Smart Contracts for Democracy: A Look at How Decentralized Autonomous Organizations (DAOs) are Organized and Run

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A pioneering crypto firm has decided to throw away its corporate structure in favor of a DAO (decentralized autonomous organization) system.

In a tweet thread, Shapeshift CEO, Erik Voorhees, has indicated that the traditional corporate model is inferior to a DAO style.

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For 7 years, the crypto exchange has had the common aspects of a corporate organization, such as:

  • Investors
  • Board members
  • Bank accounts
  • Tax compliance

According to Vorhees, the current system has become a problem for the company to realize its vision – establishing an immutable, borderless, financial system.

The CEO now believes that only an open and decentralized financial system can guarantee their vision.

In this post, we break down the basics of a DAO and why they are a superior way of structuring firms and organizations.

DAOs – Decentralized Autonomous Organizations

A decentralized autonomous organization (DAO) is a form of governance that is effected by smart contracts that executes an agreed upon protocol (rules) without human intervention.

As such, DAOs can be described as a trustless form of self-government.

DAOs are a solution to a key problem within any decision-making organ, whether in business, political government, or social institutions – the principal agent dilemma. This is whereby an individual or entity (agent) has the authority to make decisions or take actions on behalf of another person or entity (prinicipal).

Whenever this happens, there is inherent risk in the divergent goals, priorities, or access to crucial information of the respective parties. The agent may be motivated to act in accordance with its own self-interest, even if the agent was selected to make decisions on behalf of the principal’s interests.

DAOs are aiming to solve the principal agent dilemma by limiting hierarchical human intervention or centralized coordination during decision making.

A properly-executed DAO aligns the incentives of stakeholders – from founders, to token holders, users, and the general community – in governing an organization or decentralized platform.

Implementing a DAO

Different blockchain projects may have specific implementations for their DAOs. However, there are general parts when creating a DAO.

  • Smart Contract Setup: This is when all the rules and agreed upon principles are defined and encoded in a smart contract. This step is the most crucial step, because it is important to introduce clear rules that will apply to any future decision-making issues
  • Funding: The DAO needs an asset to be spent, or that grants membership to the DAO. This usually entails the creation of a native token, whose owners become members or/and are participants in the DAOs activities
  • Deployment: All token-holders can be considered like stakeholders, and they make decisions in a consensus vote. The holders can propose for changes to how the DAO and/or its activities are run.

If the DAO’s token distribution policy and consensus mechanisms defined in its underlying smart contract architecture are well-designed, the DAO’s stakeholders will naturally work towards the most beneficial outcome for the entire DAO network.

All the rules, transactions, and activities of a DAO are saved on the blockchain, can’t be changed, and can be traced at any point. The DAO therefore uses the blockchain in the same way that crypotucrrencies do, only that it is focused on governance.

Examples of DAOs

Several crypto projects already operate versions of DAOs or are developing DAOs. These include:

  • Uniswap, the leading DEX (decentrlized exchange) on the Ethereum network – Holders of a given proportion of the total UNI supply can make proposals
  • MakerDAO, a decentralized lending platform – It has given control of the $MKR stablecoin supply distribution to MKR holders, and also has a process of electing paid contribuors

None of these efforts towards DAO can yet be considered to be working fully effectively, but DAOs remain a concept that can have strong wide-scale implications.

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RECOMMENDED READING: Balancer Becomes the Latest Decentralized Exchange to Launch on Polygon

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