DAOs - Upgrading 17th Century Bricks To A 21st Century Society
Upgrading Our Societal Building Blocks For The Modern World
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Of all the revolutionary inventions throughout human history, the emergence of one, in particular, is responsible for many aspects of society that we now take for granted. Without it, our economic, financial, and even public transport systems would not exist in their current form. The complex cultures and modes of living that revolve around these systems are only possible because of this invention and the quantum leap in organisational complexity it has enabled.
The question is, does this structure still serve us as it did in the 17th century, and if it doesn’t, what alternatives do we have?
With the development of blockchain technology and the emergence of Decentralised Autonomous Organisations (DAOs), that alternative may have presented itself. In this piece, we’ll be exploring how and why this may be the case. Let’s begin.
Corporations Are (Legally) People Too
What’s 422 years old and still running the show? It’s not the current US president or even the Queen of England (though she might not be far off). We’ll give you a hint: it was born of a company well known for its humane business practices, appreciation of human decency, and benevolent worldview, and that company is not Amazon.
Figure 1 - Corporations are older than even these two. Source: Town & Country
Any guesses? It’s the ubiquitous global structure that everyone knows and loves: the corporation.
Jokes aside, the Corporation is one of the most important inventions in human history.
Since The East India Company was founded in 1600, Corporations have, for better or worse, changed the course of human history. To understand the success of the Corporation, we must also understand the core concepts which underpin traditional corporate structure.
A Corporation has a distinct legal personality which can acquire legal rights and incur legal liabilities different from those of the Directors and Shareholders. Corporations are legally recognised as "persons," meaning they can maintain financial independence from the owner's personal assets, whilst keeping any after-tax earnings.
By separating the owners' and the firm's finances, the business becomes liable for its liabilities, debts, and financial losses, protecting its owners and shareholders from obligations to pay any debts or cover any losses if the firm fails. Shareholders can also transfer ownership, as those who purchase or hold shares own a portion of the corporation that issued them. These shares convey the right to elect who manages a firm and participate in critical decisions such as whether a company should be sold. Shares are often offered in exchange for a lump sum investment, commonly from friends and family, or outside equity funding and financing. These investors take partial ownership of the Corporation and are entitled to a share of future distributable profits, known as dividends.
With small limited companies, the owners of the shares are often also the directors and managers who run the company. Larger entities tend to have more shareholders, who delegate overall management responsibility to the board of directors, which results in the separation of the company's ownership and control. The appointed directors are responsible for promoting the company's performance for the benefit of the shareholders. Those same shareholders are expected to ensure the directors represent their interests, but this sometimes does not happen. Limited liability can diminish the shareholders' motivation to fulfil this responsibility, though this has been changing in recent years.
Shareholders vs The World
Corporations require governance to function effectively. Generating returns for shareholders is often the metric for practical function. If a business is booming in doing this, problems with the nature or impact of the organisation tend to be ignored. This is not uncommon in the 21st century.
Figure 2 - Shareholder interests are why corporations exist. Source: The Japan Times
If we consider a typical leftwards argument, we are deep in the throes of late-stage capitalism. There is a lack of accountability mechanisms with teeth and the political will to enforce them. Profits come before everything else, and the little guy has no say in the matter. If we consider equally common arguments on the right, the issues are because of faceless bureaucrats' overreaching and preventing the markets from reaching their natural state of equilibrium. Big government or tech companies are impacting multiple areas of our lives, and the average person can’t do anything about it as the tech CEOs and politicians profit.
The core of both arguments is that our current economic system is flawed not because it is left or right-leaning but because not everyone's voice is heard or represented. As the Corporation was born in the 17th Century, underrepresentation wouldn’t have been an issue in the same way it is today. There were fewer of us overall, and the level of impact one Corporation could have was far lower. Since that point, however, global human society has undergone seismic changes in population size, education, science and technology level, interconnectedness, and complexity. Despite this, the traditional corporate structure remains unchanged; an issue as maximising shareholder profits can negatively impact more people far quicker than ever before. So, what can we do about it?
Basing much of human society on the bastion of human decency that was the British East India Company probably isn’t a smart idea anymore. With all of the positive advancements and achievements we have made in the 422 years since the birth of the first Corporation, perhaps it is time that corporate structures evolve.
We need to move away from maximising shareholder returns and instead focus on tackling the challenges and pressures of the times. This would require a fundamental reimagining of everything that a corporation is, and that is what DAOs are seeking to do.
DAOs Distilled
DAOs are often touted as an improvement of existing organisational structures. This could be true, but it’s also an overcomplicated explanation. At its simplest, a DAO is an organisation that is not solely powered by people but also by blockchain.
A DAO uses blockchain to galvanise a group of like-minded individuals around a shared vision or purpose, giving them an accountability and engagement mechanism that also gives them skin in the game - tokens. A DAO does away with a traditional hierarchy, with centralised decisions made by an individual or a board, and distributes that responsibility across the organisation.
Figure 3 - DAOs are not as complicated as they are made out to be. Source: Brainly.in
Anyone can acquire DAO tokens, giving them a voice to be heard and a way of making it heard through the use of blockchain-based voting mechanisms. Decisions in a DAO based on the results of this voting can be automated using smart contracts, maintaining complete transparency wherever needed. If you don’t like how a DAO is being run or affecting you, you can join that DAO and make sure your concerns are heard.
