How Decentralized Autonomous Organizations Enable New Business Models

Decentralized autonomous organizations (DAOs) are transforming the business landscape by enabling new organizational structures and funding models. As blockchain technology matures, DAOs are emerging as a powerful way for like-minded individuals to collaborate and build ventures without traditional hierarchical management.

What Exactly are DAOs?

A decentralized autonomous organization is an entity that operates according to rules encoded on a blockchain. DAOs use smart contracts to formalize governance processes, decision making, and financial transactions.

Once established, DAOs function autonomously according to their code. They exhibit several key characteristics:

• Decentralized - There is no central leadership. Governance is distributed among stakeholders according to transparent rules.
• Autonomous - DAOs operate automatically according to pre-programmed rules and member votes. No single party controls the organization.
• Membership - Participants must hold and delegate governance tokens to join a DAO. Tokens represent voting shares and ownership.
• Voting Rights - Members can vote on proposals and help shape the DAO’s activities through a transparent governance processes.
• Funding via Cryptocurrency - DAOs raise funds through initial coin offerings or membership capital. They use cryptocurrency and blockchain for transparency.

New Funding and Ownership Models

DAOs introduce new models for organizing human effort, resources, and incentives around a common goal. Traditional funding and ownership structures are turned upside down.

Rather than raise funds from accredited investors in exchange for equity, many DAOs sell governance tokens to ordinary people around the world. Tokens represent ownership and voting shares - rights traditionally reserved for shareholders.

This enables grassroots mobilization of capital from passionate communities. Enthusiasts worldwide can directly own a piece of ventures they want to support.

DAOs also allow cooperative ownership of assets. Whereas companies have defined rosters of owners and employees, DAOs are solely owned by their community as represented by token holders. The community collectively controls and benefits from assets held by the DAO.

Flexible Structure and Governance

DAOs enable decentralized governance and operational structures that leverage the strengths of their members. They provide an alternative to top-down hierarchical management dominated by a small group.

DAOs allow global collaboration and coordination at scales not possible before. Token holders collectively shape outcomes through transparent voting mechanisms on proposals. Discussions happen in open forums or apps.

Operations are managed through smart contracts. Tasks and salaries can be allotted according to skills and availability across time zones. Distribution of work and money can be orchestrated based on community input.

In essence, DAOs automate bureaucracy and administration. Their structures continuously evolve via proposals from engaged token holders. They exhibit flexibility akin to open source software projects.

Risks and Challenges

While promising, DAOs still face hurdles. Regulatory uncertainty persists around their legal treatment. As decentralized entities without formal management, regulation is difficult. Their autonomous nature also poses risks.

Once operational rules are codified, DAOs act automatically. Even with careful design, software bugs or overlooked governance issues could render them unable to adapt to unforeseen situations. Context requires human judgment.

There are also outstanding technical challenges. User interfaces for voting and discussion need improvement to allow effective participation. And blockchain platforms need scalability to support large-scale DAOs.

"DAOs unlock new possibilities for organizing human efforts. But we are just beginning to explore governance of these novel entities."

Despite risks, DAOs offer a glimpse into the future of work, creativity and value generation. By leveraging blockchain technology, they enable new kinds of:

• Funding via cryptocurrency token models
• Ownership and control by communities
• Distributed governance and operations

Properly designed, they may empower people across the world to productively collaborate towards common goals. But as a very new concept, DAOs remain unproven at large scales.

What Types of Projects are Best Suited to a DAO?

DAOs are well suited to organizations with geographically distributed stakeholders, flexible hierarchies, and projects requiring coordination over traditional corporate structures. Some examples include:

• Open source software projects - Tasks and salaries for developers could be allotted transparently based on community input. Token holders can shape project direction.
• Protocol development - Community of stakeholders in a blockchain protocol can fund ongoing development and make decisions. For example, see Aave and Uniswap.
• Investment funds - Rather than a centralized fund manager, investors in a portfolio collectively make decisions. See Bitwise Index DAO.
• Philanthropic efforts - Charitable donations could transparently fund projects selected through DAO voting and executed by qualified recipients.

How Might DAOs Change Crowdfunding?

DAOs could significantly impact crowdfunding initiatives by better aligning incentives between creators, supporters, and consumers. Some possibilities include:

• Directly engaging fans - Rather than centralized platforms, creative projects could be funded directly by communities of fans through a DAO.
• Transparent production - Budgets, contributions, and decision making could be tracked on-chain throughout the production process with community oversight.
• Supporter ownership - Contributors could get governance tokens representing ownership stake and creative influence rather than simple rewards.
• Lasting relations with fans - Rather than one-off campaigns, DAOs can maintain long-term collaborations between creators and engaged supporters.
• Automated royalty payments - Smart contracts could deliver on-chain royalty payments to DAO contributors based on sales or streaming revenue of creative work.

While still an emerging concept, DAOs offer a compelling vision for more participatory funding, transparency and ownership of creative works. By better aligning incentives and establishing enduring bonds between creators and supporters, DAOs may come to rival traditional centralized crowdfunding platforms.