True Meaning Of DAOs — Understanding A New, Emerging Phenomenon

DAOs and DACs

Currently, hundreds of decentralized autonomous organizations (DAOs) are trying to find a commercial foothold. They set out to provide a modern-day, wholly digital solution for coordinating and structuring work. At least, in theory, DAOs fulfill the same role as traditional organizations except that they are founded on Bitcoin’s philosophy of openness, transparency, trustlessness, decentralization, and scarce digital value.

Replacing companies is perhaps the most straightforward way to think of DAOs and formulate their purpose. In 2013, Vitalik Buterin referred to decentralized autonomous corporations (DACs) in Bitcoin Magazine as a top-down approach to automating labor: [1]

“The industrial revolution allowed us, for the first time, to start replacing human labor with machines on a large scale, and now we have advanced digitized factories and robotic arms that produce complex goods like automobiles all on their own. But this is only automating the bottom; removing the need for rank and file manual laborers, and replacing them with a smaller number of professionals to maintain the robots, while the management of the company remains untouched. The question is, can we approach the problem from the other direction: even if we still need human beings to perform certain specialized tasks, can we remove the management from the equation instead?”

Where corporations are characterized by strict management hierarchies, confidential business procedures, and secrecy, DAOs are community-driven, open-source networks that anyone can participate in regardless of his or her qualifications, background, or geographical location. There is no need for board members or executives since new proposals and voting are carried out by the members collectively (for example on a service like Snapshot) with the DAO’s network-specific governance token. The decision-making powers, and thereby control of the network, are distributed among all stakeholders, typically weighted in accordance with their individual stake in the project meaning how much of the token they hold.

Defining DAOs — Potential and Problems

DAOs were accounted for in Ethereum’s white paper from 2014 and in short defined as “long-term smart contracts that contain the assets and encode the bylaws of an entire organization”.[2] Another early definition of DAOs from a terminology guide by Vitalik was “an entity that lives on the internet and exists autonomously, but also heavily relies on hiring individuals to perform certain tasks that the automaton itself cannot do”.[3]

To Web 3.0 advisor and writer of the Not Boring newsletter, Packy McCormick, the democratic governance system of DAOs holds a clear advantage over traditional organizations:[4]

“DAOs are all about maximizing stakeholder value. The users and contributors are also the investors and owners. While community ownership seems weird and novel and almost hippie, it’s actually a more natural model than a few outside investors and board members dumping a bunch of money into a company and deciding what it should do. The reason we do it the way we do is that, until now, it’s been too hard to coordinate having a lot of small owner/stakeholders who all get a say in decision making. Technology is finally enabling the more natural model”.

While the potential of DAOs seems to be enormous, there are also problems in the landscape. Problems much bigger than the fact that “dao” is already a well-known word that means “the way” in Chinese, and is a key concept in the religious textbook Dao De Jing.

For starters, the majority of DAO projects do not live up to their acronym as they are neither decentralized, nor autonomous. Many DAOs are really concealed corporations with a participatory governance mechanism.[5] For example, as long as a core development team is needed to implement the community’s proposals for changes — which is often the case — the organization is per definition not decentralized nor autonomous.[6]

Much like NFTs, “DAO” is partially a trendy buzzword designed to attract investments from “crypto bros”. It could be called “crypto washing”. Another related concern is that the term “DAO” is conceptually overloaded with divergent meanings. In my interpretation, the landscape is struggling to find a real-world identity despite, or perhaps even because of the many use cases (I will write more about the practical applications in an upcoming post).

In its most simple form, a DAO could arguably be a small group of people in an online chat forum who sympathizes with the same cause and shares a crypto wallet. In its ultimate manifestation, I imagine a DAO as a self-governed flying saucer that lures carefully chosen people out to the desert where they are snatched up to partake in a cryptic mission. And anything in between these extremes.

To obtain an even better understanding of the true meaning of DAOs, we should — like any anthropologist or historian would say — understand where they came from. All valid transactions on a blockchain can be traced back to the genesis block. In a similar manner, I believe that all valid crypto projects have a direct bloodline to Satoshi Nakamoto’s white paper on Bitcoin. On this premise, we can decipher the true meaning behind our object of study by examining its origin.

Read along in my next post where I will explain why and how Bitcoin is a DAO.

[1] Vitalik Butering (Sep 2013), Bootstrapping a decentralized autonomous corporation: Part 1 ->https://bitcoinmagazine.com/technical/bootstrapping-a-decentralized-autonomous-corporation-part-i-1379644274.

[2] Vitalik Buterin (2014) Ethereum: A Next-Generation Smart Contract and Decentralized Application Platform, pg. 1.

[3] Vitalik Buterin (May 2014), DAOs, DACs, DAs and More: An Incomplete Terminology Guide -> https://blog.ethereum.org/2014/05/06/daos-dacs-das-and-more-an-incomplete-terminology-guide/.

[4] Packy McCormick (March 2021), The Dao of DAOs -> https://www.notboring.co/p/the-dao-of-daos?s=r

[5] Frank Chaparro and Davis Quinton (2022), DAOs are neither decentralized nor autonomous -> https://www.theblockcrypto.com/post/137464/mike-dudas-explains-why-most-daos-are-neither-decentralized-nor-autonomous.

[6] See Reddit thread concerning the issue here: https://www.reddit.com/r/CryptoCurrency/comments/tbwufy/most_daos_are_neither_decentralized_nor/.

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