In 1602, the Dutch East India Company was formed in what many consider the world\u2019s first initial public offering \u2014 allowing perfect strangers to share in stock ownership.<\/b> Four centuries later, the joint-stock model \u2014 especially its incarnation as the modern business \u201ccorporation\u201d \u2014 sets the pace for much of the economic world.<\/span><\/p>\n But, decentralized autonomous organizations, or DAOs, could soon disrupt the joint-stock capitalized business model, much as the Dutch East India supplanted the limited partnerships of its day \u2014 or so some may say.<\/span><\/p>\n \u201cDAOs are the new limited liability companies (LLCs),\u201d <\/span>says<\/span><\/a> DAO investor Cooper Turley of these leaderless internet-native entities where key decisions are typically made by consensus. \u201cIn five years, companies won\u2019t have equity anymore. They\u2019ll have tokens and they\u2019ll be represented as DAOs,\u201d while high-profile investor Mark Cuban adds, \u201cThe future of corporations could be very different as DAOs take on legacy businesses.\u201d Others see DAOs <\/span>challenging venture capital firms<\/span><\/a> in the race to fund Web3 projects.<\/span><\/p>\n \u201cI think DAOs are already replacing traditional corporations,\u201d Sam Miorelli, an attorney who has been active in a number of DAOs including Curve Finance, tells Magazine. \u201cThe promise of DAOs is the chance to return closer to the historical norm of project-first where smart people with good ideas can get funding and build a community around a project without first finding a legal budget.\u201d These decentralized autonomous organizations have some unique characteristics. <\/span>According<\/span><\/a> to law professor Aaron Wright:\u00a0<\/span><\/p>\n \u201cDAOs are not run by boards or managers, but rather aim to be governed by democratic or highly participatory processes or algorithms.\u201d<\/span><\/p>\n<\/blockquote>\n Indeed, they have been described as operations that \u201cresemble an <\/span>online chat room with a bank account<\/span><\/a>,\u201d given that \u201cvirtually anyone from anywhere with Internet access can join a DAO, participate in its governance and share its profits,\u201d Florence Guillaume, a professor at the University of Neuchatel\u2019s Faculty of Law, tells Magazine.\u00a0<\/span><\/p>\n Things didn\u2019t look so promising back in 2016 when one of the first decentralized autonomous organizations \u2014 unhelpfully named \u201cThe DAO\u201d \u2014 was formed on the Ethereum blockchain network. Several months after its formation, \u201cThe DAO\u201d was hacked to the tune of $60 million which led to a bitter split in the still-nascent Ethereum community, culminating in a \u201chard fork\u201d to restore the stolen funds. \u201cThe DAO\u201d cast a pall over decentralized autonomous organizations for some time.\u00a0<\/span><\/p>\n Today, these transparent communitarian organizations still face critical regulatory and legal challenges. Will they need to pay taxes? Can they open bank accounts or sign legal agreements? Can they bring lawsuits against other DAOs?<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u201cThere is no \u2018Model DAO Act\u2019 the way there is a \u2018Model Business Corporation Act,\u2019\u201d <\/span>wrote<\/span><\/a> attorneys Louis Lehot and Patrick D. Daugherty. They are \u201cfundamentally unprecedented in law.\u201d Key decisions, like deciding how funds will be spent, are often decided by a vote of members\/owners who can number in the thousands. Needless to say, decision-making can be cumbersome.<\/span><\/p>\n A few things about DAOs: They are typically cooperatives hosted on blockchains like Ethereum (but not Bitcoin) that can handle chunks of software code called smart contracts that automatically execute when certain conditions are met. For example, if an airline flight is delayed by four hours (i.e., the condition), then a payment could be triggered via smart-contract code to the cell phones of passengers who had purchased flight insurance policies.<\/span><\/p>\n Most DAOs raise funds from the sale of tokens, which <\/span>give investors\/owners voting rights<\/span><\/a>. Token owners make money if the DAO votes to pay dividends or through token price appreciation, similar to how investors earn profits in publicly listed joint-stock companies like Coca-Cola.<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n DAOs are just SPACs with extra steps<\/p>\n \u2014 Andre Cronje 👻 (@AndreCronjeTech) February 14, 2022<\/a><\/p>\n<\/blockquote>\n \u00a0<\/p>\n \u00a0<\/p>\n \u201cThere is a future for DAOs,\u201d Erik Vermeulen, professor of business and financial law at Tilburg University, tells Magazine, given their transparency, security and open source governance protocols which mean that weaknesses are constantly probed and tested. Moreover, they discourage \u201crent-seeking,\u201d i.e., manipulating public policy or the economy to increase profits. This is similar to when a company lobbies the government for subsidies. They aim to discourage natural and political monopolies because of their distributed nature, adds Vermeulen.