Why Launch a DAO?

Every founder faces a similar question at the beginning of their entrepreneurial journey: What organisational structure should I choose to maximise my chances of success?

In web3 the options are vast. Founders could launch as a traditional c-corp, a limited liability company or they could opt to adopt no legal structure at all and see what happens. This article aims to outline the benefits of launching DAO-first.

We can view DAOs as an evolution of traditional software business structures, with some key improvements that can be divided into internal and external strengths.

These benefits arise from the autonomous and borderless nature of DAOs coupled with the dynamics of tokens and blockchains. If DAOs are superior to traditional business structures then it naturally follows that all digital businesses could feasibly perform better as DAOs.

Defining a DAO

A Decentralised Autonomous Organisation (DAO) is an entity with a mission and a shared pool of capital where at least part of its operation is automated through smart contracts. A DAO normally has a token which gives contributors a shared incentive to help the DAO, and thus the token, succeed. Vitalik Buterin describes a DAO as ‘automation at the centre, humans at the edges’ (Buterin). Autonomy and automation are not the same thing. A smart contract executing certain actions based on predetermined code is demonstrating automation — a technological application where human input is minimised. In moral philosophy, autonomy is the capacity to make an informed, uncoerced decision and autonomous organisations are independent and self-governing.

We can see here there is ample room for debate about how an autonomous organisation should be defined. We should recognise that we are a long way from code being able to make all the decisions required for an organisation of any complexity to succeed, so some degree of human intervention is both necessary and desirable. Minimising human intervention through automation, and maximising individual autonomy both bring a host of efficiency benefits that I will outline below.

For the purpose of this article we will define a DAO as striving towards both automation and autonomy of the individuals that make up a DAO.

Internal Strengths

Internal strengths centre around how a DAO operates and achieves its aims.

Automation

Automating organisational functions such as how capital is allocated and how governance decisions are made benefits the DAO by reducing administrative burden and cost. As our technical sophistication grows, the scope of what can be automated grows too. DAOs capitalise on this feature through smart contracts and token voting.

Parallel Execution

The stated mission of a DAO coupled with a shared token is what incentivizes contributors towards the same aim. How contributors achieve the mission of the DAO is up to them and depending on the DAO there could be a wide range of possible activities that would be beneficial. Theoretically, a DAO could pursue multiple objectives simultaneously if it had the contributors on hand to do the work. We can imagine a network of contributors, coalescing around specific objectives which all feed into the wider DAO objective. This is the power of decentralised autonomy in a DAO: contributors can put their ideas, skills and experience to work in the way they think is best. Just because there are lots of ideas does not mean every idea needs to be pursued and deciding how to allocate capital to differing objectives is obviously important. Typically these decisions are taken based on token voting.

Parallel execution allows a DAO to respond to the market with speed and efficiency. Rather than a small group of managers being responsible for all strategic decisions, all DAO contributors are empowered to think creatively about how to push the DAO forward.

Ownership

When people own something they tend to care more about its health and success. Governance tokens can ascribe ownership rights to individuals. There is a debate to be had about whether liquid governance tokens are the best medium for running a DAO, but I will defer that topic for another article.

External Strengths

External strengths centre around how a DAO responds to the market and society at large.

Attracting and Retaining Talent

The available labour market for a DAO is as large as the internet. This is true of any purely digital business, but DAOs are unique in their ability to attract and retain talent through ownership rights and token incentives.

Agility

DAOs do not have physical premises, employment contracts, rigid hierarchies, pension liabilities, insurance plans, burdensome bureaucracy or any of the other features that can adversely affect how quickly traditional businesses can respond to market conditions. On the surface much of the administrative burdens placed on businesses are there for good reasons and DAOs are undoubtedly a risky place to work. The onus is on the individual to arrange insurance and pension cover for example, and without an employment contract, job security is somewhat tenuous. But for those willing to take personal responsibility and accept a degree of risk, DAOs offer a way to set businesses free from activity that is not laser focused on the mission of the DAO. This serves to make the DAO a more agile and responsive structure.

Transparency

The operations of a DAO exist on-chain giving a degree of transparency that does not exist in normal businesses. This transparency allows any individual to scrutinise the DAO and challenge the way it is operating. On a macro scale the transparency of DAO operations allows others to learn from the experiences of other organisations. The wealth of data has the potential to make the whole ecosystem wiser.

Misconceptions

Leadership

DAOs are not and cannot be leaderless. In any organisation there will be those who have more time, interest and talent to dedicate to particular activities and it follows that those people should take the lead where required. There is a constant question of how much and what kind of structure to adopt in a DAO. Too rigid a structure and the DAO loses its agility, can become bogged down in politics and process, and fresh ideas from community members can become stifled and lost. Too loose a structure and the DAO becomes chaos. Dysfunction reigns, nobody is accountable for anything and community members can become disenfranchised.

The keys to leadership in a DAO are fluidity and accountability. We will explore this more in a future essay.

Size

There is no correct size for a DAO, it all depends on the organisation. A DAO could be a small group of passionate contributors. I would argue so long as they are autonomous and incorporate smart contract technology they are a DAO.

Conclusion

The breadth and depth of possible DAO cooperation gives it a competitive advantage over traditional firms.

A traditional firm is made up of

• Owners (shareholders)
• Managers
• Workers
• Customers

Whilst there is some crossover between these stakeholders, they remain largely distinct. The responsibility for operating a firm sits with the managers and owners whilst workers provide labour and customers buy the outputs. The problem of how to coordinate large numbers of people is therefore solved by centralising that responsibility in a small group.

In a DAO these roles are interwoven and blurred. All token holders are owners and customers. DAO contributors are likely owners, managers, workers AND customers! This dramatic shift in ownership and incentives is what underpins the DAO model and makes it the organisational structure of the future.