A report I have co-authored on DAOs can be downloaded here.

KEY TAKE-AWAYS

The key feature that changed organizations over the years has been: reducing transaction costs to coordinate. This is reflected in Coase’s Theory of the Firm. You can achieve marginal improvements, such as applying decision support systems within an organization, but every once in a while, a large systemic change occurs that at first looks like a marginal benefit, but in essence enables wholly new types of organizations to exist.
DAOs not only allow for the reduction of transaction costs, but new organizational forms and compositions to be created.
In order to have a highly functional DAO, members must:
- Have equal access to the same information for decision-making
- Face the same costs for transacting their preferred choices
- Base their decisions on self-interest and the best interest of the DAO (not on coercion or fear)
DAOs attempt to solve coordination problems by solving problems associated with collective actions by aligning individual incentives with globally optimal outcomes (for people or corporations). By pooling funds and voting on fund allocation, stakeholders share the costs and incentivize coordination so the entire ecosystem benefits.
DAOs are performing the biggest experiment in new forms of alternative governance. These experiments are not in the form of giant nation-states but applied on a local community level. This comes at a time where peak globalization is in the rear-view window and the world is retreating to a more local model.
It is important to note, Bitcoin was the first DAO. It is run without a central authority by a core team of developers who propose decisions on the future direction of the project, mainly through Bitcoin Improvement Proposals (BIPs) which need consensus from all network participants (though mainly miners and exchanges) for changes in the code to be made.
There will be a growing number of DSaaS (DAO Software as a Service) providers, such as OpenLaw, Aragon and DAOstack, designed to accelerate the growth of DAOs as a category. They will provide on-demand specialized resources such as legal, accounting, and third party auditing for compliance services.
In a DAO a triangle of tensions exists. This lexicon of the triangle is based on the treatise “Exit, Voice & Loyalty” by Albert Hirschman. These must be balanced to find an optimal outcome which allows the DAO to achieve its mandate:
- Exit (Individual)
- Voice (Governance)
- Loyalty (Decentralization)
DAOs challenge the traditional hierarchical and exclusive organizational structure as seen in many facets of the world today. Through “wisdom of the crowds” it is possible to have better collective decision making and therefore better run organizations.
New products are being made at the intersection of DAOs and Decentralized Finance (DeFi). As DAOs become more decentralized and digitized using DeFi products as the payment/distribution methods, DAOs will increase and lead to new and more DeFi products being formed to interact with DAOs. This will be most powerful where the DeFi implementations allow token holders to use governance to customize and optimize the design of the parameters of the application creating a better, tailored user-experience. It can also be used for time locking and creating different types of fee structures.
DAOs allow for capital to be pooled, that pooled capital to be allocated, and to create an asset backed by that capital. They also allow for non-financial resource allocation.
Using DeFi enables DAOs to bypass, if they choose, the traditional banking sector, along with their inefficiencies. This is significant as it creates a Trustless, Borderless, Transparent, Accessible, Interoperable & Composable corporation.
DAO community and governance is very complex and difficult to get right, yet is crucial to the success of the DAO. Coordination processes and incentive measures need to be balanced so that all community members feel that their contributions matter.
Most DAOs are looking to wrap a legal structure with underlying smart contract code around the entity so as to comply with regulations, provide legal protection and limited liability to their participants and allow for easier deployment of capital.
DAO is a Misnomer. DAOs today are not fully decentralized, nor are they fully autonomous and in some cases they may never aspire to be either. Most DAOs will start centralized, then start adopting smart contracts to automate simple internal processes and limit centralized governance. With an aligned purpose, good design and luck they can grow towards being a truer version of a DAO in time. This misnomer has led to a lot of hype around the distributed autonomy of DAOs versus the reality of what they are today.
DAOs are not radical or unique to blockchain technology. There is a long history of DAOs to improve governance structures, decentralized decision making, improve and enforce transparency and enable membership voting and active participation in decision making.
DAO participation currently targets a niche within a niche within a niche. Many DAOs require a minimum staking for participation in a cryptocurrency. This limits participation to the crypto participants who are wealthy, tech savvy enough and interested enough to participate in a DAO.