions and processes.
– When seeking to automate and streamline agreements, transactions, or processes without relying on intermediaries or centralized control. – Implementing Smart Contracts to provide transparency, security, and efficiency in various transactions effectively.
Blockchain Governance
– The process by which decisions are made and changes are implemented within a blockchain network or ecosystem. Blockchain Governance involves establishing rules, protocols, and mechanisms for managing and evolving decentralized systems, ensuring consensus, security, and sustainability.
– When designing and governing blockchain networks or decentralized systems to ensure consensus, security, and sustainability. – Engaging in Blockchain Governance to establish rules and mechanisms for managing and evolving decentralized systems effectively.
Tokenomics
– The study and design of token-based economies within blockchain networks or decentralized ecosystems. Tokenomics encompasses the creation, distribution, utilization, and valuation of tokens to incentivize participation, align interests, and facilitate value exchange among network participants.
– When designing and analyzing token-based economies to incentivize participation, align interests, and facilitate value exchange effectively. – Utilizing Tokenomics to create, distribute, and utilize tokens within blockchain networks or decentralized ecosystems.
Decentralized Finance (DeFi)
– An ecosystem of decentralized financial applications and protocols built on blockchain technology. Decentralized Finance (DeFi) aims to democratize access to financial services, eliminate intermediaries, and enable peer-to-peer transactions and lending without traditional banks or financial institutions.
– When seeking to provide or access financial services, such as lending, borrowing, trading, or investing, without relying on intermediaries or centralized control. – Engaging in Decentralized Finance (DeFi) to democratize access to financial services and enable peer-to-peer transactions effectively.
Decentralized Identity
– A system for managing digital identities in a decentralized and secure manner. Decentralized Identity enables individuals to own, control, and share their identity data without relying on centralized authorities or intermediaries, enhancing privacy, security, and interoperability in digital interactions.
– When designing and implementing identity management systems that prioritize privacy, security, and user control over personal data. – Utilizing Decentralized Identity to enhance privacy, security, and interoperability in digital interactions effectively.
Decentralized Storage
– A distributed storage system that stores data across multiple nodes in a decentralized network. Decentralized Storage enables secure and censorship-resistant storage of data without relying on central servers or intermediaries, providing privacy, resilience, and accessibility to users.
– When seeking to store or access data in a secure, censorship-resistant, and decentralized manner without relying on central servers or intermediaries. – Implementing Decentralized Storage to provide privacy, resilience, and accessibility to users effectively.
Decentralized Governance
– The process by which decisions are made and resources are allocated within decentralized organizations or communities. Decentralized Governance empowers stakeholders to participate in decision-making, propose and vote on proposals, and shape the direction and policies of the organization or community.
– When designing and governing decentralized organizations or communities to enable stakeholder participation, transparency, and accountability in decision-making. – Engaging in Decentralized Governance to empower stakeholders and shape the direction of organizations or communities effectively.
Decentralized Autonomous Corporation (DAC)
– An organization or entity that operates autonomously and transparently on a blockchain or decentralized network without centralized control. Decentralized Autonomous Corporation (DAC) executes predefined rules and protocols encoded in smart contracts, enabling transparent and trustless operations among stakeholders.
– When designing and deploying autonomous and transparent organizations or entities on a blockchain or decentralized network. – Implementing Decentralized Autonomous Corporation (DAC) to execute predefined rules and protocols transparently and trustlessly among stakeholders effectively.
Token Engineering
– The interdisciplinary field that focuses on designing, analyzing, and optimizing token-based ecosystems and mechanisms. Token Engineering applies principles from economics, game theory, and computer science to design tokens, incentives, and governance structures that promote desired behaviors and outcomes within decentralized systems.
– When designing and optimizing token-based ecosystems and mechanisms to incentivize participation, align interests, and achieve desired outcomes. – Engaging in Token Engineering to apply principles from economics, game theory, and computer science effectively in designing decentralized systems.
Decentralized Marketplace
– A peer-to-peer marketplace built on blockchain technology or decentralized networks where users can buy, sell, or exchange goods and services without intermediaries or central authorities. Decentralized Marketplaces enable direct transactions, reduce fees, and enhance privacy and security for buyers and sellers.
– When seeking to create or participate in peer-to-peer marketplaces that prioritize direct transactions, reduced fees, and enhanced privacy and security. – Implementing Decentralized Marketplaces to enable direct transactions and enhance privacy and security effectively for buyers and sellers.
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.
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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.
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