Beyond this, DAOs can also bring massive cost savings to an organisation by automating middle-management functions with smart contracts. This also reduces the friction in an organisation by flattening the hierarchy. Internal decisions can be actioned far more efficiently through voting and direct engagement of critical individual stakeholders, resulting in greater organisational agility. DAOs can then leverage this to onboard the right people to support the DAO faster than a traditional corporation. Say goodbye to HR, as employee onboarding becomes as simple as issuing tokens to the new participant.
DAOs Are The Worst Form Of Organisation Aside From All Others
Human society has evolved over the centuries, but corporations have not. Traditional corporations and corporate structures no longer serve us as they used to, and a shift is needed in the underlying purpose of an organisation. The old goal of maximising shareholder returns, the needs of the few, is now at odds with the global scale challenges we are currently facing; the needs of the many. How do we fix this?
Carrots and sticks, also known as incentive alignment.
An incentive encourages behaviour in return for something else. By aligning incentives with behaviours we want to promote, behavioural change is possible. Ensuring everyone behaves in a way that matches their responsibilities is difficult in a traditional company. Not all employees see the fruits of labour, directors may be answerable, and shareholders may not be interested in fulfilling their rights.
This trilemma can be tackled with blockchain, as incentive mechanisms that benefit the organisation can be built into its very DNA. These mechanisms can also be made publicly visible, meaning everyone can see what a given organisation is about at any point. Anyone who can potentially get involved with a DAO could propose changes to those mechanisms if they saw fit, and the DAO could vote for those changes.
Incentive mechanisms and transparency, combined with the potential cost savings, agility boost, and stakeholder engagement, could have a massive impact on how an organisation can function. If things are done right, DAOs could become a real challenge to some of the most prominent organisations out there at a rate far quicker than many expect.
Figure 4 - Much like democracy, DAOs might be the worst form of organisation aside from all others that have been tried. Source: winstonchurchill.org
Wyoming Leads The World
Though this may sound like an unrealistic and slightly utopian vision, it is a genuine future possibility. The issue, however, is that it is not a guarantee. Owing to the potential complexity of an organisation of this nature, multiple avenues of development in various areas of research and society need to occur concurrently.
The legal status of DAOs is a significant hurdle to overcome, as very few jurisdictions worldwide currently recognise a DAO as an entity in and of its right.
Singapore, The Cayman Islands, Vermont, and Wyoming all now have distinct legal entities specifically for DAOs, but potential DAO founders' options elsewhere are limited. As DAOs use blockchain, they will likely be subject to many new crypto regulations, which will invariably be associated with an extra cost. Creating a new legal entity could provide some much-needed regulatory clarity on what a DAO is seen as because without it, the limited liability in growing a business may be challenging. Alternatives exist, and it is possible to underpin a DAO with any legal entity, as the DAO aspect only refers to how the organisation runs. The question then is what entity best fits the type of business the DAO will be conducting and the regulations a DAO will be subject to in a given jurisdiction.
On top of this, several technical hurdles still need to be overcome. The primary method of stakeholder engagement at the moment in the DAO space is through voting, but many of the voting mechanisms being implemented are flawed at best. Beyond this, best practices around smart contract security don’t exist, and with hacks an ever-present risk in blockchain, this is an issue that desperately needs fixing.
Figure 5 - Well known as an international business hub, Wyoming is one of the first jurisdictions in the world to recognise DAOs as a distinct legal entity legally. Source: Travel Wyoming
DAOs Are Great, But Where’s My Money?
Arguably the largest challenge is internal DAO accountability mechanisms for external capital.
For example, if a VC is looking to invest in a DAO, who is the point of contact for that DAO? Furthermore, who is accountable for executing your wishes if there is no clearly defined hierarchy? What are the reporting lines if you have issues or disputes that need to be resolved? If you feel your interests are not being represented effectively or your reputation is actively being harmed, how do you seek regulatory oversight or input? Our governance theories and frameworks revolve around the assumption that the organisation is centralised in some capacity, so what happens to those theories if the organisation is decentralised? Do models exist for this sort of structure?
Incentives are a potential solution here, but more research is needed to determine how best to apply them. KYC of DAO members may also be effective, although this would be a departure from the traditional ethos of not just DAOs but blockchain as a whole. KYC isn’t necessarily bad and may even be preferable in some cases. However, the impact KYC might have on the culture of a given DAO is worth considering.
These are all crucial concerns that need to be solved before the DAO space can fulfil its potential, and if they aren’t solved, then the utopian dream will remain nothing more than just that - a vision.
Figure 6 - Without accountability mechanisms and clear apportioning of responsibility, it’s not clear who runs a DAO or who the buck stops with. Source: Survival World
Closing Thoughts
DAOs allow us to reimagine how we organise individually, locally, and globally. This could be a boon for global society and give us new ways to tackle the unprecedented challenges we now face as a species. Our current systems are no longer suitable, and what got us here won’t get us there. Traditional corporate structures need to evolve, and DAOs may be one way to facilitate this.
Every industry could benefit from the cost savings, increased agility, and stakeholder engagement that DAOs can bring, but only if the challenges around accountability, governance, legality and regulation can be overcome. If successful, we have the tools to reshape some of the most fundamental aspects of our society.
There are DAOs out there right now that are actively working on solving these problems, and the ones that succeed will be the household names of a future that will look very different to the present.