The TAO of the DAO
A lot has been written about DAO’s and today I am going to write about my perspective of the DAO. Now what has TAO got to do with DAO? TAO in Confucianism is defined as the way of the universe. Taoism states that all living beings needs to live in a state of harmony with the universe. DAO in a sense tries to achieve this harmony in human endeavour.
DAO is a new kind of organizational design with a flat hierarchy mostly structured around a cooperative type organization. A DAO first and foremost is defined by its purpose to which all its members are aligned. A simple example will be the Constitution DAO, the members of this DAO had only one goal in mind to buy the first edition copy of the United States constitution. Another example would be Krause House DAO, whose only purpose was to purchase a professional NBA Club. Meta cartel ventures was an investment DAO with only purpose to invest in early stage DApps.
So, I guess, you are getting the idea, when I say purpose led organization. The members can be located anywhere in the globe and in that sense decentralized and as the goals are clearly defined, it has no management hierarchy to take care of its business however it has a governance structure. It is operations are autonomous and so are most of its members. Each member gets voting rights for the DAO’s business proposals.
DAO’s are powered by two main technologies the block chain and their smart contracts. The smart contracts define the rules by which people are bound to obey. In that sense, the human component of decision making is isolated. Why do we have to do that? Proponents of the DAO claim, this is the solution for the principal agent problem.
The Principal Agent Problem
The principal agent problem is a long-standing governance issue acknowledged by political scientists and economists. Managers acting on behalf of their direct reports, politicians taking decisions on behalf of the people they represent. Basically, an agent within an organization that has the authority to take decisions affecting the principal. Your appraisal definitely has this problem. So, this must perk up your interest. A moral hazard develops when the CEO takes on additional revenue targets that needs to come at the expense of the employees doing extra work beyond what is necessary. Here the agent acts for his own self interest aligned with the share holders rather than that of the principal. Coupled with a lack of transparency with the employee at the bottom of the hierarchy, this creates conflict and disharmony within the organization. Not all groups of people can be satisfied or kept happy.
Conventional Business
In conventional organizations, all employees are governed by employment contracts that define what they are supposed to do and not supposed to do, which is enforced by law in the country in which they live and operate.
DAO members are not governed by employment contracts but by the self-enforcing smart contracts.
(1) Blockchains and smart contracts minimize administrative transaction costs while increasing transparency and aligning the interests of all stakeholders via consensus rules related to the native token. Individual behavior is rewarded with a token in exchange for collectively contributing to a shared objective. Members of a DAO are not legally bonded together, nor have they engaged in any formal legal contracts. Instead, they are guided by incentives connected to network tokens and completely transparent regulations encoded into the software and enforced by machine consensus. There are no bilateral treaties. There is just one governing law — the protocol or smart contract — that governs all network members’ behavior.
Unlike traditional companies, which are structured top-down with many layers of management and bureaucratic coordination, DAOs provide an operating system for people and institutions who do not know or trust each other, who may live in different geographical areas, speak different languages, and thus be subject to different jurisdictions.
This model is highly beneficial for Global Multi National Companies where a significant amount of overhead needs to be incurred in terms of infrastructure, non-essential onsite staff, regulatory and compliance teams and unnecessary office politics. The overhead savings can very well pay for the initial DAO setup cost, if any.
Are DAOs, a legal Business Entity?
But wait, the DAO organization model is not a legal entity and has number of challenges in dealing with the real business world as it exists today. Wyoming, USA is the first state to pass a law that recognizes DAOs in a limited way. You can read about it here https://sos.wyo.gov/Business/Docs/DAOs_FAQs.pdf
This I will take it up as a separate topic for a later post.
Having said that, now over the years, various DAOs have cropped up and it will be a study on its own on how to understand their operating status as a legal entity and the challenges faced by them, notably DAOs like MakerDAO, Uniswap etc.
(1) The Wyoming legislature recently enacted the Wyoming DAO bill, which recognizes DAOs as a sort of organization akin to an LLC that may “establish and operate for any legitimate purpose, regardless of whether for profit” independently of the individual members. DAOs may be used for everything from one-time projects to non-profit efforts, full-fledged businesses, to long-term enterprises. They, like LLCs (Limited Liability Companies), provide a vehicle for a collection of individuals (or entities) to interact and produce various types of value. Rather than tying us to territory or a single company, they enable us to coordinate around collaboratively created value in a borderless, permission less, and transparent manner. DAOs also provide a new option for individuals with varying degrees of commitment to own and control an organization. Most DAOs have a core staff that manages day-to-day operations and additional members that participate to varying degrees and are compensated accordingly. Members are incentivized to go above and beyond, whatever their commitment level since they gain directly when the DAO’s objectives are met
Types of DAOs
We previously saw that DAOs were purpose-driven and exist to serve their members aligned with their purpose. Today we can see at least 8 different kinds of DAOs in operation and more are getting created to suit its objectives. (1)
To be continued…
References
(1) Patrick Ejeke