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.
Understanding a decentralized autonomous organization
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.
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.
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.
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