A decentralized autonomous organization, or just DAO, is a business or organization whose decisions are made electronically by a written computer code or through the vote of its members. In essence it is a system of hard coded rules that define which actions an organization will take.
When blockchain technologies were invented, the masterminds behind the concept of a DAO company were given the tools necessary to turn their ideas into a real world project. Blockchain technologies introduced the concept of a secure digital ledger, which could track all interactions of its members across the Internet and thus provide a safe and secure environment to build a decentralized autonomous organization.
Blockchain technology uses a technique called trusted timestamping to combat against counterfeit transactions. To eliminate corruption and the need to involve a third party intermediary, a distributed database is held by all users of the blockchain. The ingenuity of implementing these tools into an organization is that it allows for the organization to run without managerial supervision. Theoretically a DAO company could run completely autonomously if the platform provided sufficient rules and flexibility.
We could have companies without CEOs or hierarchy. The uses for such an infrastructure are tremendous in scale. If regulatory structures permit, blockchain data could replace many public records like birth certificates, marriage certificates, deeds, mortgages, titles, sex offender records and missing persons. Healthcare clinics can function autonomously, cab companies can control a fleet of driverless cabs, a software development company can employ thousands of independent programmers. The list is quite large and a DAO model can be applied to almost any business.
Examples of real world DAO projects are The DAO company, Digix.global and the cryptocurrency Dash. The idea behind DAO companies is that the rules upon which the company functions are enforced digitally. Other decisions are made by shareholders who control a certain amount of the tokens, or smart contracts, who can vote for decisions. Preprogrammed rules describe what can happen in the system. Certain rules are hard-coded into the company like the amount of dividend payouts or determining a certain event in the company. Other things like, determining which project will receive money is decided by letting all token holders cast their vote.
Participation of all shareholders is a problem. Just like in the real world, a lack of voting participation has been documented. The legal status of this type of business organization has not been decided on by lawmakers. Currently the term for such an organization is a “general partnership” which means that every participant is liable for any legal actions and debts the company may face.
Another hardship that arises is the difficulty of changing the code of a DAO or the smart contracts once deployed in the blockchain. On one hand, this is good because one single entity cannot change the rules, but the disadvantage is that debugging cannot be done. This is what happened with The DAO company, attackers slowly drained all funds by simply exploiting a bug in the system. The head coders of Ethereum reversed all transactions but the best way to handle such an event in the future is up for debate.
Presently a DAO structure could completely replace the functions of companies such as Dropbox, Kickstarter, Uber and Amazon and get rid of their “inefficient” human managers. Former Bitcoin contributor, Mike Hearn, believes that “30 years from now, Bitcoin will be the structure to power organizations without leaders”. The creator of Ethereum, Vitalik Buterin said “There is a lot of intermediaries that end up charging 20–30%, if the concept of decentralization takes off and does well, those fees are going to decline to almost zero”. Not all humans are in agreement with this possible change but it is undeniable that a DAO is a business model of the future.