As the capabilities of distributed-ledger systems have become more advanced, programmers and entrepreneurs have begun to envision new possibilities for organizations based on this technology. An idea for a business that could be created without a hierarchical structure, an unhackable voting system that can be implemented anywhere; the possibilities are exciting and seemingly endless. Moreover, all these ideas now possible with the rise of the Decentralized Autonomous Organization, or DAO for short.
However, before talking about DAOs, it is essential to understand what Non-Autonomous Decentralized Organizations (DOs) are. A DAO takes the concept of a traditional business, but removes the hierarchy, replacing it with a protocol by which people can interact, and which is enforced via blockchain. A blockchain-based contract contains records of each shareholder’s stock, and allows voting procedures, so each member has a say in the employees and management of the company. Smart property systems can be integrated directly into the blockchain, controlling company assets.
The autonomous aspect of DAO refers to a system that does not require voting on management or directors because the system itself is the management. A true DAO hires individuals to complete tasks the system itself cannot perform but makes all executive decisions according to a code in the blockchain and the preferences of stakeholders.
How a DAO Works:
The functions of a DAO can be broken down into 6 essential parts:
1. Tokens of Transactions
To function, a DAO needs to be given some property with which to reward desired activities for the organization. This must be given at the DAO’s inception, as the inclusion of human investors or management is antithetical to the concept of the organization.
Once created, a DAO becomes completely independent of its creator. Being unhackable and entirely transparent due to all transaction being visible on the blockchain, no trusted third party is necessary to handle the organizational finances.
Any change to the finances or code of the DAO must be voted upon by the stakeholders, and some level of the majority must concur. Here lies both the strength and one of the shortcomings of a DAO. Embezzlement is now impossible, but even such things as bugs in the smart contract’s code must be voted upon before fixing, leaving security issues open for longer than they may be in a traditional organization.
4. Contracts and Contractors
Because a DAO is not capable of writing code, constructing hardware, or developing a product, contractors must be hired to perform these tasks. Contractors are chosen through voting processes by the stakeholders.
These are the primary way by which contractors are chosen. An aspiring contractor submits their offer to be voted on by the stakeholders. To prevent the server from becoming overloaded from too many proposals or attacked by a spam-bot, monetary input may be required for submission.
6. Voting Procedures
Once proposals are submitted, stakeholders vote on the best. The winning proposal is automatically awarded the contract, and the contractor performs their work. Due to the inherently open and secure nature of blockchain, once the work is submitted the funds may be transferred directly from the DAO to the actor without the need for a third-party arbitrator.
How Would This Work in the Real World?
Former Bitcoin contributor Mike Hearn envisioned a DAO service similar to Uber, where a self-driving car would go around searching for passengers, then use the money it made to pay for its gas. In this scenario, the car would be provided by the creators of the organization, then set free. If it weren’t a self-driving car, stakeholders would vote on the driver based on proposals. The stakeholders also might vote on price per mile, price-ramping protocols, how to use surplus resources, and other decisions that affect the bottom line. If they wanted, a stakeholder could sell their stake to a willing buyer, who would then receive the previous holder’s voting rights and future dividends. The specifics would vary from business to business, as different groups of stakeholders make different decisions about their desired returns and the fate of the company.
DAOs offer the oppor:tunity for groups of individuals to come together and conduct business fairly and effectively without the need for human administration or third-party intermediaries. However, when establishing a DAO, companies still need to ensure they are operating within the existing legal frameworks. This means being aware both of the current laws dictating the sale of cryptographic tokens, and those of intellectual and physical property.
As time goes on it can be expected more and more DAOs will be created as the concept is solidified and breaks into the mainstream. How our financial, social, and governmental institutions respond and potentially utilize this emergent technology is the subject of much speculation by many in the field. However, we can expect in the next few years to see massive leaps in technology that will permanently change the way we interact with businesses and with each other.