A decentralized autonomous organization (DAO) is a management framework made popular by cryptocurrency projects and decentralized finance (DeFi) protocols. Rather than relying on a small group of shareholders, DAOs allow organizations to distribute the decision-making process among multiple parties. Also, the DAO model encourages transparency and efficiency by automating voting processes for company-wide updates and development decisions. In DeFi and crypto, DAOs present an attractive alternative to centralized governance structures. However, complete decentralization is unsuitable for most companies. Nonetheless, companies can still enjoy many of the benefits of DAOs while retaining existing management frameworks by implementing a hybrid DAO model.
In this article, we’re going to explore the hybrid DAO model. We’ll discuss the different types of DAO structures and how your business can benefit from implementing them. Also, we’ll discuss some of the factors to consider before jumping into a DAO system.
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Blockchain for Enterprise
Most people associate blockchain with cryptocurrencies like Bitcoin and Ethereum. Although cryptocurrencies are undoubtedly a driving force in blockchain, the Web3 movement has its sights set on something much bigger. Web3 technologies are becoming increasingly commonplace sector-wide. Also, the use cases for blockchain extend to finance, security, data management, communications, supply chain management, energy, arts, entertainment, media, real estate, and beyond.
However, when discussing blockchain solutions for business and enterprise, we often talk about something slightly different than Bitcoin and Ethereum, which are public blockchains. These public chains are completely decentralized and transparent. Further, they have no central authority, and anyone can use them. On the other hand, private blockchains are permissioned networks with a central authority. Moreover, many businesses are adopting a hybrid blockchain solution that combines the best elements of both public and private blockchains. Using a hybrid solution enables businesses to benefit from the security and decentralization of public blockchains while implementing specific permissioned features to suit their organization’s specific requirements.
Enterprise blockchain solutions are helping to optimize business practices and increase transparency across many industries. If you want to learn how companies like Microsoft, IBM, and Coca-Cola use blockchain to optimize business processes, check out the Blockchain for Enterprise course at Moralis Academy.
What is a DAO?
A decentralized autonomous organization (DAO) is a legal framework made popular by decentralized finance (DeFi) protocols. Traditional governance structures tend to rely on a small group of powerful individuals for decision-making. When this occurs, it can be pretty challenging to align the goals of the various employees of any given business. However, DAOs allow businesses and organizations to implement a transparent governance structure on the blockchain using a “bottom-up” approach.
DAOs allow each member of a group or organization to align their goals by voting on update proposals that determine the future direction of a protocol. To facilitate this, most DAOs use a distributed network of governance token holders. Governance token holders oversee the management and decision-making of a cryptocurrency project or protocol. Each vote is publicly viewable on the blockchain, making the process incredibly difficult to manipulate. Also, DAO members tend to vote on mutually exclusive outcomes rather than selecting multiple options.
Rather than a central authority determining the future direction of a project or protocol, DAOs put the power to make changes in the hands of their users. This model allows users to become more than just consumers. Moreover, DAO members have “skin in the game”, allowing them to act as a collective governing body with aligned interests.
How Do DAOs Work?
DAOs automate decision-making processes using smart contracts. Smart contracts are immutable, transparent agreements on the blockchain. Once a vote settles and the outcome is clear, DAOs execute the terms of the vote using smart contracts. This minimizes the need for trust and counterparty risk, eliminating much of the potential for human error or foul play.
When an organization wants to change the parameters of a protocol, it can do so as and when they see fit. However, DAOs enable community members to have a say in the outcome of these decisions. In DeFi, proposals often relate to token supplies, reward schedules, and token burning. However, update proposals can cover just about every area of your business.
Generally speaking, one governance token is equal to one vote. Some DAOs only let members vote once per proposal, whereas others use weighted voting to incentivize people to buy and hold more of a particular token. For example, holding 20 governance tokens could enable a DAO member to vote on the same proposal 20 times.
In addition, DAO members can vote on how community funding is granted. DAOs often have a treasury that contains funds for grants and community initiatives. As such, members can vote on how these funds should be spent and which projects should receive the support of the community. Check out the Build Your Own DAO course at Moralis Academy to learn more!
Pros and Cons of DAOs
Implementing a DAO model into your current business structure has many potential benefits. One of the benefits of the DAO model is that it is decentralized and requires no central authority. Decision-making is a collective endeavor that prevents powerful individuals or groups from acting selfishly. Also, DAOs empower those who participate. Anyone with the ability to vote in a DAO has an incentive to participate in a fair and equitable voting system.
Another benefit of DAOs is that they increase transparency. Rather than containing votes in a siloed database, DAOs use public blockchains for immutable data storage. All votes are publicly viewable on-chain, helping to prevent bad actors from acting against the interests of the organization. In turn, this helps to foster a community of like-minded individuals working towards a common goal.
