DAO — Decentralized Autonomous Organization

A completely new type of enterprise.

A “decentralized autonomous organization (DAO)” is a new way of mixing up the scene around start-ups and established companies. Management becomes superfluous. The control over the company takes away computer coding and the entirety of the shareholders.

Photo by Austin Distel on Unsplash

A DAO is, as the name implies, an organization. In the economic context, it is a company. The main difference between “normal” companies is that no hierarchical management structure controls the company. Especially in corporations, one knows the pyramid-like hierarchies. The CEO as the absolute boss, the individual members of the executive board and further levels of upper and middle management determine the organizational structure of a company.

Within a DAO, things look completely different. There is no such thing as this traditional form of the management hierarchy. Just as Bitcoin eliminates middlemen such as banks, middlemen (the management) are also superfluous in the DAO. But who determines the fate of the company? 1. fixed-programmed rules. 2. the owners themselves.

In the founding phase of the company, there is the possibility to acquire shares within the framework of a so-called ICO. The shares are often paid for via Ether. Similar to a listed stock corporation, the investor acquires shares in the company. The invested money represents the capital of the company, which will use it in the future. The exciting thing is that as a shareholder of a DAO you also have decision-making power.

The amount of this authority depends on the number of shares acquired. The percentage of shares reflects your own influence as a voting shareholder. Basically, the entirety of the owners has a say — with the respective share of the voting power.

The establishment of a DAO can be compared to crowdfunding, in which the investors are also involved in the management of the company. The fact that conventional management hierarchies do not find a place in a DAO reduces high costs. In groups with many hierarchical levels, the administrative cost block can account for a considerable amount of the total costs. These are superfluous in a DAO.

Sounds exciting — but what makes the whole thing so unique? The DAO is not a conventional company. It doesn’t even have a real headquarters if you will. It only exists virtually on the many computers which are integrated as nodes in the blockchain. Technically a DAO is a collection of implemented Smart Contracts in the Blockchain.

Smart Contracts is computer coding in which the contract conditions are stored. These are used to carry out or monitor contracts fully automatically. These contracts (“Smart Contracts”) in the blockchain take over functions that would otherwise be available to managers. DAOs are generally referred to as smart contracts of the most complex form.
Thus, two decision formats are emerging in the DAO: On the one hand the hard-programmed rules of Smart Contracts for e.g. the amount of the distributions and on the other hand the votes of the shareholders about projects, etc. are the most important.

Photo by Patrick Tomasso on Unsplash

The DAO itself cannot manufacture its own products or provide services. In order to go through value creation processes, such as creating a finished product from raw materials, the DAO engages executive staff or external suppliers. Classic employment or supply contracts are obsolete. Smart Contracts are the basis of cooperation.

The process of cooperation and decision-making in the DAO is as follows:

  • Proposal
    Someone prepares a proposal, which product/services from which provider will be delivered for how much ether.
  • Reconciliation
    The shareholders shall discuss and decide on the proposal submitted in a joint vote.
  • Delivery
    The provider manufactures the product or is ready to provide the service.
  • Sales
    Customers can purchase this product or use the service. The DAO can either reinvest the revenue from the business in its growth or distribute it to its shareholders.

A virtual enterprise without any hierarchies is usually a utopian notion. The “decentralized autonomous organization” shows that it is possible. Once again, the Blockchain is a game-changer. Because only the trustworthy environment of the blockchain enables such constellations as a DAO. Even entire governments can theoretically be represented by a DAO. Nevertheless, other questions need to be clarified. What about liability if the DAO causes damage? What do tax payments look like for the profit made if the company does not have a clear registered office? Even if not everything has been clarified, I find the concept of decentralized autonomous organizations exciting.

We will see what future development will bring. What do you think of that? What do you think of DAOs?

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The Cryptocurrency Consultant

Written by

Bitcoin, Blockchain and Cryptocurrency Educator. Passionate Writer. My talent is to easily explain complicated contexts.

The Startup

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