Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
Decentralized autonomous organizations (DAOs) are quickly captivating the crypto community and reimagining the future of organizational models and hierarchies. These member-owned communities operate without centralized leadership and are gaining usage heading into 2022 by swapping traditional organizational structures for crypto-economics.
While many were unfamiliar with DAOs before ConstitutionDAO’s recent failed bid at a copy of the U.S. Constitution, they are multiplying at a rapid rate. According to Cointelegraph, active DAOs have increased by 660% since 2019.
It's essential to learn how DAOs operate and what is fueling their momentum to understand how they challenge legacy structures with applications well beyond the crypto community.
What are DAOs?
DAOs are organizations whose policies and governance (operations and stakeholder interaction parameters) are programmed in the blockchain. They're encoded in a computer program instead of in typical paper governance documents like shareholders' agreements and bylaws.
This way, the rules aren't subject to different interpretations like in typical organizational constructs and are transparent to DAO members. Updates to operations procedures and decision-making follow the pre-established framework. They unfold automatically after trigger events or based on decisions approved by specific DAO token-holders who vote electronically.
Some of the leading benefits of the setup are reduced organizational friction, fully democratic governance, and no need for intermediaries between DAO members and decision making.
How DAOs work
These structures can theoretically serve any blockchain. But ethereum-based DAOs are the most ubiquitous due to the blockchain’s popularity for decentralized finance transactions. They operate via autonomous smart contracts without the management bureaucracy layers that encompass a typical organization.
Computer programs that follow pre-encoded instructions promote transparent decision-making and reduce friction and red tape. Typically, third-party actors may have different views and use cumbersome governance processes when taking action, like using shareholders' votes during annual meetings.
The perceptions of shareholders' in corporations that they are disenfranchised reduces their propensity to make decisions. Also, the economic cost of such action is relatively high. DAOs address those challenges. Most decisions don't require further member action, and the computer code can conveniently execute instructions.
Why are they gaining usage?
More groups and organizations are turning to DAQs, from my own PlannerDAO – which serves the financial planning profession – to the aforementioned ConstitutionDAO. And for a good reason.
They set steadfast rules. DAOs use incorruptible contracts to establish a series of commands and rules. They effectively act as the company's C-level, tasked with defining rules devoid of any hierarchy. DAOs also represent the entire organization and enable widespread engagement. Typically, those with the highest ownership have the power. In crypto-fueled landscapes, the one with most tokens has the prominent voice, and DAOs ensure a non-corruptible decision-making framework representing members' common interests.
A system that doesn't pin a particular person to the top and others to the bottom allows collaborating, and members can freely air their views without fearing to "cross the line." Everyone has a stake in a DAO, which enables widespread engagement. When planning to instill an expansive decentralized approach, prepare for the workload. Governance is still necessary for a decentralized but not autonomous organization. But with DAOs, the governing model is automatically executed with smart contracts doing the heavy lifting.
Projects and ideas must move upwards in traditional setups as they gain approval at several levels before implementation. Throughout this process, most ideas dilute. But there's no chain of command in a centralized structure, so views don't drain, and messages remain intact in translation.
What does the future hold for DAOs?
Despite the uncertainties and challenges, DAOs are set to disrupt traditional business and organizational structures. Some industry experts consider them the new LLCs. In a few years, there won't be company equity. Instead, they'll use tokens, and DAOs will represent them.
American billionaire investor, Mark Cuban, acknowledged the value of these advanced setups in a tweet in June. According to him, the future of business organizations is set to change as DAOs replace legacy structures. Cuban said that entrepreneurs who shift to DAOs can reap significant rewards.
Understandably, the new approach may not fit every business type. However, DAOs offer numerous helpful processes and features to boost a company's efficiency and productivity through the decentralized approach. The wave of institutional investment in these structures is also an industry growth indicator. It signifies the potential from continuous widespread deployment, increasing competition with traditional organizations and businesses.
Based on recent trends, the successful and mega-popular enterprises of the future could be DAOs. After learning how DAOs work and what fuels their momentum, it's clear why the crypto community is dazzled.
Steve Larsen, CPA, CFP® is co-founder of PlannerDAO, a cryptocurrency education community for financial planners. He is also co-founder of the Certified Digital Asset Advisor (CDAA) designation, as well as an adjunct professor of finance at Gonzaga University, where he teaches classes in cryptocurrency and financial planning. To learn more about PlannerDAO, please visit plannerdao.com.
Read more articles by Steve Larsen