The concept of DAOs (Decentralized Autonomous Organizations) was first introduced by Dan Larimer in 2013. Essentially a DAO is an organization whose workings are solely defined by code. This code establishes rules that define all the internal mechanisms that manage the allocation of the organization’s funds. In a blockchain, these rules (called smart contracts) are automatically enforced by a decentralised network of computers, and as such can’t be directly influenced by any particular agent, and consequently doesn’t depend on any managerial supervision to operate.
Most cryptocurrencies that are open and decentralized can be considered DAOs. Taking Bitcoin as an example, so-called miners are rewarded with new funds for the work they do. Nobody controls this fund distribution, as it is all defined beforehand by the protocol itself, and there is no way for any single entity to modify this behaviour. Once a necessary action is taken, the expected result is obtained. Always, without fail.
The most amazing property of such systems is that they enable users to enter into agreements and exchange value on the internet without the need of knowing or trusting each other, as the self-executing property of smart contracts eliminates counterparty risk. This allows for complex sets of rules to be designed, and for the creation of entirely new trustless economies to emerge, based on a vision shared by the organization’s stakeholders.
Dash is probably the best example of a working DAO, with a simple but effective voting platform to fund software development and marketing activities. The success of this model is testified by the fact that many other newer cryptocurrencies, for example Pivx, Decred and ZenCash, have organized the same way. Other notable projects implementing DAO Treasury systems are BitShares and Steem.
In August 2015 DASH (portmanteau of Digital Cash), one of the top cryptocurrencies by market capitalization, launched DASH Treasury and its related voting platform
The Dash currency has 3 main stakeholder groups:
- miners, who maintain the network’s security
- MasterNodes, who run specialized software and reduce the currency’s volatility by staking a substantial deposit (1000 DASH, currently ≈278,000$)
- Developers, end users, and merchants
Every time a Dash block is mined, 45% of the reward goes to the miner, 45% goes to MasterNode Operators (MNOs), while the remaining 10% is awarded to the Treasury.
Anyone can request funding from the treasury by paying a non-refundable fee of 5 DASH(currently ≈1390$). Nonetheless MNO (MasterNode Operators) are the only ones who can vote on these proposals. If a proposal receives a number of net positive votes larger than 10% of existing masternodes, it is eligible to be funded. Funding priority is then established by a ranking of these proposals based on the number of votes they each receive.
The treasury’s monthly budget for August 2018 will be 6,176.72 DASH. At the current price of 278,91$ per coin, this is ≈1,722,748$. In December 2017 the treasury budget reached an all time high of over 4.2M$.
This is a considerable budget to spend on software development and marketing, and has helped Dash in maintaining its position as a top cryptocurrency, albeit losing pace to newer projects with huge ICO funding.
While most of the permissionless cryptocurrencies that run on their own public blockchain are DAOs in their own right, other more sophisticated DAOs can be built as a set of smart contracts deployed on top of another public blockchain, using their own specific internal token for governance, and managing different kinds of currencies.
The first such project was a decentralized Venture Capital fund, launched back in 2016 on the Ethereum blockchain. Rather unimaginatively called “The DAO”, it attracted 150M$ in one of the biggest Initial Coin Offerings to date. Users purchased “DAO” tokens, allowing them to submit and vote on investment proposals. If a proposal reached a certain voting threshold, it would be funded automatically by the smart contract.
After two months in operation, a hacker exploited a bug in the smart contract code to siphon away 50M$ of investor money, cutting The DAO’s wings before it was able really takeoff. This massive blow created a major rift in the Ethereum community. A majority of the community, spearheaded by the Ethereum Foundation, decided to alter the ledger, returning all hacked funds to investors. Others in the community were unimpressed with this bailout, and decided to “fork” the blockchain, maintaining the unaltered ledger, in what is now known as Ethereum Classic.
