Will Decentralized Autonomous Organizations (DAOs) Become Mainstream Governance Tools?

As counterintuitive as it may seem, one of the great strengths behind blockchain is the fact that no one has complete control over it. In traditional ledgers, even digital ones, someone always oversees its operations, be it a bank, an investment house, or another institution.

Blockchains are distributed across hundreds, even thousands, of data centers around the world. No one, not even the chain’s founders, can alter an existing record without simultaneously changing a critical majority of its duplicates – not an impossible task, but extremely difficult.

Blockchain for Governance

In recent months, we’ve seen this paradigm pushed to a new level. Instead of a distributed ledger limited to the transaction of digital assets, new Decentralized Autonomous Organizations (DAOs) are taking shape that shift the entire governance of a chain to a distributed footing – essentially handing control of the community’s operations to its members.

How does this work, exactly? The DOA is governed by smart contracts housed within a blockchain. Changes to the contracts, or acceptance of new ones, can be proposed by anyone but can only be enacted by a consensus of the members. Voting is usually transparent, and when the conditions for approval are met, the contract is automatically updated.

In many cases, the voting is weighted according to the number of tokens distributed across the chain (“simple token voting”). The more tokens you own, the more votes you get. And consensus can be awarded in any number of ways – by a simple majority of tokenized votes, by higher thresholds of approval for certain measures, such as a 2/3 or even 3/4 supermajority, or some other agreed-upon method. By nature, though, the DOA should be distributed and transparent so that control cannot be centralized by individuals or groups.

New Corporate Paradigm?

To some, this is not just a novel new way to manage an organization. It is a fundamental shift in how they operate and how decisions are made. For the business world, this represents a potential reinvention of the corporate structure from top-down hierarchies to more cooperative, collaborative organisms.

A recent post on Columbia Law School’s Blue Sky Blog by Professor Wulf Kaal and tech consultant Josh Bykowski argues that the DAO is poised to revolutionize the finance, insurance, and service industries by cutting out the need for middlemen, streamlining workflows and optimizing costs. Meanwhile, issues regarding content ownership and fair compensation that are plaguing the media industry could be resolved through DAOs, even as the era of artificial intelligence-driven intellectual property evolves.

As well, non-profits and government agencies will see vastly improved financing, broader-based decision-making and more equitable allocation of resources at a faster pace.

Ready for the Metaverse

But perhaps the most fertile breeding ground for DAOs is the metaverse. When literally everything is virtual, the benefits of consensus-based governance become more ingrained in organized activity.

A case in point is Decentraland, a virtual reality platform built on the Ethereum blockchain. Members have the ability to do virtually anything and go anywhere in the world, including conduct business and make decisions regarding the evolution of the environment.

This is done through virtual tokens representing land or networking elements called MANA, which can be used to exchange NFTs, wearables, avatars and other assets, as well as vote on the many issues raised by members of the community.

Cyber Solution

The DAO is also making its presence known in the crypto world. Holders of cybercurrencies are increasingly gravitating toward decentralized operations, with services like MakerDAO allowing members to essentially act as their own bankers. MakerDAO uses currency tokens called Dai that are pegged to the US dollar and backed by Ethereum, USD Coin and newer cryptocurrencies.

For governance, the service uses MKR tokens that are used to vote on changes proposed for the platform’s protocols. Members decide on things like interest rates, acceptable collateral, and even hiring decisions for technical and management positions – essentially setting the terms under which their assets are saved and invested.

The Bottom Line

While decentralized authority may offer greater control to the members of a community, there are some downsides. For one, the speed of decision-making can be hampered depending on how many votes are needed to approve a measure. Likewise, some members might not be as knowledgeable or informed as others, leading to manipulation and even coercion. And, of course, the platform must employ top-notch security to prevent breaches and malware.

Whether DAOs become the norm in the digital economy or carve out their own operational paradigm remains to be seen. But if they are as efficient and trustworthy as they seem, it is hard to see how today’s corporate structure can compete effectively, especially if digital currencies become as ubiquitous as national currencies are now.

And if corporations can be made more effective by stripping them of their central authorities, what does that say about governments?