In this “DAO vs Traditional Organization” article, we’re going to dive deep into the world of decentralized autonomous organizations (DAOs). We’ll explore how DAOs operate and how they differ from regular businesses. Plus, we’ll look at some of the pros and cons of creating a DAO.
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DAO vs Traditional Organization – What is a DAO?
A decentralized autonomous organization (DAO) is a trustless organization that enables blockchain developers to automate decisions and agree on the parameters of a cryptocurrency or protocol. A DAO, also known as a decentralized autonomous corporation (DAC), enables like-minded developers worldwide to collaborate without third parties or intermediaries. Also, the rules and decisions of a DAO are governed by its members rather than any central authority. Furthermore, some DAOs have built-in treasuries that members can vote on to allocate funding. Every member has an equal voice within a DAO and can vote on proposals to bring changes into effect.
Unlike traditional corporate structures, DAOs don’t have CEOs or leaders. Also, because all decisions are recorded on the immutable blockchain ledger, agreements can’t be altered without informing the entire group and making a united decision. Accordingly, all members of a DAO obey the rules embedded in the code on the smart contracts defining the terms of the DAO. Nobody can secretly spend money from the treasury or change the outcome of a vote.
DAOs provide a decentralized alternative to traditional management structures. This enables blockchain and Web3 projects to remain decentralized and conduct community governance without a board of directors. All of the authority to make decisions stays in the hands of the community. In turn, this enables cryptocurrency projects to steer new protocols in the right direction to create thriving, sustainable ecosystems with sound money principles. Also, a DAO allows an organization to operate more transparently and with less human error and trust than any traditional organization.
DAO vs Traditional Organization
Before we discuss the differences between a DAO vs a traditional organization, let’s first discuss the similarities. For starters, both a DAO and a standard company require a founding member or team. In the traditional world, this might be an entrepreneur who finds a gap in a market. However, the founding members of a DAO may be a small group who want to create value through a new protocol or service.
Forming a traditional company requires the submission of documentation. For example, if you wanted to form a limited liability company (LLC) in the U.S., you would need to provide information such as the name of your LLC and a company address. Following this, you’ll need to pay a filing fee, get insurance, perhaps some licenses, and a bank account. Conversely, forming a DAO requires fewer formalities. Creating a DAO does not require participants to fill out any paperwork. Also, although some DAOs will incorporate as LLCs, it is not an essential step.
Furthermore, the creators of a DAO might converse and plan the fine details of an organization in an informal manner compared to traditional organizations, with boardroom meetings swapped for Discord and Telegram conversations. After this, decisions are brought onto the blockchain using smart contracts. Rather than using pages of physical paper contracts, smart contracts enable DAO creators to automate the terms of their organization using self-executing code.
Not only does this optimize the entire process, but it also removes trust between parties. Smart contracts are at the core of every DAO. Accordingly, these contracts will stipulate every parameter of the DAO, such as how new members can participate, how members access treasury funds, and how voting mechanisms should function. Moreover, smart contracts mean that members of a DAO don’t need to meet each other in person.
DAO vs Traditional Organization – Funding
Initially, the funding for an LLC tends to come from the founding members and partners in the form of capital contributions. These contributions usually represent a percentage of ownership in the business and cover initial operational costs. Moving forward, if an LLC needs additional cashflow, members could take out a business loan or look to venture capitalists (VCs) and investors for funding. In this case, each investor takes a portion of ownership away from the original contributors.
One of the downsides of outside investors is that they expect a return on their investment. Although this may seem obvious, it could force an organization to make questionable decisions to ensure returns for investors. However, DAOs offer an equitable alternative for raising capital.
DAOs align financial contributions with governance rights to enable investors to become owners and workers. To fund a DAO, most projects will create a token that can be sold on open markets. Anybody who wants a stake in that organization can simply purchase governance tokens to have a say in the direction of the project. In turn, these token sales help to fund the treasury of a DAO. Furthermore, a DAO treasury can lock funding into a multi-signature wallet to increase security and prevent any single member from withdrawing funds. Also, DAO members have an incentive to maintain the well-being of a project, not just make a quick buck.
DAO vs Traditional Organization – Structure
The structure of most organizations requires each employee or member to function together harmoniously. Any significant deviation from this cohesion could disrupt the entire organization and cause it to stop working. To keep everything running smoothly, traditional organizations often adopt a hierarchical structure, with those at the top making decisions that those at the bottom will implement. This top-down, tired pyramid structure clearly defines the roles of each member or employee, which is an efficient way to delegate responsibility throughout a large workforce.
