Evaluating The DAO Model for Start-Ups

Blockchain technology has enabled a new digitally-native way for groups to coordinate without a central leader or authority.

This new form of organisation is called a DAO: a Decentralised Autonomous Organisation.

A DAO is a fully-programmable platform for collaboration. It is a self-forming, self-governing, and self-operating organisation that is run on and by the blockchain.

DAOs have emerged as a new primitive organisational structure that removes human dependencies from the system.

Given my fascination with what makes start-ups succeed, I thought to explore and share the case to be made for DAOs to challenge the way traditional businesses are formed, administered, and operated.

First: DAO BASICS

Each DAO possesses its own constitution and economy.

A DAO’s constitution encapsulates its collectively defined set of rules, which are coded on the blockchain, and enforced by self-executing smart contracts. A DAO can only modify its constitution through discussing proposals, and passing on-chain votes.

A DAO’s economy is captured by the total value of tokens issued and distributed by the DAO. Members and other stakeholders can invest in the DAO by purchasing or earning its native token, and vote to allocate the DAO’s treasury to productive means.

By combining on-chain governance and economic incentives, a DAO can address the inefficiencies of corporate design, and offer a more effective, scalable, and sustainable framework to collaborate.

In order to support DAOs as a viable framework or idea for start-ups, we will look at their impact through the lens of 3 foundational pillars: people, purpose, and productivity.

PEOPLE

As a start-up or company, attracting, hiring, and scaling competent and motivated talent is competitive and burdensome, and managing human nature is another complex issue.

The DAO structure makes it easier for the organisation to scale securely, and for contributors to access more flexible and inclusive opportunities. In the context of DAOs, geographic borders and legal red tape are not relevant. This makes DAOs better adapted to the self-sovereign worker. By being open and permissionless, DAOs can access a larger pool of human resources. Moreover, as DAOs exist outside of jurisdictions, DAOs avoid the regulatory burden and upfront cost of talent acquisition.

Although DAOs are open for anyone to join, members are only incentivised to join based on their personal alignment with the DAO’s rules and purpose. When joining a DAO, members imply their agreement with the DAO’s constitution, trusting the on-chain governance mechanism to work in their best interest. Pre-programmed smart contracts can also verify the DAO’s membership requirements (e.g. token or NFT holding, provenance, reputation, etc.) are met before granting new members formal rights and entry. As it is the blockchain that does the verification instead of humans, bias is eliminated from the selection process. Moreover, members can be recognised as trustworthy despite remaining anonymous. This creates both an organic and algorithmic filtering mechanism, in which only those that are qualified and motivated will invest and commit to the DAO.

DAOs are also better designed to mitigate conflict and ease human resource management. Many start-ups and companies fail or are severely challenged not due to their idea, but because of the management complexity of human dynamics. Human nature tends towards greed and power, which can lead to bad behaviour such as manipulation or coercion. If mismanaged, individual interests are favoured at the expense of the collective, and chaos ensues. DAOs are decentralised by nature, and share power through democratic algorithmic governance votes passed on the blockchain. This makes every consequential decision and process (i.e. fund allocation, reward distribution, protocol change, etc) transparent and trustworthy. As a result, members can have full trust in the system, and maintain order.

PURPOSE

Contrary to corporations, DAOs are non-hierarchical, and share the ownership of their entity.

As both stakeholders and contributors, DAO members owe fiduciary duty to each other.

The DAO’s token economics defines the incentive mechanism that will (or will not) promote membership engagement, contribution, collaboration, and success.

The token investment in a DAO is most often intended and expected to appreciate in value. Consequently, token holders are incentivised to grow the DAO’s total value in order to increase the worth of their individual share. In order to do so, they need to attract, create, and retain value in their network.

• Attract Value: by stimulating inflows of new investment in the DAO (new members or outside investors)

• Create Value: by building projects, delivering services, making good investments, etc.

