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HomeBlockchainDecentralized Autonomous Organizations: DAO - An Overview of Key Characteristics and Differentiators

Decentralized Autonomous Organizations: DAO – An Overview of Key Characteristics and Differentiators

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DAO: Understanding the Decentralized Autonomous Organization

What does DAO stand for?

DAO stands for Decentralized Autonomous Organization, also known as the “Dow” of the crypto world. But don’t let the fancy name fool you, it’s just a group of people united by a common goal, without a central authority calling the shots.

Decentralized

No single person or board holds all the power in a DAO. Instead, decision-making is shared among contributors, token holders, and the community. Everyone gets a say in how things run, just like in a democratic country. Think of it as a company run by the people, for the people.

Autonomous

DAOs are autonomous, meaning they govern themselves, like a small nation. They have the power to write their own rulebook and aren’t bound by the laws of any country or corporation. And while some processes may be automated, the organization as a whole is always in control.

Organization

DAOs can be anything from a startup to a social club, as long as it’s a group of people united by a common goal. So don’t be fooled by the name, a DAO is just like any other organization, but better.

What sets DAOs apart from traditional companies?

  1. Decentralized power structure
  2. Autonomous governance
  3. Token-based economy
  4. Transparent and immutable record keeping

Difference 1: Token-based Decision Making with Smart Contracts

Voting in DAOs

DAOs are different from traditional organizations in the way that contributors vote on key decisions. Unlike shareholders, contributors vote on-chain, using blockchain technology to record their votes. This ensures transparency and immutability of the voting process.

Governance Tokens

To vote, contributors need to acquire governance tokens specific to the DAO. These tokens can be earned by working in the DAO or buying them on a decentralized exchange. The more tokens a contributor holds, the more voting power they have. This is because the final results of the vote are determined based on the number of tokens cast, not the number of people who cast votes.

Token Holdings and Skin in the Game

The emphasis on token holdings in voting is because it is assumed that people who hold more tokens have a greater stake in the success of the DAO. However, this idea has been challenged as contributors who pay for their daily expenses with the tokens they earn from working in the DAO also have a high stake in the project’s success.

Smart Contracts

DAOs use smart contracts to execute the results of the vote without requiring human intervention. The smart contract automatically sends or doesn’t send the funds based on the results of the vote, ensuring that the vote is trustless and immutable.

Concerns and Best Practices

While the use of smart contracts and on-chain voting is still in its infancy, DAOs and thought leaders are experimenting with different voting methods to find the best practice. It is important that the voting is performed in a trustless manner, meaning that there is no need to rely on any one person or group to do the right thing for the system to work.

DAO Governance in Action

Decentralized-Autonomous-Organization
src: CryptoRobin

An Example

Let’s take an example to understand how DAO governance works in practice.

Suppose Jane works on the treasury committee of a DAO. Jane notices that the treasury needs another full-time member to help manage the finances.

So, she writes a proposal asking the DAO to create another full-time position and finance it with 80,000 DAI for the salary of a treasury manager. The proposal is discussed in the communication channels of the DAO (Discord, Telegram) and then put up for a vote on-chain.

Voting and Smart Contract

The smart contract holds the 80,000 DAI (DAI, read as “die,” is a stablecoin pegged to the U.S. dollar) in escrow while the vote occurs. If the vote turns out in favor of creating the role, the smart contract automatically sends the 80,000 DAI to the wallet address specified in the proposal.

If the vote is not in favor, the 80,000 DAI is sent back to the DAO’s treasury. This is a trustless transaction, as no human intervention is required, and the computer code handles it all.

Difference 2: Non-hierarchical flat structures

Flat Structure

DAOs avoid centralization by moving away from traditional hierarchical structures. Instead of a pyramid-like, top-down management structure, DAOs use a flat management system in which people don’t report directly to a higher-up.

The day-to-day operations may look different for every DAO, but overall, DAOs remove middle managers and bureaucratic red tape in favor of a simpler system. Contributors manage each other through consensus, voting, and agreements, and everyone is involved in the work.

Challenges

Removing hierarchies is a challenging task, as almost everyone on the planet is raised in hierarchical systems. However, DAOs are a major step towards making flat organizations the norm.

