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February 25, 2018
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Why DAOs May Spark a Corporate Transformation

Beyond the hype of Bitcoin, cryptocurrency and stories of instant fortune are the beginnings of some real technological revolutions. We hear it in the whispers of smart contracts and the semi-regular announcements of enterprise blockchain projects. Just as important however may be the new organisational phenomena that’s gradually gaining traction: the Decentralised Autonomous Organisation (DAO). In the following piece (and Part 2, coming soon after), we’ll explore what a DAO is, what it means for business and the potential consequences of blockchain-native organisations.

 

What is a DAO?

At its most basic level, a DAO utilises blockchain and smart contract technology to create an organisation which is governed by code. Because a DAO and the rules which govern it exist on a blockchain, all DAO functions can be handled with an automated permissions system, governed by code. It creates the possibility for all DAO members to have full knowledge of financial records, transactions, business dealings and information, and gives certainty that no one can break the rules.

DAOs are typically governed by consensus – automatic algorithms that allow members to vote on decisions based on predetermined parameters. For example, the Dash cryptocurrency blockchain allows all masternode holders – individuals who possess 1000 DASH or more – to vote on resolutions which can allocate funds stored in a ‘treasury’ to certain worthwhile projects. The now infamous Ethereum DAO, which was intended to be an open venture capital organisation, operated on a similar premise.

These are very basic examples of a predominantly financial implementation of the DAO structure. Work is now well advanced on creating far more complex – and powerful – models to operate decentralised blockchain companies.

 

DAO 2.0 – Smart Blockchain Organisations

The DAO 2.0 model proposes harnessing smart code to automate a wide range of internal functions and external relationships. It envisions a broad ecosystem of automated, borderless companies, all doing business on enterprise grade blockchains.

Projects like Aragon, EOS and Colony are building platforms to achieve this. But why are many touting this as a new corporate revolution?

GIF of Colony website - a DAO dApp.

Colony – one of the platforms hoping to run a DAO 2.0 ecosystem on the Ethereum blockchain.

Openness is one reason the new DAO structures are so attractive. In an organisation where blockchain-based code is used for typical corporate functions like the constitution, voting, shareholding, financial records, payroll and project management, much of the uncertainty surrounding company management is eliminated.  No longer does a minority shareholder need to fear majority shareholders taking actions that are unconstitutional. Members can be assured that funds will not be appropriated without their permission, as DAOs can hold the major portion of capital in a multi-signature wallet, which would require permission of many or all stakeholders to deal with. In short, it levels the playing field and mitigates risk.

Automation through wide-reaching smart contracts is another major boon of these new DAOs. From paying non-discretionary dividends, to creating an automated task bounty system in which members can ascertain the funds exist to pay them for their labour before beginning the task, DAO automation may completely revolutionise the way we do business. When we begin to look at digital jurisdictions in which DAOs can choose which over-arching ‘laws‘ will govern their commercial relationships, things reach a whole new level of exciting.

DAOs are also blockchain native. As the decentralised application (dApp) ecosystem increases in size and utility, it will allow traditional companies to utilise blockchain technology in their enterprise to a degree. DAOs, however, will take this one step further – they’ll incorporate any functionality natively into their existing blockchain structure, creating less friction and harnessing the full benefits provided by the technology.

Many of these new-generation DAOs and DACs (Decentralised Autonomous Companies) will be more akin to cooperatives or associations – a group of individuals working together for mutual gain. A DAO may elect not to have any ‘employees‘ in the traditional sense of the word, but provide remuneration to members in other ways – sharing of profits, issuing of tokens, awarding of bounties or wholly non-monetary rewards.

 

What are the practical benefits of the DAO/DAC model?

This all sounds great in theory, but how will this look in practice? There are several immediate benefits that a DAO model will provide any enterprise:

 

1. A borderless, non-jurisdictional organisation

While some modern companies may claim a form of national agnosticism, they still hold a corporate personality within their nation-state. After all, they have offices, provide physical goods and services, and employ paid workers. This comes with myriad regulations and obligations, as well as considerable ongoing cost in legal, accounting and tax advice (among many others) to ensure continued compliance. A DAO, existing solely on-chain and not holding corporate personality in any one nation, may side-step some (or even all) of these issues.