Despite the advantages this model offers, it can be limiting for several reasons. The communication of ideas tends to trickle down from a small group of people to the majority. Often, this can reduce job satisfaction and inhibit employees from aligning their goals with the company. Furthermore, this model can stifle innovation and prevent collaboration.
However, DAOs take a completely different approach to structure and hierarchy. DAOs don’t have bosses, managers, and CEOs. Instead, each member can interact with smart contracts to vote on how things should operate. Also, DAOs benefit from smart contracts that reduce the issue of human error and poor performance.
Furthermore, almost every aspect of a DAO is written into the code of a smart contract. This includes the allocation of funding, voting systems, and the implementation of improvement proposals. Accordingly, DAOs promote collaboration, transparency, and open discussion more than most traditional organizations. Moreover, every member of a DAO must agree on any changes before they can be implemented.
Why Join a DAO?
DAOs enable groups to come together to achieve goals that are outside of the scope of traditional companies. Members can participate in decentralized crowdfunding and funding management in a way that removes most of the paperwork, fees, and trust from the equation. Also, DAOs are incredibly quick and simple to set up. Plus, anyone can create a DAO, regardless of nationality or status.
In addition, DAO members can define their own goals. Unlike a traditional company with shareholders, DAO members can directly control their own destiny. The only shareholder interests within a DAO are those of the DAO members. These visions are aligned more than most corporations and serve to benefit those who do the work.
Another advantage of a DAO is that every member can speak openly and frankly. Often, big companies can be intimidating, especially for employees. If an employee feels that they have been mistreated, it can be difficult to speak up if they feel that their job may suffer as a result. However, DAOs remove this dynamic and promote inclusion and discussion.
Moreover, DAOs can facilitate and automate the transparent distribution of funds and financial rewards. Instead of a small handful of powerful people deciding how money is spent and how employees are reimbursed for their time, DAOs create an open and mutually beneficial system whereby each member knows the reasons for each decision that affects them. Accordingly, DAOs remove many of the hierarchical hurdles and bureaucratic obstacles that prevent innovation and make people dissatisfied in their roles within an organization.
Downsides of a DAO
As with any organization, DAO members have different reasons for joining. Some members will be more active than others and participate in governance and community ventures. However, some members could see their DAO membership as more of a speculative investment opportunity. However, it can be challenging to get rid of any passengers once they are a part of the DAO.
In a traditional company, bad actors or selfish individuals can be fired or disciplined. Unfortunately, these aspects of a DAO are yet to be defined. Also, DAOs can quickly become uncoordinated if they are too big. An optimal DAO might have 5-10 core members with a larger peripheral support network. However, if this group becomes too large, it can easily become inefficient and contain too many inactive participants. DAOs can quickly grow to a size that becomes inefficient and incohesive. If the finer details of a DAO are not predetermined, an organization can be challenging to manage if it includes too many members. Also, errors within the code of a DAO’s contract could take a long time to rectify if the community is slow to vote on any changes.
Also, the DAO model is relatively young and does not cover every nuance of complex organizational structures. The remote nature of DAOs prevents members from engaging in in-person, face-to-face dialogue on a regular basis. Although there are several benefits to working remotely, time differences and language barriers can cause issues for DAOs that operate internationally.
DAOs have the potential to heavily disrupt several business models. However, DAOs are currently unable to fulfill every role within every type of business or organization. The chances of multinational corporations such as Coca-Cola or IBM switching to a DAO model are slim. That said, DAOs present multiple opportunities for an organizational overhaul sector-wide.
DAO vs Traditional Organization – Summary
Despite the similarities between DAOs and traditional organizations, a DAO is more than a novel business model. A DAO enables a group to raise funds, share ideas, and build an equitable organization where everyone has a say. Working for “the man” could soon be a thing of the past if DAOs achieve their true potential and disrupt the traditional corporate structure used throughout western businesses. DAOs enable investors, employees, and organizations to operate within a framework they can align with, with a shared goal of predetermined outcomes that favor cohesion and innovation over shareholder profits.
Furthermore, the DAO model enables organizations to remove unconscious biases around age, race, and gender to reward only on merit. Accordingly, DAOs provide far more of an equitable environment for participants than a typical corporate structure. Moreover, DAOs facilitate the community governance and decentralization of a project, features that are a prerequisite for many Web3 organizations. In the future, we can expect to see several innovations and elaborations on the DAO concept.
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