The Idea of the DAO — Misunderstandings and Potentials

Markus Büch
Picture by Shutterstock.

Abstract. The figure of the Decentralized Autonomous Organization (DAO) has a high status in the universe of distributed ledger technologies. Although the term is more than well known in the community, much remains unclear. In addition, there are many misunderstandings or misconceptions. Anyone who deals with the technology of distributed systems can use the term “DAO”, but I feel the terms “decentralized”, “autonomous” and “organization” are misinterpreted. So the DAO is just like an elephant: easy to recognize, but difficult to describe.

Decentralized. It is understandable that an organizational structure based on the technological structure of a fully meshed network (P2P) can be described as decentralized. Although already the term “decentralized” has no independent meaning, since it is only a negative delimitation of “central”. However, the concept of decentralization in the DAO context is given a meaning that goes beyond the mere network-like linkage. Rather, the DAO is concerned with power relations that deviate from other forms of organization. In contrast to the established corporate and organizational forms, decision-making authority is not vested in a limited group of people, but in all those involved. But this comparison does not quite correspond to reality. Each organization is led by its members and not by leaders. By definition, these are always intended to carry out the will of those involved in the organization.

Lack of control. A distinction must also be made between operational activities and those relating to the internal organization or the organization itself. This is always decided by the members or other “shareholders” — with the exception of the Foundation. They shall also have the right to remove directors at any time. The seemingly perceived systemic lack of control is not present. Every company organization would come to a standstill if all parties involved had to vote on every decision. This mode of operation enables independence and agility. In addition, the majority of corporate organizations today are decentralized. Especially large online trading platforms draw their strength from a multitude of decentralized and independent (not autonomous!) operating business units. Anyone who wants to know how decentralization works in reality should therefore also deal with today’s corporate and platform structures and not just with the governance of P2P networks.

Neutrality. Moreover, a DAO does not solve the problem that a large number of people can also influence a small number of important decisions; the minority effect cannot be neutralized by decentralization alone. Consequently, if decentralization is to address a new form of power limitation, it would perhaps be advisable to focus on the aspect of neutrality. In this sense, a decentralized organization would be one in which there is protection against control by individual interests or monopoly structures. Above all, it could be used, for example, to elevate the collaboration of master nodes in a network to a real organizational level. Last but not least, even the best decentralized decision-making is of no use if the decision can only be implemented centrally.

Autonomous. This part of the term is basically a misnomer, as is also the case with Smart Contracts. As little as a smart contract is an “intelligent contract”, so little is a DAO an “autonomous organization”. First of all, a DAO is more or less a complex smart contract. Therefore, it is not autonomous, not even in the rudimentary sense of the word, because “autonomy” means “independence”. But a DAO is not an organization that acts independently. It cannot do this because of the specifications implemented in the Smart Contract. A DAO only reacts because the Smart Contract is triggered. Only the previously defined procedure is then executed automatically. Therefore, a “DAO” would probably be more of a Determinated Automated Organization. The idea that “autonomy” means a form of artificial intelligence should be excluded here. First of all, a consensus would have to be found on what is meant by “artificial intelligence”. In any case, a DAO is anything but intelligent. This is also comprehensible due to its Smart-Contract basis. Therefore, the perspective on the term “autonomous” needs to be changed. If, on the other hand, autonomy is understood to mean a specific form of technology-supported independence, then completely different possibilities would arise for organizations. This opens the way for entrepreneurial activity through non-proprietary levels of cooperation, which would in fact provide a counterpart to today’s monopolistic platforms.

Organization. Finally, the question arises as to whether a DAO is an organization at all. It should first be pointed out here that there can be no such thing as an “autonomous” organization that is independent of humans and purely controlled by algorithms. The lowest common denominator of all organizations is the fact that it must still be a social (communication) system. A structure in which only majority decisions are made automatically by a determined process or by an “artificial intelligence” has little in common with this. A DAO understood in this way cannot be assigned an organizational status. Today’s DAO structures are predominantly computer program-based and star-shaped voting structures. In many cases, it is only a matter of managing budgets. This is not much in terms of organizational diversity. But of course development is still in its very beginning.

The “TheDAO” induction. Inevitably, dealing with decentralized autonomous organizations leads to the phenomenon of “TheDAO”. It should be noted here that, according to the white paper, this was not a “decentralized investment fund”. Rather, the original idea was aimed at a company created with the help of technology of distributed systems. It should not make yield-oriented investments, but demand and offer goods and services and thus participate in the economic world like a “real” company. In addition, in the DAO discussion, “TheDAO” usually concludes that there is a fixed basic structure. But “TheDAO” was only one application of a multitude of possible DAO variants. From the Turing completeness of the Smart-Contracts architecture it can be deduced that there are unlimited possibilities to design a DAO. Nevertheless, the definition of a DAO is mostly induced from the individual case “TheDAO”. Universally applicable features, which may be found in any DAO basic structure, are usually not sought at all. This restricts the scope of application without necessity. Reducing the DAO to a technology-based instrument of crowdfunding does not do justice to the potential of the organizational form. Especially since there are also DAO-like structures that are of earlier origin. Distributed systems technology offers far more opportunities for a different business world, especially when forms of network-based business collaboration are interwoven with the idea of ownership. However, this presupposes that universally valid basic structures are extracted.

Bitcoin != DAO. Finally, from time to time we find the statement that “Bitcoin” respectively the “Bitcoin network” is an example or an original form of a DAO. Historically, the previous idea for the DAO in the form of the Decentralized Autonomous Company (DAC) was conceived as a reaction to the quasi-plutocratic developments and upcoming centralization effects in the Bitcoin network. Bitcoin and the DAO are thus diametrically opposed. In addition, the actions of the participants in the Bitcoin network are primarily controlled by their individual interests. A common interest and also a social interaction system (see above) are missing. The Bitcoin network is more infrastructure and less organization. But that’s all “it” ever wanted to be.

German. This text was published in German on BTC-Echo: https://www.btc-echo.de/die-idee-der-dao-von-missverstaendnissen-und-potentialen/

Markus Büch

Written by

Jurist — Researcher — FOM Berlin

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