\u00a0<\/span><\/p>\n But, are they really superior to traditional organizational business models? Not all agree. \u201cThe current token system does not necessarily prevent monopolies because there are individuals that may own a large amount of the DAO tokens and thus may control voting results,\u201d Sarah Hammer, managing director of The Wharton School\u2019s Stevens Center for Innovation in Finance, tells Magazine, adding:<\/span><\/p>\n \u201cAll DAOs are different. Some DAOs are structured to facilitate inclusion and others limit their membership vis-a-vis something called token gating. Token gating requires the DAO member to authenticate that they hold the DAO\u2019s NFT token in a crypto wallet before they enter the DAO\u2019s Discord server or website.\u201d\u00a0\u00a0<\/span><\/p>\n<\/blockquote>\n \u201cThe defining attribute that makes DAOs different from past organizations is the use of the blockchain as the root of trust,\u201d Eric Lim, senior lecturer at the University of New South Wales, tells Magazine, \u201csuch that the inputs and outputs from decisions that matter are immutable and auditable.\u201d This represents an advance over traditional centralized organizations, which Lim has called \u201ca zero-sum game.\u201d\u00a0<\/span><\/p>\n DAOs have been attracting more attention in the mainstream press in the past year which has shed light on both their strengths and weaknesses. The ConstitutionDAO, for instance, formed on short notice in November, raised $47 million in a matter of days to bid on a rare first printing copy of the U.S. Constitution offered up for auction by Sotheby\u2019s.\u00a0<\/span><\/p>\n The DAO, <\/span>described<\/span><\/a> as a \u201cfinancial flash mob\u201d, <\/span>gathered<\/span><\/a> more than 17,000 \u201cdonors\u201d \u2014 a signal achievement, in the view of many, and one, if it had succeeded, that would have put the historic document \u201cin the hands of many\u201d (e.g., in a museum), as opposed to a single individual who might never display it again.<\/span><\/p>\n Once the bidding began, however, it became apparent that the DAO\u2019s transparent decentralized structure could be exploited. Everyone knew how much money had been raised by ConstitutionDAO and the amount that could\/would be bid. \u201cThe problem with the ConstitutionDAO is that the maximum possible bid is completely transparent,\u201d <\/span>explained<\/span><\/a> David Friedberg. \u201cThe seller will just bid against the DAO to get their max bid.\u201d Ken Griffin, CEO of Citadel, walked home with the rare document.\u00a0<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n Our final note is that we hope that, after we\u2019re gone, the past few weeks serve as a reminder of what\u2019s possible \u2013 that a group chat of internet friends with memes and dreams can strive towards ambitious goals 🙂<\/p>\n gn \u2014 ConstitutionDAO (📜, 📜) (@ConstitutionDAO) December 15, 2021<\/a><\/p>\n<\/blockquote>\n \u00a0<\/p>\n \u00a0<\/p>\n The unwinding didn\u2019t go smoothly, either, as DAOs can be quickly formed for special events and disbanded afterward. \u201cConstitutionDAO\u2019s core team struggled to come up with a plan to return investments as contributors bickered in online group chats,\u201d the New York Times <\/span>reported<\/span><\/a>. \u201cThe average investment was about $200, but now the investors may have to pay that much in fees to get their crypto back.\u201d<\/span><\/p>\n That experience hasn\u2019t discouraged DAO proponents, however, who assert that, as with any innovation, growth challenges are to be expected. These entities are designed to flourish in the Web3 era. Moreover, DAOs\u2019 decision-making processes can be streamlined by implementing digital-age variations like delegated voting, whereby owners (i.e., token holders) who are too busy to study the details or fine print of a proposal can assign their vote to a trusted third party.\u00a0<\/span><\/p>\n As EY Global Blockchain Leader Paul Brody explains, shareholders in large corporations today can vote out management if it doesn\u2019t perform effectively. In practice, this rarely happens but delegated voting changes everything. \u201cDelegated voting rights are going to be a revolution and not just for DAOs,\u201d Brody tells Magazine, adding:\u00a0<\/span><\/p>\n \u201cAs people invest widely in both blockchain and traditional stock markets, it becomes impossible to keep track of all the key issues from executive pay to the carbon footprint. The ability to delegate your votes to industry or topic experts will allow owners to exercise a much stronger and clearer voice in the management of these companies.\u201d\u00a0<\/span><\/p>\n<\/blockquote>\n \u201cSmart contract-based voting schemes make it possible to involve a larger number of individuals in decision-making, at least as compared to more cumbersome and expensive systems for collecting and verifying votes,\u201d <\/span>according<\/span><\/a> to Wright. \u201cThe availability of smart contract voting protocols may make it possible for some enterprises to adopt their own individually tailored allocation of decision-making power between stakeholders.\u201d<\/span><\/p>\n DAOs can also change who is hired for a project and how they are paid. \u201cThere is no question that DAOs are the future of work,\u201d Anne Connelly, Faculty with the Questrom School of Business at Boston University, tells Magazine. \u201cIn an ever globalized society, the benefits of being able to hire internationally and pay across borders in crypto will provide an unprecedented competitive advantage.