What are DAOs good for anyways?
DAOs (Decentralized Autonomous Organizations) are a new phenomenon in Web3 used to gather and organize people with similar goals and interests. Despite DAOs being in their infancy, three US states (Vermont, Wyoming, Tennessee) now offer DAO as a legal formation option. Many lawyers have observed that these new structures amount to nothing more than a sexier Limited Liability Company (LLC), meaning DAOs looking to incorporate in the US might be better off incorporating under a more tried and true legal entity. But this decision ultimately comes down to,
1. The purpose of your DAO
2. And talking to an attorney (of which I’ve not been blessed with the power of the JD)
So what are the purposes of the most ubiquitous DAOs today? Today, DAOs fall into two groups — Governance DAOs or Membership & Trade DAOs.
Governance DAOs allow multiple people to govern the rules and actions of decentralized protocols and projects. Instead of a central authority setting rules such as fee rates, liquidity requirements (in the case of financial exchanges), or compensation of software engineers, a collection of DAO members vote on these rules as an organization. Typically, DAO members are early project contributors or customers of the protocols themselves.
Membership & Trade DAOs typically represent a collection of likeminded individuals working towards a common goal. Today, many of these DAOs are collections of blockchain enthusiasts or software engineers who are dedicated to the expansion and adoption of blockchain technology. Not only do these organizations use the time, talent, and money of their members to advocate for their shared mission, but in exchange they typically offer membership benefits such as shared job boards, product discounts, access to other exclusive communities, and more.
Now that we laid out the basics of DAOs today, let’s get to the important question, What are DAOs really good for?
On the surface, the first section of this article hasn’t presented a compelling reason why DAOs are any better than a conventional organization.
Like Governance DAOs, shareholders of public companies are afforded many privileges to vote on important company decisions from executive compensation to mergers and acquisitions. Anyone who has owned a stock via a brokerage firm would note that proxy voting today is largely straightforward and easy.
Similarly, Membership & Trade Organizations such as the American Bar Association, National Education Association, and National PTA efficiently represent the interests of millions of US citizens today. The list of these types of organizations in the US is exhaustive, with the top 10 representing over 20 million people alone. Although some of these organizations have had moderate membership reductions in recent years, they are all still financially stable, and have considerate power in community and government advocacy.
So is the DAO structure really any better than conventional alternatives? In short yes, but both have a lot to learn from each other to reach optimal outcomes.
As someone who has had the opportunity to intimately participate in large membership organizations in the US, I’ve heard a common complaint among some of the largest, “We don’t know our members.” Although the range of this knowledge gap varies, all of these organizations believe that the connection to their individual membership is lukewarm at best. In response, many have spent millions of dollars on innovative membership tracking solutions. These Web2.0 solutions have greatly closed the gap, but not eliminated it.
Enter the DAO. A DAO’s inherent usage of blockchain technology gives them a powerful toolbox to close the membership gap. How?
- Real time membership snapshots — DAOs using tokens for verification have a realtime view of the size of their membership and who each member is.
- Faster temperature taking — DAOs have much faster processes for taking votes digitally. Although in-person events are important, digital voting can provide key real-time insights on how DAO members feel about important topics and developments.
- Code as Law — DAOs can utilize the power of smart contracts to lay out specific rules and actions members can take. Best of all, it is nearly impossible to game or change these rules without the agreement of the membership.
Although these are some of the key benefits of a DAO structure, there are others, such a benefits distributions, that are organization specific.
Despite DAOs having a clever advantage in the membership gap dilemma, they are still a collection of human actors that face the same trials of any membership organization.
So far, some of the most ubiquitous DAOs have ignored these sociological challenges. It’s common to feel that conventional rules need not apply when you are at the cutting edge of new technology. But DAOs, run by humans, will face the same existential challenges their conventional siblings have faced time and time again including:
- Corruption — Paying favors to certain members in exchange for continued support, or the misuse of organization funds by the people in positions of power.
- Cult of Personality — The membership rallying around one individual as the “savior” of the group, rather than focusing on how the collective whole can contribute to the organization.
- Not Cultivating Member Leaders — Not spending enough time encouraging “junior” or new members to get more involved and learn the ropes. This can be a major sand trap to the long-term survival of an organization as institutional knowledge is not passed downwards, and when core leadership departs or retires there is significant brain drain.
DAOs will enrich our ability to gather and coordinate as humans. Not only is this exciting, it is needed. However, my recommendation is to remind DAOs that, “Those who do not remember the past are doomed to repeat it.” And conventional membership organizations would do well to remember a different quote, “Disrupt or be disrupted.”