These three act as a flywheel: the more value is created in the network, the more external participants are drawn to invest in the network, and the more it grows and prospers, the more members are incentivised to remain invested in the long-term.

The DAO can also program incentives based on its token such as token staking rewards, governing power incentives, additional rights, token burns (reduction of supply), etc. If properly designed, the token economics programmed on the blockchain will further incentivise voluntary actions in pursuit of the DAO’s greater purpose.

An organisation’s incentives are designed to influence members’ actions, and the culture is a result of incentives. The outcome of integrating an economic infrastructure to motivate and align members towards the common purpose of the organisation is powerful for productivity and sustainability.

PRODUCTIVITY

The measure of a start-up or company’s success is most often focused on ROI and ROA.

Rather than the prospect of a liquidity event, the investment in a DAO is justified by the expectation of sustainable operations and profitability.

From this perspective, a DAO offers a cost and efficiency advantage over traditional corporate structures.

First, the DAO software acts as a coordination layer. On-chain rules and self-executed governance significantly reduces the overhead and overwhelm. This function alone eliminates ambiguity, and allows the DAO to function in a reliable and orderly way, with less distraction, and more trust. Embedded trust is also a gain in efficiency. In an environment in which peers trust each other, individuals are more open to share and collaborate proactively and freely. DAOs benefit from a built-in trust layer insured by the blockchain, and economics to motivate them towards a common goal.

Second, on an operations and service level, the DAO can leverage smart contracts to automate and deliver specific functions and actions. This can save intermediary costs and time at many levels: financial transactions, procurement, compensation, supply chain tracking, etc.

Third, DAOs do not depend on CAC or marketing expenses, but rely entirely on earned social legitimacy. Since DAOs are fully transparent, members can be held accountable for their responsibilities. It is in the best interest of members to deliver on their promises to draw in and retain stakeholders. Plus, by supporting the network’s development and activity, use cases and utility can expand to further drive up token demand.

Lastly, by sharing purpose and ownership, naturally engaged talent and empowered leadership emerges. There is therefore more room for initiative, creativity, and voluntary participation at scale to drive innovation and productivity.

DAO THEORY VS REALITY

DAOs provide a good framework to inform how we can improve on our current corporate structures to enable more efficient, equitable, and scalable collaboration systems.

That being said, the outcome of DAOs remains largely hypothetical.

At this time, the most common use cases for DAOs today are investment syndicates, project incubators, social groups, protocols, and open sourced projects. The scope of a DAO’s purpose is currently relatively focused, but in the future, we could experience a world in which a larger DAO with many functions coordinates via many sub-DAOs.

As the model is being proven, DAOs can face specific challenges. For example:

• Voter apathy or lack of voter engagement

• UI/UX friction (i.e. private key management, lack of universal interoperable identity profile solutions, acquisition of assets, siloed communication channels, etc.)

• Lack of DAO software and hosting infrastructure

• Flaws or overlooked functions in the governance protocol code

• Responsiveness of community to achieve consensus quickly

• Fluidity of leadership and participation

• Privacy on the public blockchain (*private blockchains or re-encryption tech could be explored)

• Human nature infiltrating itself

Many of these challenges have solutions that are being engineered, or will be resolved as they evolve over time.

Although it is difficult to predict at this time, DAOs might be adopted by international unions with geographically decentralised stakeholders, or prove to be better suited for small exclusive groups and hyper-agile teams.

To Conclude

In the context of start-ups and corporations, a DAO structure can benefit your people, clarify your purpose, and improve productivity KPIs.

At this time, a DAO presents a theoretical framework for organising at the scale and speed of the internet. It provides an alternative to corporate design that is more efficient, agile, transparent, and secure made possible by the advancements of programmable blockchains.

A DAO offers the possibility for organisations to explore a broader spectrum of automation and decentralisation.

A DAO may be a means to an end, and not the end itself.

As we continue to evolve the ways in which we interact and integrate with the digital layer, new possibilities of organising and collaborating will continue to emerge. This is just the beginning.

And I’m excited.