One of the most innovative concepts to have been successfully implemented through the blockchain technology is the introduction of Decentralized Autonomous Organisations or DAOs. Vitalik Buterin, one of the co-founders of Ethereum (ETH), defines a DAO as a “virtual entity that has a certain set of members or shareholders who have the right to spend the entity’s funds and modify its code”, the aim of which is to replicate “the legal trappings of a traditional company or nonprofit but using only cryptographic blockchain technology for enforcement.”
A DAO is an open-source blockchain protocol that is governed by a set of rules, created by its members, completely and autonomously, functioning democratically while removing the need for a centralized governing authority. There is no need for any human intervention thus creating a transparent and decentralized organization.
To be able to develop a self-sustainable and autonomous DAO, it is first necessary to ensure that the Smart Contracts are correctly configured, since any error or omission in the details may destabilize the project. DAOs also need to be funded. It must develop and distribute some digital assets that could be spent by the DAO, be used to determine the voting power of members or incentivize people and activities. Individuals and organizations can participate in the DAO by purchasing the DAOs digital asset and receiving voting rights. All decisions concerning the DAO are then made through votes. All token holders become a part of the DAO’s community to vote on the business plan and future decisions of the DAO as well as how to utilize the funds. In other words, all business, economic and financial decisions are taken by the members of the DAO provided with governing rights over the DAO, without any hierarchy model in place.
A DAO has the following distinctive characteristics:
- It enables people to self-govern themselves without facing any bureaucracy or hierarchy hurdles.
- The DAO source code is embedded in a smart contract on a blockchain which specifies the rules for interaction among members, governance, voting powers, etc.
- These rules are self-executed without the need for any human intervention.
- There is no need for a central governing authority dictating control over the organization.
- Properties of the blockchain including transparency, cryptographic security, and decentralization are also inherited by the DAO.
The History of DAO
The first reference to the concept of DAO was made way back in 1997 by a German professor of Computer Science Werner Dilger, who published an article titled “Decentralized Autonomous Organisation of the intelligent home according to the principle of the immune system”, wherein he defined DAO as a self-sustaining and autonomous system.
The second reference was seen during the period after the introduction of Bitcoin when the phrase Decentralized Autonomous Company (DAC) came up. DAC was defined as a self-governing company, using tokenized tradable shares as a means of dividends. Any individual could become a stakeholder in the DAC by simply purchasing stock or being paid in the stock. Thus, owning the stock would give the individual entitlement to a share of the profits, participation in the growth, and having a say in the running of the DAC.
Bitcoin is sometimes considered to be the first DAO since it was operating autonomously on an open consensus basis. However, it lacks the basic governance mechanisms that are generally found in a DAO. Further, the term DAO is understood today as referring to an organization deployed as smart contracts on top of an existing blockchain and not to a blockchain network as itself.
The first real DAO was created in 2016 by a German startup called Slock.it, which was known as the Genesis DAO or ‘The DAO’. The first of its kind, it was intended to act as an investor-operated venture capital firm. The coding framework of The DAO was built into a smart contract on the Ethereum blockchain. It was launched with a token sale where individuals were able to purchase DAO tokens with ETH. The owners of The DAO tokens were then entitled to voting rights. The members of The DAO would then vote on different projects to fund and were in a position to profit from their investments by reaping dividends from the gains of the project. The DAO was however hacked due to the discovery of a loophole in the coding, which led to the hacker stealing $70 million worth of ETH. Ethereum soon recovered the money by using a method known as a hard fork in which token holders were given the ability to withdraw their tokens.
This hack resulted in diffidence among people regarding DAOs, resulting in a debate weighing the pros and cons of DAOs.
Since DAOs are based on the two pillars of autonomy and decentralization, it operates independently, transparently and consistently. DAOs are based on rules embedded in smart contracts and are able to operate without human intervention solely based on the rules decided democratically by the members eliminating the need for hierarchy. The open-source code makes sure the rules, transactions, and activities can be reviewed by any individual, thus creating a high level of transparency. Decentralization further allows DAOs to function globally by eliminating borders and providing access to services to areas that may otherwise be unserviceable.
However, it is a complex process to program the DAO and automating tasks. Error in a single line of code could destabilize the entire program and lead to losses. Moreover, the legality of its operations is an issue. The lack of legal status of the DAOs creates a hindrance for the DAO to operate globally.
The Current Scenario
Genesis DAO opened that gate to several new projects, such as the MakerDAO, a decentralized lending network developed on the Ethereum blockchain, and the Dash DAO which is an open-source peer-to-peer cryptocurrency that offers instant payments and private transactions.
The DAO industry has seen considerable growth in the past couple of years. OpenLaw DAO has paved the way for the creation, deployment, and management of DAOs by removing the need to be a developer or have experience in blockchain technology to be able to deploy a DAO. Recently, Uniswap, a cryptocurrency, launched its own governance token, $UNI to enable Uniswap to transition to a decentralized community-operated network.
The development and growth of DAOs have birthed the need for regulatory backing and legal status. Presently, Wyoming is the only state in the world that recognizes DAOs as legal entities and provides a legislative framework for the regulation of DAOs. The law provides legal status to the DAO and provides liability protection to the members of the DAO community which otherwise would be considered a partnership, with the “partners” facing unlimited liability. Further, the traditional legal protections available to an LLC have also been made available to DAOs.
DAOs are based on Trustless technologies, which means that they don’t require the trust which is otherwise needed in a traditional organization. The rules and activities of the DAO are in the open and any changes require the majority vote, hence, the old ways of trusting the head of an organization are no longer necessary.
The goal of a DAO is not to reduce human intervention in the organization, but to obliterate it completely. The basic structure of the DAO makes it the most cost-effective and fair business model conceivable. A DAO is programmed to only protect the interest of the business, and since there are no employees, middlemen, or even managers, the consideration for salaries, intermediaries, and distribution of profits is negligible, making it possible for DAOs to run on razor-thin margins. Relying on automation further leads to fast scalability without compromising the quality of service.
The only obstacle standing in the way of a DAO revolution is the lack of legal regulations. DAOs being a novel business model, requires novel legislation to properly understand the legal requirements for running a DAO. Many courts would define the relationship between members of the DAO and investors as a “general partnership” which is accompanied by unlimited liability for every stakeholder for all the debts and liabilities or legal action that the DAO may face. However, in practicality, the stakeholders of the DAO should not have unlimited liability, their liability should be limited to the amount of contribution made by them.
The introduction of the Wyoming Act, giving legal recognition to DAOs indicates the start of a wider trend that would see global organizations exist in a decentralized form in the near future. With more countries considering recognizing DAOs as legal entities, the future of the business world may shift drastically compared to the one we know today. We may be living at the start othe era of decentralization.
The WACEO is a non-profit organization on a mission to provide regulatory clarity, as well as business and structural assistance to DAOs. keep yourself updated on information relating to blockchain projects and DAOs, visit our website here.