DAOs Could One Day Be The Primary Mechanism for Corporate Governance

For more than a decade, the world of crypto has represented the leading edge of both technology and finance. But from the outside, there's no shortage of people that view it as disruptive — or even subversive. And it's those defenders of the status quo who've been the most resistant to the many benefits that crypto has to offer.

But despite all of that institutional resistance, crypto's relentless march forward continues. With each passing day, more and more ideas, concepts, and technologies are crossing over out of the crypto realm and into the business world writ large. And the latest example of that is the decentralized autonomous organization (DAO).

First developed to help manage crypto projects in a decentralized way, DAOs are beginning to gain traction in the wider business community. And their rise is prompting some to wonder: can they eventually come to replace corporate boards as the primary mechanism for corporate governance? Here's a look at how that might happen and what's standing in the way.

The Basics of a DAO

To understand why DAOs are getting some serious attention from mainstream businesses, you must first answer the question: what is a DAO in the first place? And without getting too deeply into the technical details, the answer to that question is simple.

A DAO is a blockchain-based system of smart contracts that allows large groups of individuals to participate in and have a say in a crypto project. Most DAOs use crypto tokens to perform a handful of functions necessary for the proper operation and development of the project they control.

In a DAO, the most basic form of token functionality is access provisioning. In other words, owners of a specified number of the token have access to the DAO and its features. The second function is governance. In that case, tokens function as voting shares, giving the holder a proportional say in how the project proceeds. And the third function is compensation. In a DAO, it's common for tokens to accrue to participants who do work needed for the project to progress.

A DAO as a Form of Corporate Governance

At first glance, it would appear that DAOs would be a natural fit in a corporate governance role. But only at first glance. The reason for that is simple: corporations aren't democracies. In a typical corporate management structure, there's a distinct stratification between the people calling the shots and the shareholders.

The former is ordinarily comprised of a board of directors. And the latter typically only gets to vote on who those directors are and other high-level governance decisions. They have almost no say over the day-to-day operations of the business they own a part of. But the average DAO doesn't work that way.

In a DAO, it's most common for every token holder to have voting rights commensurate with their holdings. No single user has more of a say than the others unless they've got more assets at stake in the DAO. And there's no board of directors, per se. All of the decision-making is done by the group, and the majority wins.

But there's nothing that says a DAO has to operate that way. It's technically feasible to set up a DAO that emulates a conventional corporate governance structure. And operating a business in that way has some merit. It's one of the reasons that business heavyweights like Mark Cuban have sung the praises of the DAO model of late. And at the same time, some heavyweight investors are doing everything they can to get in on the ground floor of what's predicted to be an explosion of DAO activity in the months and years ahead.

So What's Stopping DAOs From Crossing Over?

The primary factor limiting DAOs from making serious headway in the corporate governance space is a lack of regulatory certainty. Put simply, there isn't enough of a legal structure surrounding governance by DAO for any major business to use one for that purpose. It's a similar problem to the one that continues to hamper Bitcoin adoption in the US and beyond.

Whereas individuals might ignore the uncertainty and take the plunge into crypto, corporations — with investors to answer to — will not. That means it's unlikely that we'll see any corporation of note explore the use of a DAO for governance anytime soon. But that doesn't mean we won't see it at all.

The reason is that there's been some recent activity on the regulatory front regarding DAOs. Wyoming — which is as crypto-friendly as it gets — recently enacted a law giving DAOs similar legal standing to LLCs. That may soon make the state into something of a proving ground for using DAOs in corporate governance. And if there's some success there, it's not all that farfetched to expect that additional states or federal regulators might look to emulate Wyoming's legal approach.

The Bottom Line

So, to answer the question posed at the beginning of this article, yes, DAOs may one day come to replace corporate boards as the primary form of corporate governance structures. But that day's certainly not today, or likely even close.

As with most other disruptive changes in the business world, no business is going to want to test out a new form of governance unless there are some legal ground rules in place to guide them and help them avoid liability. And it's going to take time for regulators to agree upon those rules and codify them.

The bottom line, though, is that crypto's recent past offers some clues as to what to expect, here. After all, it wasn't that long ago that mainstream financial commentators agreed that crypto itself was little more than a tech-fueled Ponzi scheme. And today, it looks likely that we're going to see a government-issued crypto dollar sooner rather than later.

So, as DAOs continue to prove themselves as a trustworthy governance solution within the crypto realm, keep a close eye on Wyoming. It may soon yield the prototype of a DAO-managed corporation. And when it does — you can bet that it won't be the last time you see one of its kind.