We are all familiar with ‘everything-as-code’—a pattern that started with infrastructure-as-code and has now extended to other areas such as architecture-as-code, security-as-code and more. However, all the incarnations we have seen so far have been less than ambitious! The dawn of cryptocurrencies and the underlying blockchain technology is moving us firmly toward organization-as-code. Org-as-code is the most disruptive evolution we have seen so far. The crypto world uses a different term for it: decentralized autonomous organization (DAO).
Before you freak out because, “OMG crypto!” let me assure you that I am not trying to sell you any of the 9,000 (at last count) cryptocurrencies. Undoubtedly, crypto has polarized public opinion. There are crypto maximalists who believe that crypto is the solution to everything. You often hear, “Bitcoin solves it!” Then, there are the crypto skeptics who dismiss the movement as simply digital tulips—a Ponzi scheme at scale for the internet age. Only time will tell if they are right.
Now, my opinion falls in the gray area in between, where some groundbreaking new ways of working are evolving. People across the globe are collaborating in decentralized, efficient, democratic and non-hierarchical ways in the world of crypto. Radical new constructs for the internet age are being piloted—DAOs, smart contracts, pseudonymous identities, tokenomics, etc. just to name a few.
This post is firmly focused on DAOs.
So, What is a DAO?
A DAO is a way to work with like-minded folks around the globe where the business (the org) is owned and managed by its members in a democratic way.
“In traditional organisations, people are at the core and automation is at the edge; whereas in DAOs, automation is the core and people are at the edge.” – Vitalik Buterin
As opposed to traditional organizations that are structured in a top-down hierarchy, with many layers of management and bureaucratic coordination, DAOs provide an operating model for people and institutions that do not know nor trust each other, who might live in different geographical areas, speak different languages and, therefore, are subject to different jurisdictions. Instead of legal contracts managing the relationships between people, computer code enforces the rules.
Some of the key features of a DAO are:
- An organizational setup based on rules and policies that are encoded as computer code.
- The rules are transparent and controlled by members, not a central authority; usually, on a public blockchain.
- Rules are executed by a set of smart contracts independent of human (not even the creators!) involvement.
- Built-in treasury that no one has the authority to access without the approval of the group/community.
- Decisions and ideas are governed and funded by proposals that are voted on and managed through voting by token holders.
Colony.io is one startup that helps set up DAOs. A screenshot below from their site gives you an idea of the elements of organizational design that can be (re)defined in the radical new DAO world.
Do We Really Need DAOs ?
Here are a few challenges that DAO attempts to resolve that you often see in conventional centralized organizations:
- Good ideas struggle to reach the top.
- The system incentivizes authoritarian leadership.
- Failure to tap into the wisdom of the crowd.
- There is a higher probability of spectacular failures driven by the greed of a few, as evident from examples such as Enron or the 2008 financial crisis.
- There is usually a lack of transparency in decision-making.
- Good policies exist—usually on paper or hidden away in by-laws—but are not executable.
- Single points of failure are natural due to the asymmetry in organizational structure.
Examples of DAOs
Before you dismiss this as utopian and unrealistic, here are a few real-world of examples of DAOs in play
- Nexus Mutual—A decentralized ‘people-powered’ alternative to insurance which operates as a DAO. It is run entirely by its members. Only members can decide which claims are valid. All member decisions are recorded and enforced by smart contracts on the Ethereum public blockchain.
- DAI and MKR—A stable decentralized currency (DAI) and platform for decentralized finance apps (with a market cap of about $5 billion).
- The DAO ( Đ)—A form of venture capital that started as a crowd-funded token sale. There was no conventional management structure or board of directors. But it got hacked in 2016, and a third of funds were siphoned off. (This is a key example to remind ourselves that if the org is code, then security issues can be near-fatal.)
- DASH —A digital cryptocurrency. A DAO run by a subset of users called masternodes, which perform standard node functions like hosting a copy of the blockchain, relaying messages and validating transactions on the network, and which, in addition, act as shareholders, voting on proposals for improving DASH’s ecosystem.
- Flamingo DAO—A DAO that deals in digital art via NFTs. NFTs are non-fungible tokens, not non-functional testing!
- Gitcoin —Uses DAO to fund digital public good projects ( $24 million funded so far using a quadratic funding model)
These are just a few examples. Adoption is exploding, and stretching into areas like charities, freelancer networks, venture funds, investment clubs and more.
DAOs are still emerging, and there are many aspects that are yet to be fully explored, especially around legal status, regulatory frameworks and compliance. It is, however, only a matter of time before the DAO way of working becomes mainstream.
In my view, it is not a binary question between DAOs and conventional organizations. Adopting many of the practices of DAOs will strengthen traditional organizations and reduce some of the weaknesses we touched on earlier.