\u201d These autonomous organizations provide participants with more power than they could possibly wield in traditional corporations, Connelly says. Workers \u201chave more ownership in the outcome of the work, and those in developing countries will be less likely to fall prey to geographic class divides.\u201d<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n Others are more measured, however. \u201cWe aren\u2019t quite there yet,\u201d says Vermeulen, adding that DAOs still have technical and operational shortcomings and may be prone to \u201cSybil attacks\u201d and \u201c51% attacks,\u201d while Guillaume adds that \u201cDAOs will probably not replace traditional corporations but offer new alternatives to existing corporate and social organizations. They will be the organization of choice for specific cases, but this will be greatly influenced by legislation and how DAOs will be treated legally,\u201d further explaining:\u00a0<\/span><\/p>\n \u201cEntrepreneurs and other people looking for a legal structure to undertake a new venture might be more inclined to choose to create a DAO if this type of organization has legal personality and offers limited liability to its members.\u201d<\/span><\/p>\n<\/blockquote>\n According to Miorelli, open-source legal work and open-source decentralized building blocks are two ways that DAO can bring on a lower-transaction-cost future for all. \u201cThis also goes for funding ongoing projects. The core innovation of DeFi projects \u2014 many of which are governed by DAOs \u2014 is that \u201cthe returns available when transaction costs decline to near-zero and when immutable contracts make enforcement of antiquated and classist rules like accredited investor regulations impossible.\u201d<\/span><\/p>\n DAOs will need to overcome some key obstacles \u2014 like sometimes diffuse governance structure that doesn\u2019t handle conflict or competition well. \u201cCoordinating and organizing activities in a decentralized community is definitely difficult, complex and unwieldy,\u201d says Lim.\u201d Meanwhile, Guillaume adds that \u201cDAO governance structures need to reach a point where it is easier and more adapted to manage resources using smart contracts than using traditional organizational structures.\u201d\u00a0<\/span><\/p>\n However, DAOs cannot entirely eliminate the human factor and all the limitations implied therein. \u201cDAOs don\u2019t solve human organization issues but neither do corporations. No legal or organizational structure eliminates interpersonal conflicts,\u201d says Miorelli, adding that any well-organized endeavor can try to manage those conflicts.\u00a0<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n There are other reasons to hesitate before pronouncing DAOs as the future of organizational business models. There is a danger of convergence, for instance, DAOs evolving to resemble something like traditional top-down managed corporations. That is a question in Brody\u2019s mind: \u201cWhen does a DAO cease to be a truly participatory ecosystem and start to look like just another flavor of shareholder- \u2014 now stakeholder- \u2014 owned company, complete with full-time management team and a very corporation-like hierarchy?\u201d\u00a0<\/span><\/p>\n Will a DAO just be a corporation with tokens instead of shares? \u201cOr, will it come to mean something more that implies a very high level of user and owner overlap, engagement and participation?\u201d asks Brody. \u201cI see DAOs as one of several business structures that people would consider alongside partnerships, sole proprietorships and corporations,\u201d he continues, although he anticipates that most blockchain businesses will be managed by DAOs and many \u201cprotocol-driven technology businesses\u201d as well.\u00a0<\/span><\/p>\n Then, too, some DAOs seem almost too good to be true \u2014 like OlympusDAO which was, at one point, <\/span>paying<\/span><\/a> 2,681.5% APY for those willing to stake its OHM coin. Some dismissed the DAO as little more than a Ponzi scheme and some believe that it can be the future of DeFi. But, the brouhaha around it suggests that more regulation may be coming for these internet-native entities. Would that ensure DAOs\u2019 future?<\/span><\/p>\n The answer isn\u2019t clear. While some U.S. states such as Wyoming have handed down legislation around DAOs, Hammer notes, \u201cmany others have not done so. In addition, some DAOs may implicate federal regulations and securities laws in particular.\u201d<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n But if you\u2019re familiar with the Fourth Turning paradigm, you may understand that the organizational format that succeeded during the Industrial Age may not be the optimal format for the digital age.<\/p>\n There is a new kind of \u201cfirm.\u201d The decentralized autonomous organization #DAO<\/a><\/p>\n\n
The DAO of 2016<\/span><\/h4>\n
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A better business model?<\/span><\/h4>\n
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-Core<\/p>\nGrowing pains<\/span><\/h4>\n
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More regulation coming?<\/span><\/h4>\n
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