Despite the many advantages of DAOs, they are not without limitations. If a DAO is not thought through properly, it could leave the mechanism open to exploits. Also, because DAOs allow multiple people to vote, it can be a slower process than a decision-making process guided by a CEO or a smaller group of shareholders.
Furthermore, DAOs rely on the broader community having basic knowledge and understanding of Web3 technologies. Suppose voting members do not fully understand the implications of their votes or the broader effects on the organization. In that case, they could cause friction when aligning the goals of the broader membership or cast votes with little thought towards their effect.
One of the most significant considerations for a DAO is security. Web3 requires a level of technical knowledge that can lead to vulnerabilities. Despite DAOs inheriting the security of the parent blockchain, they are often vulnerable to hacks and exploits. When this occurs, treasury funds can be stolen, and votes can be manipulated.
What is a Hybrid DAO?
Now that you’re familiar with the concept of DAOs, let’s take a look at hybrid DAOs. Hybrid DAOs combine the effectiveness of a board of directors with the decentralized governance of Web3. Hybrid DAOs enable businesses to benefit from transparent group-voting mechanisms while retaining any of the traditional practices of traditional governance. The Hybrid DAO model still utilizes the voices of a group. However, this group can be much smaller than that of a DeFi project. Also, organizations can tweak the exact parameters of a hybrid DAO model to suit the specific needs of their company.
Just like regular DAOs, hybrid DAOs benefit from the transparency and immutability of blockchain networks. Hybrid DAOs can help minimize inefficiencies and reduce wasted energy while enabling companies to establish exactly which aspects of their governance should be decentralized and to what extent this should happen. Also, the hybrid DAO model utilizes governance tokens to facilitate decentralized voting on the blockchain, just like traditional DAOs.
Furthermore, the hybrid DAO model helps businesses to bridge the gap between the decentralized world of Web3 and the traditional corporate environment. Providing that a hybrid DAO model features a robust set of values that underpins the entire process, they can help businesses and organizations to thrive industry-wide.
Why Use a Hybrid DAO Model?
Governance and management styles vary significantly between companies and industries. Naturally, a model that works for one organization may not work for the next. However, a hybrid DAO model can be tailored to meet the specific requirements of your business. Most businesses outside of crypto and blockchain would struggle to implement a fully decentralized governance structure. Furthermore, it would be difficult for many prominent business models to completely dismiss any existing corporate structures and instead opt for a community-governed organization.
On the other hand, DAOs help businesses to see past titles and positions by giving voting power to a larger cross-section of team members. Also, a hybrid DAO model enables businesses to take advantage of the various marketing and audience engagement opportunities that Web3 provides. For example, if you run a clothing company, what better way to encourage audience engagement than allowing consumers to actively participate in the design of new collections? Not only would it drive consumer feedback, but it also gives consumers a voice and a sense of community around your products. In addition, adopting a hybrid DAO model could help save time and resources on marketing and market research.
On-chain governance provides an immutable trail of valuable data derived from those who have a stake in the future of a company. Instead of shareholders making decisions that benefit their balance sheets, governance token holders have an incentive to act in the interest of the organization at large.
Moreover, hybrid DAOs give customers an unparalleled connection with your brand while providing actionable insights from your most loyal user base. With a growing demand for Web3 technologies, a hybrid DAO model could help your organization to gain a competitive edge and adapt for the future.
Why Businesses Should Adopt a Hybrid DAO Model – Summary
In just over a year, the existing number of operation DAOs has increased tenfold. The continuing trend for brands and businesses to adopt Web3 technologies reflects the demand for these technologies. However, because Web3 is so young, adopting Web3 technologies enables businesses to stand out from the crowd in many sectors. Furthermore, the increase in popularity of the metaverse is becoming increasingly apparent sector-wide, with many companies and brands using NFTs and Web3 as a staple in marketing and audience engagement tools.
Introducing a DAO to your business could help eliminate inefficiencies and improve transparency in democratic procedures and governance. Also, a hybrid DAO model enables businesses to combine the best elements of decentralized governance and traditional governance practices to advance their business culture and secure the future direction of their company via equitable and transparent voting mechanisms.
Integrating Web3 technologies is often daunting for businesses. There is a common misconception that integrating blockchain and smart contracts into existing business practices requires a complete system overhaul. However, the reality is that you can implement all kinds of Web3 features into your workflows with little friction.
The Ethereum Smart Contract Programming 101 course at Moralis Academy is the perfect starting point for any development team looking to take their programming skills to the next level and integrate Web3 functionality into their projects. In this course, we provide all of the resources you need to build and deploy smart contracts on Ethereum. Also, check out Moralis Projects to learn how to build your own decentralized applications (dapps). Join the Web3 revolution today with Moralis Academy. In addition, check out our “Rust & Solana” and “Solana vs NEAR” articles to learn more about smart contract programming on Solana.
