The simplest way to describe DAOs – distributed autonomous organizations – is that they are online communities owned and controlled by their members. The basics are a group of people with a common goal get together online, pool their resources and collectively attempt to accomplish the goal.
Think of them as online co-ops.
But unlike traditional co-ops, DAOs are governed by smart contracts (collections of computer code) that define the DAO’s operating rules. These smart contracts operate on blockchain technology, which provides rule transparency (everyone can see them) and security (the rules can’t be changed without member approval). Key DAO operating decisions and changes to the DAO’s smart contracts are made collectively by the members voting.
A good example is the recently formed Constitution DAO, which had the goal of acquiring an original copy of the United States Constitution at a recent auction. Their bid failed, but in just a few weeks, an online core group of about 35 people was able to form the DAO, recruit 17,000 members, raise $47 million, and bid to buy the Constitution.
This effort nicely illustrates some of the advantages of DAOs. They can be formed quickly and easily, they can tap into online audiences for members and supporters, and the members share in the rewards or accomplishments of the DAO. Another important advantage is the rules-based nature and transparency of smart contracts means trust is built into the system. The last point is very important. Without that trust, it’s very unlikely the Constitution DAO could have recruited so many members and raised $47 million so quickly.
The chart below, from The Bankless DAO’s article State of the DAO 3 – Overview of the DAO Ecosystem, illustrates that most any kind of organization can be formed and managed as a DAO.
See the Bankless DAO article for more information and details on the various types of DAOs in the chart.
(Click image to enlarge)
DAOs are important because they are proving to be a cheaper and more efficient way to form and operate for certain types of organizations than more traditional corporate structures are. For example, we think DAOs are likely to become a popular teaming mechanism for groups of independent workers.Using a DAO, groups of independent workers could quickly and easily form up to accomplish a task, and deform when finished.
Having said that, there are still unresolved issues and problems with DAOs. One big issue is a lack of laws and legal clarity around DAOs. So far, only Wyoming has passed a law providing legal status for DAOs (they’re a type of LLC if registered in Wyoming). This means when problems occur, the legal ramifications are unclear – and potentially very problematic.
DAOs also face the same issues traditional co-ops face, with a big one being that management by voting can be inefficient and/or contentious. This often results in co-ops being less able to respond as quickly as more agile organizations in the face of change.
But it’s clear that DAOs have advantages relative to other organizational forms. And because of these advantages, we expect to see many more DAOs formed in the coming years.
This article was originally published here.
