DAOs v. Corps Is the Trial of the Century
The Winner Will Build a Culture for Humanity to Flourish
DAOs are gaining traction as an alternative to the corporation by flipping corporate hierarchy on its head.
While corporations are a set of rules dictating how humans must behave, DAOs are a set of humans dictating how the rules must behave.
The DAO experiment of liberating humans from the corporate hierarchy is noble; corporations are purpose-driven entities that exploit materials, such as humans, to achieve their ends. Respecting the wishes of humans, even if contrary to the corporate template, is a good thing.
However, despite their promise as an alternative to corporations, maturing DAOs are starting to show their cracks. If the cracks are not sealed, the gains made by DAOs may be returned to corporations.
CORPORATION DEFINED
Corporations are not captured by an easy definition; one framing sees the corporation as a legal fiction bound by a set of interacting contracts. The contracts are with customers, suppliers, employees, lenders, regulators, etc. In all instances, there is a clear corporate mandate to serve the financial interests of the business.
This definition of the corporation contrasts with DAOs because the latter don’t have the same boundaries built into their DNA. In the corporate world, if shareholders are unhappy with the work of their CEO, contracts afford them legal remedies enforced by the courts. While DAOs do have written agreements, their effect is limited; unlike aggrieved shareholders, DAO members feeling wronged turn elsewhere for solutions.
THE CORPORATE ADVANTAGE
The Corporate Stamp
People who spend time at an organization are conditioned by their environment, be that a Wall Street law firm or an animal rights not-for-profit in Michigan. Because members commonly have a blind spot to this fact, they are unknowingly carrying the baggage. Unintentionally, the ways of the old system creep into the new system.
An example is the 2008 U.S. financial crisis. During this time, the Treasury Secretary was Henry Paulson, a former executive at investment bank Goldman Sachs. Though the crisis was perpetrated by investment banks, ultimately, those same corporations that caused the problem were the ones that were bailed out. Legislation arising from the crisis (the Dodd-Frank Act) built a moat around the firms in existence in 2008 and increased investment bank wealth.
The argument can be made that the outcome was predictable — if you have a former investment banker setting the rules, he’ll protect his own. It raises the question of whether DAO members fresh off the corporate payroll are equipped to make a change.
Incumbent Advantage
Corporations have endured every business cycle imaginable. It’s hard to imagine, but in the late 1970s there was fear that government regulation was going to push corporations to extinction. They survived and developed a playbook: game the regulatory framework, exploit foreign markets, and fudge the accounting. One of their most effective corporate tricks is acquisition. In late 2021, retailer Nike purchased Web3 design firm RTFKT, reminding us that anything is for sale in Web3, perhaps even a DAO.
Clear Vision
Company vision gets discussed at the annual corporate retreat, and it’s often no more than a talking point. For DAOs, vision is on the docket every day; vision and purpose is a work-in-progress defined by every voice at the table.
It’s noble that DAOs take vision seriously, but having flexible goals comes with risk. The corporation serves its shareholders and the metric is dollars. If a DAO is unable to discover its purpose, it flounders — something that Web3 architect and early DAOist Andre Cronje understands. In his opinion, DAOs are best deployed as singular vehicles with a discrete purpose. “As entities I hate DAOs…as soon as you try to make a business out of a DAO it goes horribly.” The sooner DAOs go through earlier iterations, and cement their decentralized vision, the sooner they can make their impact.
DAO DEFINED
The definition of “DAO” is a moving target, with plenty of subjectivity regarding the words “Decentralized”, “Autonomous”, and “Organization”. Generally, a DAO is a community-aligned organization around an idea with decentralized, automated mechanisms that help it to achieve its goals. The DAO movement rejects corporate tenets like veiled procedures, cubicle entrapment, and disingenuous corporate speak.
DAO ADVANTAGES
DAOs as Resistance
If the corporation is the dominant language, then DAOs speak in a counter-cultural dialect. DAO artists Sinjun and Crypto Bushi offer a good explanation for the sentiment in describing their NFT series.
DAOpunks’s mission is to enable humans to liberate themselves from the soul-sucking drudgery of default world work and lead them to the rewarding, expansive freedom found in meaningful DAO work.
In the case of DAOpunks, they will provide grants to people that wish to exit the corporate world. Not all DAOs are structured to be anti-corporation, but their decentralized nature is an invitation to aberrant voices and the pursuit of their ideas. Punks get kicked out of corporations, DAOs invite them to the table.
DAOs Are for Creators
Web3 is a reaction to its predecessor’s moment — a span of 20 years when a few dominant American corporations drew the roadmap for creators. Web2 proposed a Faustian bargain: the creator was granted an audience and a customer base that reached every corner of the world. In return, the platform (Amazon or Facebook or Google) held power over what gets published and what gets rejected, placing their own interests above creators.
