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Closing The Gap Between Companies & DAOsby@shaanray
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Closing The Gap Between Companies & DAOs

by Shaan RayMay 9th, 2022
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Decentralized Autonomous Organizations (DAOs) are a utopian idea. Today’s organizations require people to conduct legally-required functions, such as paying employees or buying insurance. DAOs have come a long way since the hack of the first DAO and the hard fork of Ethereum. People can make DAO-ish organizations by adopting blockchain-backed solutions to as many corporate functions as appropriate. They should encourage jurisdictions to give legal recognition to DAOs and to provide friendly governance and compliance regimes.

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Decentralized Autonomous Organizations (DAOs) are a utopian idea. Today’s organizations - corporations, government agencies, and non-profit organizations - have a jurisdiction. DAOs are everywhere and nowhere. Today’s organizations embrace hierarchy and have governing boards and managers. DAOs are flat and they make decisions either by number of votes from token-holders (participatory DAOs) or by the rules of the code itself (algorithmic DAOs). Today’s organizations require people to routinely conduct legally-required functions, such as paying employees or buying insurance. DAO users and counter-parties are compensated automatically through smart contracts.

DAOs have come a long way since 2016. Initially tarnished by the hack of the first DAO and consequent hard fork of Ethereum, many DAOs today are successfully providing incentives for user participation – by making users stakeholders, by yield farming, by airdropping tokens (including retroactively), and by specializing in creative niches.

This article proposes that while continuing to improve on DAO structures and incentives, the crypto community close the gap between companies and DAOs in two ways.

First, they should embrace blockchain-backed solutions – especially those built within Bitcoin, Ethereum, and other prominent ecosystems – to existing corporate functions. Second, they should encourage jurisdictions to give legal recognition to DAOs and to provide friendly governance and compliance regimes.

Adopting this two-pronged strategy will make today’s organizations more DAO-ish, enable organizational complexity while reducing compliance costs, and strengthen the crypto ecosystem.

Use blockchain for existing corporate functions

People can make DAO-ish organizations by adopting blockchain-backed solutions to as many corporate functions as appropriate. For example, organizations can:

  • Use smart contracts to pay employees and contractors continuously and automatically during the appropriate periods of time, freeing up its HR function for higher-value pursuits;
  • Track items in its supply chain – such as tracking apples from farm to grocery store or tracking minerals from mine to market – on blockchains, so that any item’s path can be audited at any time, reducing audit costs and timeframes; or
  • Use smart contracts to automatically transact with counter-parties that accept an organization’s terms, thereby reducing sale, procurement, and other transaction costs.

Big companies exist because of the high transaction costs that decentralized forms of association face – for example, when finding employees or suppliers. One of crypto’s many benefits is disintermediation and the reduction of transaction costs. By building corporate functions on top of the Bitcoin or Ethereum ecosystems, DAO enthusiasts can take incremental steps toward reducing transaction costs, while strengthening these ecosystems.

Secure legal recognition and friendly governance and compliance regimes for DAOs

‘Dropping’ tokens to users or focusing on donations are some ways that bright DAO enthusiasts have steered clear of onerous compliance requirements.

DAOs that operate in regulated environments or tackle complex objectives – for example, an international movement to manufacture a new kind of vehicle – will need to comply with more laws. For example, if your DAO is active in banking, it could be subject to KYC, AML, and other legal requirements.

An unincorporated DAO in a regulated field can easily be deemed by countries or states to be a legal entity. Since the default legal entity – a partnership – has unlimited liability, this would subject every DAO participant to unlimited liability.

So, it is important to have jurisdictions recognize DAOs as corporate entities, to limit users’ liabilities. Efforts in this direction are already underway. In Wyoming, DAOs can be LLCs, while Vermont recognizes blockchain-based LLCs. These efforts should be intensified. Jurisdictions should compete to be seen as DAO-friendly and compete to host DAOs.

Innovators within crypto ecosystems, like those for Bitcoin and Ethereum, have already built many layers and capabilities into these ecosystems. Legal recognition and friendlier compliance regimes can give rise to more complex DAOs that take advantage of these layers and capabilities, while adding richness and strength to the ecosystems.

Conclusion

The crypto community is creative and has come a long way in the last few years. In addition to innovating on DAO structures and incentives, it should make organizations more DAO-ish by putting existing corporate functions on the blockchain and secure legal recognition and friendly compliance regimes for DAOs. This will enable more complex DAOs to emerge while strengthening their underlying crypto ecosystems.

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Shaan Ray