Paper 16: DAOs
Are Decentralised Autonomous Organisations the future of work?
Decentralised Autonomous Organisations (DAOs) are being heralded as the future of work. Why work for a company when you can work for a DAO?
In this Paper I explore what DAOs are, how they fit into the Web 3.0 ecosystem, and what I like and dislike about them.
As a heads up, I finally launched my podcast on 32 Dreams this week! You can check it out on Spotify and YouTube, and there are some highlight audio clips in this Twitter thread. (Post-production killed me this week! Hope it will improve with time.)
What is a DAO?
A DAO is essentially an alternative to a company: an organisation of people working towards a goal.
So why are DAOs special or better than companies?
On the Ethereum website it says this:
Think of them like an internet-native business that's collectively owned and managed by its members. They have built-in treasuries that no one has the authority to access without the approval of the group. Decisions are governed by proposals and voting to ensure everyone in the organization has a voice.
There's no CEO who can authorize spending based on their own whims and no chance of a dodgy CFO manipulating the books. Everything is out in the open and the rules around spending are baked into the DAO via its code.
To summarise, DAOs are:
Decentralised - no CEO so proposals can be made by anyone
Transparent - everyone can see what is being proposed and worked on by everyone else
Less hierarchical/more democratic - all DAO members can vote on next steps
Borderless - people from all over the world can come together to collaborate quickly
Why are DAOs useful?
Collaborating with people has been historically difficult because there are all sorts of trust issues you need to resolve before you feel confident enough to move forward in business.
Starting an organisation via a DAO deals with this to some degree because it is the code in the smart contract which ensures funds can only be used after the necessary approvals have been secured, which means you don’t actually need to get to know someone perfectly to decide if you trust them as an individual or not - your funds are secured by the code.
As such, cross-border collaboration can take place in a manner much easier than ever before.
What are the different types of DAOs?
There are many different types of DAO, just like there are many different types of company. Here are just some that have been created (and I am sure there will be many other use cases in future):
Social DAOs are organized around shared interests. For example, Friends with Benefits is a private social club that builds products and offers IRL private events. You need to hold 75 $FWB tokens to join.
Investment DAOs raise funds to invest in and own assets (e.g., NFTs) as a community. For example, Flamingo bought an Alien Cryptopunk NFT for 605 eth (~$761K) in January 2021. Constitution DAO raised $47M in a failed attempt to bid for a copy of the Constitution in November.
Protocol DAOs help a DeFi protocol transition from being owned by a core team to being owned by a community. For example, Uniswap issued UNI tokens to let its community members vote on how the protocol should evolve.
Commerce DAOs allow a community to co-own a retail or e-commerce business through tokens. For example, E1337 is a luxury apparel brand owned by 1337 token holders.
Media DAOs empower a community to produce content collaboratively. For example, this content you’re reading was written by members of Odyssey. Another example is Stoner Cats, a community-funded adult animation series.
Odyssey DAO, whose purpose it is is to create quality Web 3 education, curated this useful list of different types of DAOs.
Summary comparison of DAOs vs traditional organisations
Summary comparison shared on the Ethereum website.
How do DAOs fit into the rest of Web 3.0?
Some DAOs have governance tokens. These tokens might serve as the votes that members can place as part of DAO decision-making.
Some DAOs use NFTs for governance instead. In these cases, holding one NFT might equal one vote towards the decision-making.
In both instances, DAO decision-making is taking place on-chain using blockchain technology so that everything is verifiable and transparent.
The good stuff
I think DAOs are really disruptive because of the speed at which they permit a group of like-minded people from different parts of the world to collect and allocate funds. This is truly extraordinary.
There is also an argument that DAOs align the incentives of all stakeholders better than traditional companies. The argument would be that when people have (i) a financial interest and (ii) a semblance of control in an organisation they will be more incentivised to drive value to that organisation, which in turn makes the organisation more valuable. (This contrasts with the apathy many salaried employees might feel in traditional companies.)
@Abraham_L_L, founder of @Coterie_Capital - a DAO launchpad - considers incentive alignment to be a real strength of a DAO
We seem as a society to be trending towards more flexible, ad-hoc work, and DAOs do seem more conducive to this type of work where you can contribute from wherever you are.
The questionable stuff
There are many issues with some DAOs as they stand:
Legal personality - it is crucial in a functioning society that organisations have a separate legal personality so that the individuals working for them are not liable for everything they do whilst working for the organisation. Some DAOs have not ‘incorporated’ either as a company or as a DAO. For all intents and purposes, this means that the DAO - by law - does not exist. As such, those who work for them are legally on the hook for their ‘DAO’ activity.
Jurisdiction - it’s not clear at the moment in whose jurisdiction DAOs should fall. It’s important that there is a jurisdiction who can hear cases for or against DAOs, so that DAOs can participate in global commerce and all parties can have legal certainty. (As the value of deals get larger, it’s obviously not smart to contract with someone who you can’t sue if things go very wrong.)
Anonymity - many DAO members would like to remain anonymous. It’s not obvious to me how you can raise your hand to participate in unlimited upside by virtue of your involvement in a DAO, and simultaneously refuse to accept the downside of legal ramifications should your involvement in the DAO lead to something illegal. If you want the gains, there has to be a way for the pain to get to you too - that’s just how just societies work.
Asset sharing - some DAOs claim to share assets amongst its members. If the DAO is not legally established, this is obviously a fiction. Furthermore, even if the DAO is legally established, it is not necessarily straightforward to put these assets into the DAO because that would constitute a transfer of ownership.
Decentralised governance - this is really hard. It’s not obvious to me that people en mass care enough about governance to meaningfully engage over long periods of time. We have already seen “councils” emerge who take on more responsibility, which in my mind is simply mirroring previous “senior leadership” structures.
Final thoughts
Living on the internet means that we want to assemble, discuss, finalise, incorporate, produce, and transact on the internet.
DAOs might be the future in this respect, but not because they are so intrinsically revolutionary.
I think the technology on top of which DAOs are built (blockchain/cryptocurrencies/NFTs/Discord) is the real enabling factor for more effective global collaboration.
In any event, I suspect regulation will catch up to bring some effective legal frameworks to this new type of organisation (and I’m aware this is already happening in some jurisdictions) since the demand for DAOs is real.
Have a great day,
B
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Disclaimer: The content covered in this newsletter is not to be considered as investment advice. It is for informational and educational purposes only.
I hold some of the NFTs mentioned in these newsletters.