Decentralised Autonomous Organizations (DAOs): The Future of Digital Management

What exactly is a blockchain? 

A blockchain is a decentralised digital ledger that securely stores records across a network of computers in a transparent and unalterable manner, with each "block" containing data linked in a chronological "chain." These are created by collecting transaction information, entering it into a block, running the block data through a cryptographic hash function, and creating a chain of blocks. The blockchain has mostly been used, so far, in cryptocurrencies and so the most notable application of the blockchain is, unsurprisingly, Bitcoin. With Bitcoin, blocks (or in this case bitcoins) are made by sending the transactions to a mempool, essentially a queue, being picked up by a miner and entered into an open block, which is then closed and mined. To mine a block, the miner must undergo a validation process. This is done by solving a series of computational problems, or proof of work, where a unique number, called a nonce, is found that goes through the hash algorithm in the block to produce a hash that matches the specific criteria (must start with a certain amount of zeroes to be valid). Once this is done, it is confirmed by other miners and is added to the blockchain.

Bitcoin, and cryptocurrencies, are not the only useful application of a blockchain. The transparent, immutable and decentralised nature of blockchains makes them desirable in a plethora of domains. This has become even more so today, with the increased risk of having centralised systems in place due to the heightened means of control offered by advancing technology. Central banks are a primary example of this risk as they offer the potential to, if given full power, have strong authoritarian control over the entire monetary system (and this, as we addressed in an earlier article, is already happening with CBDCs). Of the many potential applications of blockchains, one key use lies in digital management, specifically in the form of decentralised autonomous organisations.

What is a DAO and how does it work? 

Tokens can represent anything from coins, to votes, to cars.

A decentralised autonomous organisation, or DAO, is a type of completely decentralised, transparent and democratised organisational structure. A DAO is held on a blockchain where blocks are used not as monetary transactions, as in Bitcoin, but as votes. All members, or token holders, cast votes (for decision making in the organisation) in a way where every vote is transparent and openly visible, as well as unalterable. Effectively, this allows for a stronger means of decentralisation and democracy within organisations, and eliminates fraud in voting – allowing for a completely honest and open decision making process. By taking away the anonymity and potential for fraud by making voting transparent, DAO’s will also incentivise voters to vote and act in ways that benefit the community – as not to wreck their reputation.

A recent example of a successful DAO is Decentraland, which was launched in February 2020. It is a decentralised virtual world, or metaverse, where users can interact and socialise – it also allows users to purchase real estate which is held as NFTs on the Ethereum blockchain. As a DAO, users collectively vote on all decisions, such as for platform development or real estate policies.  

Where should we use DAOs? 

Yet even with the benefits and successful application of DAOs, there are undoubtedly some genuine drawbacks. Most notably, a fully decentralised and democratised organisation such as these will cause significant time for decision making. Having every token holder vote on every issue will certainly be a long and arduous process which would not be ideal in all scenarios. This is one of the biggest reasons I have against the use of DAOs in governance and politics. It is paramount that governments can make quick (yet still carefully thought out) decisions and there is already enough stagnation in solving problems worldwide due to funding and parliamentary procedure – DAOs would only make this worse. The same applies in large corporations where it is just as necessary to have decisions made fast, and in a way consistent with the values of the company. There are some, such as the American economist Richard Wolff, who believe that democracy needs to be implemented into corporations and that corporate decisions need to be made by the workers. Yet capitalism is, by far, our best and most successful economic system and that must be kept in place by corporations as they are now. Furthermore, companies are organisations and so have their own visions and identity – hence rather than voting for change (unless dire) in their companies, workers should align themselves with like-minded companies. 

 So, if DAOs aren’t useful in governments and corporations, where are they useful? It seems that DAOs are best applied in communal organisations that are inherently completely democratic – or at least should be. These include potential deFI (decentralised finance) institutions such as venture capital funds or crypto based virtual communities such as Decentraland. Furthermore, smaller or more local organisations, such as city councils, would likely benefit from DAO structures. For example, most decisions made by city councils are concerned with issues directly affecting civilians – such as roads, parks, entertainment facilities, etcetera. Local communities would run far more smoothly if decentralised and democratised. All in all, DAOs, and the principles they represent, are of vital importance in our evolving world and should be considered for wider implementation.