The rise of unstoppable organizations
The untimely demise of The DAO highlights the fact that Smart Contracts are not flexible. Once deployed, they can’t be changed, so bugs need to be found and fixed beforehand. For this reason, as the industry matures, frameworks of standard “vetted” contracts are becoming increasingly prominent.
One such example is Aragon OS. Launched in 2016, as an Open Source Software project, it aims to create and distribute all necessary software to build digital organizations, as well as to establish a “digital jurisdiction”, for resolving disputes.
Using these tools, users will be able to easily create an internal token to represent shares, take decisions by voting (based on configurable parameters), raise capital in various currencies, and manage funds. The organization itself holds the keys to these funds and defines the rules by which this value can be transferred both inside and outside of the organization, making it possible for trustless company governance on the internet.
Tools like these will greatly reduce the effort necessary to create new organizations, as it will only be necessary to have some Ether to pay for the transaction fees to deploy the necessary smart contracts on the blockchain. These fees are currently around 0.1ETH (at current price, ≈40USD).
If we compare Aragon DAOs to traditional corporations, or even to simpler businesses like partnerships, it is clear that the digital variety is much cheaper, transparent, quicker to setup, easier to scale and, arguably, more secure (as no-one can run away with the company’s capital). With more digital companies emerging, it is plausible to imagine this kind of organization will be fairly common in the future.
By running on the Ethereum blockchain, these organizations don’t require anyone’s permission to be established, are anonymous, and (can be) virtually immune to government intervention (more on this in my next article). By coordinating the efforts of a limitless number of stakeholders through a set of unbreakable, self-enforcing rules, DAOs allow for the creation of business models and entire economic concepts that are simply not possible in the traditional economy.
What are DAOs good for?
Automatically executing agreements and self-enforcing rules are not necessary for every organization. In small organizations, where it is feasible for all members to know and trust each other, it may be more efficient to create simpler structures with a nominated treasurer, rather than a set of rigid rules for fund management.
However, it is easier to understand the potential of DAOs when thinking of organizations whose members are, by nature, adversarial. When participants don’t trust each other or have conflicting short-term goals, the creation of a self enforcing set of rules to manage common funding is an optimal way of coordinating competing market actors towards shared longer-term goals or the creation of common infrastructure.
As a potential solution to the tragedy of the commons, DAOs allow for collective ownership by a self-regulating organization, offering a way to create scalable models of governance for publicly owned assets. This may lead, for example, to the creation of industry specific consortiums of companies working on a global scale.
A specific example from the service industry
Uber has been hailed as a prime example of internet-based innovation, being the first private company to reach a billion dollar valuation. However, at a very basic level, Uber is simply a technological middleman, matching drivers with passengers.
With current smart-contracts, Uber’s technological role could easily be fulfilled by a simple DAO. This organization would finance developers to build a an app which they use in common. An app of this nature could be made to be provably fair towards all taxi providers, who in exchange would pay back a small fee to the organization.
As long as this organization erects no barriers to entry and remains permissionless, allowing anyone to join and compete (ex. anyone can become a new taxi, anyone can propose themselves as developers), then there is no incentive for other groups to compete with this model, levelling the playing field and allowing taxis to compete transparently on pricing and service, while benefitting from a publicly funded infrastructure.
DAOs as the next wave of disruption
The internet is dominated by massive centralizing entities that derive their wealth from acting as middlemen between internet users. These giants have become ubiquitous by creating easy-to-use interfaces, and have grown disproportionately by commandeering exorbitant fees.
Any business model basing its success on the connection and coordination of market actors is ripe for disruption by blockchain based competitors, whereby the need for a central entity is substituted by a set of rules enforced by trustless systems.
DAOs were born at the junction of computer code, economic incentives based on cryptocurrencies, and the power of borderless online communities. In the coming decade, we will see a multitude of new organizations spring up, challenging the status quo with new governance models based on transparency and stakeholder participation.
While no-one can tell for sure what lies ahead, I believe DAOs have the potential to shake the foundations of the digital economy, providing opportunities for a more inclusive, more decentralized internet to emerge.