DAOs, design-by-committee, and the future of online organisations

The world of work is rapidly migrating from physical space to the internet and this newly dominant medium for work is going to significantly change how we structure society. This may sound dramatic, but it is inevitable that industrial-revolution era systems, legislations and structures will eventually be superseded. I think, in the crypto community, we’re already seeing the structures of the future emerge.

The world today looks very different to the world in the 1970s when the first LLCs were established to adapt the corporate world for globalisation. In the crypto community, a new organisational structure has been adopted to cater to the brave new world of distributed collaboration: the DAO (Distributed Autonomous Organisation). Put simply, DAOs are internet-native organisations, orchestrated by code on a blockchain, designed to enable a distributed membership to democratically govern their pooled resources. DAOs can represent commercial endeavours (i.e., companies), non-profit initiatives, social clubs, and more.

Thanks to the glut of acronyms and arcane terms, DAOs can seem a lot more complicated than they really are. Just think of them as a new type of business structure alternative to partnerships, sole traders, companies and LLCs, enabled by some pretty simple technology.

At a glance:

• DAOs are democratic. Membership is granted by the commitment of capital or work. Members can then raise and vote on proposals, like a board of directors.
• DAOs are distributed. As an internet-native organisational structure, DAOs enable (potentially even anonymous) people from around the world to collaborate. I believe this location-agnostic approach is the biggest benefit that will lead to adoption.
• Members pool and invest their resources. A DAO is like a group chat with a bank account. Participants vote to decide how funds (which exist as cryptocurrency) are spent/invested.
• DAOs are regulated by code. All organisations are managed against contracts and regulations, but compliance with these rules is reliant on the good faith of members. DAOs augment their shared bank account with code (smart contracts) that ensures funds are only utilised when the pre-defined voting conditions are met. This enables DAOs to operate in zero-trust circumstances (e.g., collaborations with strangers from all over the world).
• DAO regulations can be patched. DAOs have the capacity to make changes to existing systems by providing a mechanism to replace any part of the system that is not working or is a security risk.

Starting an organisation with someone that involves funding and money requires a lot of trust in the people you’re working with. But it’s hard to trust someone you’ve only ever interacted with on the internet. With DAOs you don’t need to trust anyone else in the group, just the DAO’s code, which is 100% transparent and verifiable by anyone.

— Decentralized autonomous organizations (DAOs), Etherium.org.

Contracts are ambiguous, argued by lawyers and discerned by judges. Smart contracts, however, are completely unambiguous — unlike legalese, code is interpreted one way only. This is the innovation that enables truly distributed organisations. If you trust the code that undergirds your organisation, the amount of trust you need in your collaborators is significantly reduced. Obviously, code comes with its own risks: code can have bugs and security flaws and this has caused serious problems for DAOs already.

One common criticism of DAOs by the old guard of business is that truly democratic organisations (particularly ones with a very large voter base) will suffer from the many shortcomings of design by committee. If in the future, you’re imagining the average DAO will have a very large pool of distributed members, I think this is actually a pretty reasonable criticism. While broad democracy is a great framework for governing some types of organisations (I imagine this will have phenomenal results in the philanthropic space), I would argue that most great companies succeed as a result of the outsized influence of specific contributors and operators who possess the right skills and experience to solve a specific problem. Absolute organisational democracy would dilute the influence of these people and ultimately put DAOs at a disadvantage against traditional organisations.

This is why I think, in the future, many DAOs will end up having a small, selective membership, resembling a corporations board of directors. And, while many believe DAOs will liberate organisations from the tyranny of centralised leadership (i.e., executives like CEOs), I believe many DAOs will elect to hire CEOs and executive teams. DAOs will also likely lead to more generous and transparent ESOPs for employees.

Is anyone eager to start a DAO and buy some coal mines?