The Tao of DAO

Updated: Dec 21, 2019

Photo by imgix on Unsplash

I was listening to the podcast “Unchained” hosted by crypto/blockchain journalist, Laura Shin, the first time I ever heard of DAO, (Decentralized Autonomous Organization). Laura was interviewing Luis Cuende, the CEO of Aragon, during the podcast, and none of what they were talking about really made sense to me at first. I forgot about it until the Medium article “Introducing the Ethereum Marketing DAO” popped up in my news feed. That article intrigued me to learn more about DAO. This is what I found out:

DAO: Decentralized Autonomous Organization

Decentralized: There are two aspects of decentralization to keep in mind. First, Blockchain is the underlying technology to provide a secure digital ledger. Decentralization means that, technologically, it is not in control of a central authority. No one can unilaterally shut down a DAO as they are primarily built on a public blockchain. The second aspect concerns the organization structure itself. DAO runs without a leader or hierarchy, and is governed by a cooperative community.

Autonomous: First is execution autonomy - A DAO's rules are pre-programmed in smart-contracts at the beginning and built into the code. The code is transparent for all to analyze. During execution, there is no interpretation of the rules from humans, and rules are enforced by software. DAO also has financial autonomy because transactions get done in DAO's native cryptocurrency. For operations to continue, there is no dependence on existing financial systems.

Organization: The organizational structure is flat, having no hierarchy, and governance is handled through democratic processes of proposals and voting. Owners make decisions about the DAO. The number of tokens that a person purchases forms the basis of ownership. That number also defines their relative voting power within the DAO structure. The seed money used to acquire tokens is also the starting capital for the organization.

A study of DAOs would not be complete without looking at the history of DAO and how it forever impacted Ethereum. In the summer of 2016, "The DAO" was started by a token sale. It was created on Ethereum as a set of smart contracts and it was meant to be a venture capital fund for projects. Its members, who contributed capital, were able to vote on projects to get funded using the DAO token. Profits from investments were distributed back to the members. But before the experiment could take place, someone found a vulnerability in the code and siphoned away approximately $50 million USD. The "hacker(s)" was working within the realm of code in the smart contract, and nothing could be done to stop it since the deployed smart contract was now immutable - as per Blockchain characteristics. This event put Ethereum's reputation at stake, and the community had to respond. After debate, a decision was made to introduce a hard fork. And so we now have Ethereum Classic and Ethereum. At best, "The DAO" was a failed experiment. You can read more about the shaping of Ethereum in this article by the Coin Insider, “The Story Of DAO, And How It Shaped Ethereum.” To understand how the DAO experiment is progressing today, I took a closer look at a few functioning DAOs: - Creating the platform for governance of decentralized organizations on a global scale. The benefits touted are to cut costs, effective budgeting of shared resources, and to scale limitlessly. DAOstack is also managing its development project using Genesis DAO, which I am assuming runs on its platform. - Also provides a platform to build Dapps and also a Dapp that provides tools to create and run DAOs.

Aragon - Is creating a platform to create DAOs. They are creating the rails which others can use to get started with and manage their DAO more efficiently. Aragon also uses its platform for governing its own Aragon project.

DigixDAO - Supports the development of DGX token, which aims at democratizing access to gold by tokenizing it. DGX has a market cap of $5M, and the fund currently has $8M. Participation is through loading your wallet. Rewards are sourced from DGX (transfer fees & demurrage fees), which is also the supported token.

MakerDAO - Is the DAO that uses MakerCoin (MKR) to manage the price of its decentralized stablecoin - DAI.

Dash DAO - Supports payments focused cryptocurrency - Dash - "Instant transactions and micro fees. Any amount, Anytime. Anywhere". Masternodes have voting power, and they vote on projects to continue development work on Dash. The intriguing thing is that the funds to be disbursed come as a portion of block reward for mining. Masternodes are also participants in the network, so this mechanism will incentivize them to cooperate on the proper use of those funds because masternodes are affected by the outcomes. DAO structure has added a layer of decentralized governance on top of distributed technology, adding to the robustness of the cryptocurrency. There are many other DAOs in different stages of experimentation based on the platforms, e.g., dxDAO, PolkaDAO, etc. (on DAOstack)

So, is there a point in creating a DAO compared to a hierarchical organization structure?

DAOs have a promise of disintermediation by removing the managerial hierarchy. Automation of decision-making using technology helps reduce the cost of the ecosystem by eliminating organizational hierarchies. It would save on labor costs here. However, management hierarchies provide leadership and administrative value in an organization. You can automate business administration. Still, business realities keep changing, and an organization has to respond, and that decision making will shift to the owners. They now have to review, debate, and vote upon proposals.

If you want to use this structure with a few members to collect and disburse funds for projects with a necessary audit in place, I don't think there will be many issues. But, as the scope of DAO increases, they'll have to play well with the existing regulatory framework. At this time, the legal status of DAOs is also unclear. Who is responsible if things go wrong? There is the talk of LAOs with a legal wrapper around the DAOs to work through this.

DAO needs member cooperation and participation as the underlying basis for it to be a success. Shared goals will always help move it in that direction. Common crises could be that catalyst bringing together for a common purpose to overcome the crisis. But as soon as those key ingredients go missing, it'll be difficult for a DAO to continue. Dash DAO seems to have the best model, where financing is independent through mining reward. Defining masternodes as participants also incentivizes them to cooperate and participate in shared goals.

Outside of that, I'd imagine forming a DAO for a short-term goal with the end of reducing administrative costs might make sense. But expecting a self-sustaining decentralized organization running a fleet of autonomous electric cars as a going concern is likely only possible after much more evolution in the DAO space.

Why DAO based on blockchain technology?

After all, organizations today use automation to bring down administrative costs, and there are tools available for global collaboration. If there is a need for shared data reality and give transparency, blockchain-based DAOs will provide advantages. They will help reduce the total cost of data management as no reconciliation would be needed. Additionally, platforms like Aragon could also make the setup of a short-term DAO by providing the necessary tools to jump start the setup and governance.

Rahul is a technology advisor with a deep background in enterprise IT. With a driving-need to learn, he is always exploring how technology can help make our lives better. Rahul is currently busy following the breadcrumbs down the Blockchain rabbit hole, picking up shinies along the way. Brilliant minds have an open invitation to connect @ And, have a coffee break over a scintillating conversation on Blockchain - or travel, or climbing, or diving, or Seahawks, or...

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