Being ‘on-chain’ or having an online structure will not automatically exempt an organisation from national corporations law. If two companies combine to create a joint venture using a DAO model, or a business forms in one nation to provide goods and services, it will need to comply with the legislative structure of your country. Regulators usually take the view that if an entity looks like a duck and quacks like a duck…it’s probably a duck.

Tax man and police man - after your money!

Could a land-based government tax a decentralised, blockchain native organisation?

However, if the proposed DAO is a collection of individuals from a number of countries holding no land or assets through which to invoke a jurisdictional basis, it may be difficult for any State to ‘get at‘ the organisation itself. Indeed, it would be difficult for the DAO to ascertain which jurisdiction it belongs to. I discuss this further in Part 2 of this series.

 

2. An increased sense of ownership and ‘buy-in’ for members

Traditional ‘top-down’ company structures pool decision making power and money at the top – first with the shareholders, and then with executives and upper-level management. While this model has worked for previous generations, it is increasingly resulting in lower employee happiness, job quality and loyalty to any one company, especially in millenials.

DAOs can provide a monetary and decision making ‘stake‘ for all members, incentivising them in a more meaningful way to invest their time and effort into the long-term goals of the DAO. It can also provide alternate means to earn income and gauge performance, like bounties, inter-organisational venture capital and flexible structuring.

 

3. Access to new types of business relationships, or improving existing ones

Business to business relationships are intrinsic to modern life. Joint ventures, partnerships, side-projects and not-for-profit enterprises are all ways in which a DAO can be trialled within an existing corporate structure. They offer ways to cut down on waste, increase trust and cooperation, and define the rules ‘in stone‘ for any type of B2B arrangement.

Obviously, due diligence must be performed to ensure that where your DAO interacts with existing jurisdictions or engages any taxation legislation, it is fully compliant. Specific legal advice should also be sought in relation to the offering of shares in a DAO based primarily in one country, as it may fall under the scope of a security.

Regardless, the potential for all parties to interact with each other in a completely open and autonomous manner using a DAO model cannot be overstated, and the early adopters will invariably reap the largest rewards.

 

4. Preparing early for the future of online corporate interaction

Given the many benefits of blockchain and smart-contract technology, it’s likely that business relationships will occur increasingly ‘on-chain’. Contracts, financial and online arrangements that don’t have some form of smart-contract automation ‘baked-in’ will be regarded with suspicion, as it will be interpreted as an unwillingness to operate in a trustless environment. The question will inevitably be asked, “What are you hiding?

Organisations that exist predominantly ‘on-chain’ will find themselves in prime position to take advantage of opportunities, and be  leaders in their field. They will operate on a lean and efficient model that will grow to become the envy of their competitors, and the pride of their members.

 

How do I learn more?

There are several projects running within a DAO framework right now, including:

  • Bitshares – first real decentralised corporation
  • Dash – Decentralized Governance by Blockchain (DGBB)
  • Steemit – a social media blockchain with member-controlled resolutions

These are still quite basic, and have limited functionality. However, there are several platforms that are building DAO 2.0 structures, with many more extensive features. While these are all still under development, these are some of the ‘front-runners’ for a true DAO 2.0 solution:

  • Colony – A platform for open organisations. You can find their whitepaper here.
  • EOS – A complete smart contract and decentralised application solution, looking to solve some of the major problems faced by Ethereum.
  • Aragon – A platform for all manner of decentralised organisations. You can find their extensive documentation here.

It is very likely we will see several more players emerge as blockchain and smart-contract technology matures. For now, the DAO 2.0 ecosystem is very much in its infancy.

 

Where to next?

Once these DAOs and DACs begin to interact with each other, digital jurisdictions and conflict resolution must be considered. I discuss this in part 2 of this series on decentralised corporations, which I’ll link here once published.


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