For the creators not interested in the bargain, the terms were not negotiable. In the example of Amazon, while consumers happily adopted a one-click, international marketplace and made it a de facto monopoly, the flip side was that all creators now had to use that same marketplace. Creators at odds with Amazon policies were left in the dark.
The alternatives offered by the DAOs of Web3 are numerous. Where the corporation plays gatekeeper between creators and their markets, profiting by harvesting information and manipulating consumer behavior, DAOs can exist for the sole purpose of championing the voices of its community. The DAO does not need to own the relationship between buyer and seller, meaning the creator has greater rights to their content. The creator economy thrives in an ecosystem with permissionless markets where content ownership is the default.
DAOs As a Multitool
The Facebook mantra “move fast and break things” is an attitude that gave the trillion dollar company an edge over its competition. Facebook innovated by disrupting and pushing boundaries. DAOs take this further because they can move faster and they are built to accommodate breakage. The absence of the traditional hierarchy and rigid frameworks means that DAOs are shifting and shaping daily to best adapt to changing conditions.
How flexible are DAOs? They can be used to push a climate agenda by affecting carbon asset pricing, like KlimaDAO, or by incentivizing the green economy, as MakerDAO is doing. Some DAOs exist just to collect NFTs that have special relevance to the NFT artist community. In the case of ConstitutionDAO, the organization stormed Sotheby’s to buy a specific rare document with $46 million that it had gathered from a pool of international investors in a matter of days. If an idea exists and there is passion behind it, DAOs are the superior model to bring it to life. It explains why the dreamers who once went to Silicon Valley now inhabit Discord chats.
DAO HURDLES
Further comparison to corporations highlights the significant challenges DAOs face, putting them at a disadvantage to corporations where the issues of governance, state regulation, employee incentivizing, and profitability have already been solved.
Governance
Governance is the first task on the checklist when a DAO is formed, but at later stages, it’s still important to discuss, sapping DAOs of their productive capacity. Governance is a particular thorn for DAOs because at inception they are not seeded with rules like corporations are. For obvious reasons, as DAOs add rules and centralized mechanisms, the purists consider this an assault on the community.
Regulation
Uncertainty is expensive for corporations, and the same applies for DAOs. Given that DAOs are operating in a regulatory “no man’s land”, money and energy is spent on projections of manifold scenarios. This drains the DAO’s resources. Even if a court finding or government decree seems to protect a DAO, the protection is only good for that jurisdiction. For example, Wyoming has offered some LLC protections for DAOs, but it is unclear if transnational DAOs enjoy any benefit from the legislation.
Incentivizing
DAOs are at home in the Web3 space, where pseudonymity is common, systems are freely forked, and activity happens in a virtual, borderless space. In this environment, it’s a challenge to incentivize community members to work towards the good of the DAO.
- Pseudonymity means that members are worried less about their reputation because identities can be swapped if necessary.
- The idea that information is up for grabs and cloning is fair game puts DAO intellectual property at risk because there’s no regime to protect it.
- Without barriers such as contracts or state-enforced borders, it’s more likely that people drift away after free-riding.
Profit
Once a DAO consumes its seed funding, it’s at risk if it hasn’t achieved a plan for profitability. The same could be said for DAOs relying on the market cap of their token: price volatility is greater in DeFi than state-sponsored markets. It’s a common refrain among the DAO community that passion and creativity don’t pay the bills. Revenue does. Sooner or later revenue streams need to be established or the house of cards comes down.
The Humanity in DAOs Is the Trump Card
It’s true that DAOs are starting to show their cracks, but it’s not necessarily a bad thing. Testing in real life is the best way to expose flaws, parallel to the argument that DeFi code is sound because it’s under constant threat.
For DAOs to flourish, they need to find ways to optimize the “humanity” in the organization, listening to the punks and taking on lofty missions. While market capture is the corporation’s credo, DAOs are not fixed by a single idea. They can push frontiers, whether it be a market opportunity or the expansion of an ideal.
If DAOs are successful in building a framework to empower the voices, they can go far. Onboarding a voice to a DAO is much easier than hiring an employee in a corporate department; a bridge of human relationships is stronger than a network of contracts. To quote Cronje again: “What people often underestimate in the (DAO) space is the power we have in terms of coordination.”
It should be easy for DAOs to embrace collaboration in the WAGMI atmosphere of Web3, but the pull of corporate ways is strong, and riding at escape velocity toward the frontier is a difficult journey.
Author Bio
TeeLEROO is applying pruning shears and pen to the world around him.
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