DAO explained: What is a Decentralized Autonomous Organization?
How companies benefit from new forms of cooperation
DAOs embed cooperation and collaboration in the DNA of many blockchain applications. But also for traditional DAO stands for Decentralized Autonomous Organizations and, let’s face it, is for most either completely unknown or another buzzword of the blockchain bubble. But the idea behind DAO is relevant to all of us. Basically, DAOs are about finding new forms in which to organize work and, more importantly, collaboration. These new forms are based on the core idea of eye-level collaboration between the stakeholders involved. In this context, topics such as stakeholder economy instead of shareholder economy and ecosystems instead of centrally controlled platforms are much better known. Decentralized Autonomous Organizations are now a special form of how such cooperation principles can be implemented. The DAO idea should therefore be studied by anyone who believes that there will be hierarchy-free, cooperative forms of collaboration between individuals and also between companies in the future. companies, new collaboration models are becoming more important. Is there a lesson to be learned from DAOs? A glimpse behind the scenes reveals the answer.
DAO stands for Decentralized Autonomous Organizations and, let’s face it, is for most either completely unknown or another buzzword of the blockchain bubble. But the idea behind DAO is relevant to all of us. Basically, DAOs are about finding new forms in which to organize work and, more importantly, collaboration. These new forms are based on the core idea of eye-level collaboration between the stakeholders involved. In this context, topics such as stakeholder economy instead of shareholder economy and ecosystems instead of centrally controlled platforms are much better known. Decentralized Autonomous Organizations are now a special form of how such cooperation principles can be implemented. The DAO idea should therefore be studied by anyone who believes that there will be hierarchy-free, cooperative forms of collaboration between individuals and also between companies in the future.
What is a DAO?
In principle, the explanation of a DAO comes from the name itself – ‘Decentralised Autonomous Organisation’. As the name implies, this is a form of organization that is
- is autonomous – meaning it has the ability to act on its own and is independent of individual internal and external actors
- is decentralized – thus decision-making is by consensus of the members and is independent of a central location and leadership
Every organization needs rules. The set of rules of a DAO is coded in the form of an immutable software, the so-called Smart Contract. The smart contract is the backbone of the DAO. To ensure the immutability and autonomous operation of this smart contract, it is operated on a blockchain infrastructure. This transparent and tamper-proof decision-making ensures the basic principle of autonomous operation of the DAO. No matter which member triggers an action in the DAO, it will always lead to the same result according to the coded rules. The best way to compare this is to an organization’s rules of procedure codified in software and written down in a blockchain. Unlike the rules of procedure captured in paper form, the smart contract of a DAO does not allow for any room for interpretation either, which should reduce the likelihood of conflicts between members.
Every organization needs members. The goal of a DAO is to create equal opportunities among all members. After the initial rules of the DAO are defined, member recruitment must be started. This usually runs in the blockchain world by issuing tokens. Accordingly, the holders of the tokens are the members of the DAO and, according to the coded rules of procedure, can submit proposals, participate in votes, and share in the tasks and success of the DAO. The votes are then conducted through traceable procedures that are cast in software.
DAOs as a framework for future cooperation
A DAO can be used for almost all forms of collaboration. It can map collaboration between individuals just as it can map collaboration between companies.
- The joint financing of assets (investment)
- The coordination of a joint service delivery (cooperative)
- The use of common resources (sharing)
The biggest driver of DAOs is the changes in the way we all live and work toward independence and self-determination. Whereas in the past a full-time job in dependent employment was “normal,” today’s working worlds are increasingly characterized by freelance work. Whereas the radius of one’s own action was severely restricted by office duties, today at least part of the work can be performed from any location as a matter of course. Whereas in the past it was completely normal to buy and own things, today simple usage matters more than owning a product. All these changes demand and promote structures of cooperation and participation from which the DAO idea was born.
DAOs – Relevant for traditional businesses?
Currently, DAOs only exist in the crypto world. Mostly, they are used for coordinating the cooperation of individuals. But for companies in particular, the principles of DAOs represent a great opportunity. With trends such as the sharing economy and the increasing demand for interconnected services rather than isolated products, companies are often only able to provide services as part of a network. Today, companies have two alternatives. The classic is collaboration in a supplier relationship (supply chain). Here, the company at the top of the chain usually controls the supply chain. An alternative to this is cooperation platforms. In the platform economy, however, the aggregation of data and the associated information asymmetry pose the risk of the emergence of market-dominating platform monopolies. DAOs, with their approach of depicting a cooperation that is neither controlled nor dominated by one of the participants nor by the operator of the digital cooperation solution, can offer a counter-model to this.
Wrapped DAOs – the way to legally compliant organizations
In their basic concept, DAOs anchor decentralized organizational principles:
- Hierarchy-free control
- Complete transparency about structures and rules
- Equal opportunities for all members regardless of place and time of joining
- Trust through secure protection against manipulation
In these aspects, they differ from classic organizational principles and are therefore often seen as an alternative to classic corporate and organizational forms. Of course, this is not very practical, since any DAO that is to be effective needs a legal framework. If this is not explicitly defined, DAOs will probably be seen as partnerships with all the associated difficulties. Currently, there are efforts to wrap DAOs as constructs in the mantle of classic legal forms such as cooperatives, associations or even limited liability companies. These promising approaches could help DAOs make the leap out of the crypto world.
Understand DAO not as a goal but as a path.
In the crypto world, DAOs are taken for granted today, but outside the bubble they are hardly a topic. If this is to change, DAOs must be understood not as a fixed construct (with blockchain, smart contracts & co) but as a path. Regardless of the means used, there are nevertheless increasingly widespread efforts that new forms of collaboration must be found. Until this becomes the new normal, there are still some hurdles to overcome. In addition to the legal complexity already mentioned, technical and social complexity must also be resolved. For example, it is not easy from a technical point of view to cast complex sets of rules in code. For less complex issues, however, there are already frameworks, such as Aragon, to start a DAO without extensive blockchain know-how. In practice, social complexity emerges as the greatest challenge. Openness and active co-creation are required from all participants. The initiators of a cooperative or an ecosystem must create incentive and control systems that function stably over the long term. Once a cooperative has been launched, members must have the will to actively participate in its expansion. Such cooperative systems do not emerge overnight. Based on a common goal, defining, building and legally anchoring a cooperative organization is a path worth taking.