The Origin of DAO

A New Idea DAOs aren’t the first organization to experiment with non-hierarchical structures, they are building on the ideas of previous models. Flat organizations have been explored by experts in fields such as holacracy and sociocracy.

Frederic Laloux introduced the concept of a “Teal Organization” to describe organizations that have eliminated rigid reporting structures and pyramid-like hierarchies. DAOs take this idea of a Teal Organization and add a new layer, the use of token voting.

Different Structures

The concept of “flatness” in an organization is a fluid one, and DAOs reflect this. Some DAOs have coordinators that act more like managers, while others have completely flat teams with equal footing for all members.

Although the structures may vary, the underlying principle of moving away from bureaucracy and towards a new type of organization remains consistent across all DAOs.

Difference 3: Flexible and Non-Traditional Working Methods

Flexible Work DAOs do not adhere to traditional 9-5, Monday to Friday schedules. There are no set “office hours” for a DAO, as members are spread across the globe.

Instead, contributors work when, where, and how it fits their lifestyle. This may seem similar to the work habits of tech company employees who have been working from home since the pandemic began, but the working habits of DAO contributors are even more flexible.

Multiple Roles

DAOs also allow contributors to take on multiple roles and responsibilities. Rather than being confined to one specific job title, such as “Senior Product Operations Manager,” a contributor may be a Logistics Lead in a product team, an advisor in a user experience research group, and a member of a product ideation group.

This allows contributors to explore their interests and develop new skills and also encourages them to stay with the organization for longer periods of time as they can continue to learn and grow in their roles.

DAO Tooling and Coordination Mechanisms

Communication Platforms DAOs rely on specific tools to facilitate their working habits. Popular platforms include Discord, a more casual version of Slack, and Telegram, an encrypted messaging service.

Much of the day-to-day work within a DAO occurs within messaging channels and voice rooms, making it easy for contributors to work on the go, during off-hours, or whenever they are most productive.

This is a departure from traditional office environments, but similar to the remote working trend that emerged during the pandemic.

Difference 4: Global Collaboration and Multilingual Approach beyond Corporate Standards

Decentralized-Autonomous-Organization
src: medium

Global Collaboration

DAOs have completely transformed the concept of multinational organizations. Rather than having offices in a few major cities, DAOs are multinational organizations that operate as if all members were in the “same room.”

Contributors from all over the world work together in real-time, regardless of their physical location. This creates legal and regulatory challenges, but also fosters a unique environment of camaraderie and collaboration between people who may never have met otherwise.

Cryptocurrency Payment

Another aspect that allows for seamless multinational collaboration in DAOs is the use of cryptocurrency as payment.

Instead of using traditional fiat currency, DAOs pay members in a variety of cryptocurrencies. This eliminates the need for currency conversion and allows for a more efficient and streamlined process of working together across different countries.

Additionally, the use of cryptocurrency as payment also allows for more flexibility and autonomy for contributors, as they are not restricted by traditional banking systems.

DAOs are also experimenting with other forms of digital assets, such as non-fungible tokens (NFTs), to facilitate the exchange of goods and services.

NFTs can be used to represent ownership of a digital asset, such as artwork, music, or video, and can be bought and sold on blockchain marketplaces. This opens up new possibilities for DAOs to create and monetize digital content in a decentralized way.

Another important aspect of DAOs is the use of decentralized exchanges (DEXs) to trade and exchange digital assets.

DEXs are built on blockchain technology and allow for peer-to-peer trading without the need for a central intermediary. This enables DAOs to operate in a more trustless and autonomous way and allows members to trade governance tokens and other digital assets without relying on centralized exchanges.

Wrapping Up

To summarize, DAOs are a new way of organizing people and resources around a common goal, without the need for a central authority. They are decentralized, autonomous, and operate on a token-based voting system with smart contracts.

DAOs use non-hierarchical structures, remote and fluid working habits, and are multinational and multilingual. They are influenced by various factors like tooling, coordination mechanisms, and legal and regulatory gray areas.

They are still a new and evolving concept, and as the technology and understanding of them develop, we can expect to see more and more organizations adopt this new way of operating.

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