Web 3.0 Part 2 – What Is A DAO & What Can Businesses Learn From Them?

In our last post we defined what Web 3.0 is and some of the technical and regulatory challenges that could hinder its progress. We also defined decentralization in the wider context of web 3.0 and some of the positives and negatives around that.

In the post we are going to dig deeper into web 3.0 and decentralization by talking about DAOs. If you have no idea what any of that means then do not worry. This post is for you!

So make yourself comfortable, it’s time to dig into DAOs.

What is a DAO - An image showing several cryptocurrency symbols.
Photo by Shubham Dhage on Unsplash

What is a DAO?

DAO stands for Decentralized Autonomous Organization but they can also sometimes be referred to as Decentralized Autonomous Corporations (DAC).

Both DAO and DAC are organizations constructed by rules that are encoded as a computer program. This program is (although not always) transparent, controlled by members of the organization and not influenced by central governance. So DAO’s are member-owner communities or groups that operate without a traditional centralized leadership.

Financial transaction records and the rules of the program are maintained on a blockchain. This is supposed to bring transparency and it also facilitates the use of smart contracts.

Ok, So What is a Smart Contract?

To understand DAOs you have to understand smart contracts. Smart Contracts are part of the machinery that helps the DAO to function (whatever that function looks like).

So we have established that DAOs are organizations built with rules that are encoded as a computer program. The easiest way to understand smart contracts is as lines of code within that computer program. The terms of agreement, say between a seller and buyer, are written into those lines of code. This “code” can self-execute and transactions resulting from the smart contract are trackable (and irreversible) on the blockchain. As mentioned above, the rules of the DAO are maintained on a blockchain.

Smart contracts are usually how people buy into DAOs. When they buy into a DAO a smart contract is issued and the person buying into the DAO gets their governance token.

That governance token is a “vote”.

So How Does Voting Work In A DAO?

Each member of a DAO has a governance token. This gives each member the opportunity to vote on decisions that affect the DAO. These decisions are usually around how the DAO spends its “money” (this is one of the many areas DAOs intersect with the crypto space).

DAO - Image showing a contract being signed to symbolize smart contracts.
Photo by Cytonn Photography on Unsplash

What Does a DAO Even Do?

All of this is very hard to understand and in all honesty, it’s made to sound more complicated than it really is.

It’s not vastly different from shares in a company. Shareholders often get to vote in matters of company governance and this is pretty much how DAOs work. 

The difference is DAOs can theoretically be “for anything” and a voting token does not give you the same rights as a shareholder. You could have a DAO that is set up purely for the purposes of buying one piece of expensive art. Or funding a new series of a TV show that got canceled. ConstituitionDAO, for example, was set up purely to purchase one of the original copies of the U.S. constitution.

But ConstitutionDAO is also an interesting example of the limitations of a DAO. ConstitutionDAO failed in its bid to purchase a copy of the U.S. constitution. The refund process for members has been, to put it politely, a mess.

So a DAO is an organization that exists on top of, and as, a computer program where people have voting tokens that inform and influence how the DAO makes decisions. The DAO also usually holds a pool of cryptocurrency and voting tokens help influence how that pool of cryptocurrency is spent.

But what happens when it all goes wrong? We know in the web 3.0 space that is not a rare occurrence. In fact, the first ever DAO offers a cautionary tale.

What is a DAO - Image of two coins with crypto symbols on them.
Photo by Quantitatives on Unsplash

The Tale Of The First DAO…

The very first DAO launched in 2016. Named “The DAO” (no points for creativity there), it was built as a smart contract on the Ethereum blockchain.

It is also important to note here that “The DAO” coding framework was developed open source by the Slock.it team. The creation phase was a big success and, at one point, The DAO had Ether assets that were “worth” $250 million.

The DAO itself was basically a venture fund where people could pitch their ideas to the community and potentially receive funding.

But it all went VERY wrong.

In June 2016, not long after The DAO launched, a hacker found an exploit in the code. This exploit allowed the hacker to drain funds from The DAO. The equivalent of $70 million was stolen, though the hacker did stop taking money from The DAO, even though they could have continued.

This was the beginning of the end for The DAO. In 2017 the United States Securities and Exchange Commission (SEC) got involved. 

The SEC concluded that “Tokens offered and sold by a “virtual” organization known as “The DAO” were securities and therefore subject to the federal securities laws.” This means that in the view of the SEC, The DAO violated securities laws along with people that invested in it.

The DAO is something of a cautionary tale for DAOs in general. It has also steered new DAOs in how to avoid SEC scrutiny.

When things go wrong in Web 3.0, they can really go wrong!

Image of several people around a laptop.
Photo by John Schnobrich on Unsplash

What, If Anything, Can Businesses Learn From DAOs?

A lot of businesses are looking at DAOs to assess what they can learn from them and how the technology could be utilized for business innovation.

But, right now, it is difficult to really see any business utility in the current DAO model. At least at the moment. 

For example, how many actual organizations would really benefit from unbreakable or codified rules? Businesses in the last few years have spent a lot of money to get more agile, right now operating like a DAO could reverse that. 

If you have to stick to smart contract decisions that will impact organizational dynamism. In a commercial context a business has to deal with ambiguity and change all of the time. New competitors rise, demand may fall but change is constant. Immutable computer code is not really very flexible and adaptable.  Now imagine you are involved in a start-up. Founders and entrepreneurs make decisions based on incomplete data all the time. They might have to put products out before they are ready. Writing smart contracts for all this would slow everything down to a crawl.

DAOs are also in a legal grey area. The whole idea around blockchain and DAOs is that they are based around anonymity. When things go wrong in a corporation, responsibility has to be assigned. How would that even work in a DAO (as it stands)? How does a DAO pay taxes? Most economic activity depends on knowing the party you are doing business with. How does that work with a DAO? There is a lot of uncertainty with DAOs and business is not known for liking uncertainty.

Image of two laptops together in a business meeting.
Photo by Scott Graham on Unsplash

DAOs Are Not Going To Replace Organizations…Yet.

But this is the embryonic stages of what DAOs could eventually be. Could businesses use aspects of DAOs to improve their organizations? Absolutely! Organizations could use DAOs to make huge changes, as you can use DAOs to do anything.

Imagine how companies could use smart contracts to make ironclad promises to employees (which probably will not catch on). Could companies take the spirit of DAOs and decentralization and use that, rather than the technology, to become truly flat organizations? A company could even set up a property DAO for its employees to get around high prices in the housing market. A DAO like that would be a real differentiator in the competitive recruitment market.

Taking the spirit of DAOs and innovating from that is likely to be something businesses could do now. There is too much uncertainty in DAOs themselves for most businesses to get behind them in a meaningful way. But times change and they are changing much faster now than they used to. Once the technology behind DAOs is more consistent, anything could happen.

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Talk to MAQE

Want to decentralize and become a flatter organization right now, rather than wait for DAOs, then talk to MAQE. We can help you to make your business faster and more agile. Get in touch via [email protected].