Our banking system is already being transformed by blockchains. Properties like trustlessness and immutability, on the other hand, aren’t just useful in monetary applications.Another area that could be impacted by this technology is governance. Blockchains have the potential to enable totally new forms of organisations to operate autonomously without the need for a central entity. This article will provide an overview of how these groups might operate.

How does it operate?
Decentralised Autonomous Organisation is abbreviated as DAO. To put it simply, a DAO is an organisation managed by computer code and programmes. As a result, it can function independently without the need for a central authority.

A DAO can deal with external data and execute commands based on it via smart contracts, all without the need for human intervention. A DAO is usually run by a group of stakeholders who are compensated through a token system.

A DAO’s rules and transaction records are transparently kept on the blockchain. Rules are usually decided by a vote of stakeholders. Proposals are the most popular method for a DAO to make decisions. A proposal is implemented if it is approved by a majority of stakeholders (or if it meets another condition set forth in the network consensus rules).

Akin to a company or a nation-state in certain ways, a DAO operates on a more decentralised level. Traditional organisations have a hierarchical structure with several layers of bureaucracy, but DAOs do not. Instead, they employ economic mechanisms, such as game theory, to align the organisation’s interests with the interests of its members.

Members of a DAO are not bound by any formal contract. Rather, they are linked by a common objective and network incentives based on consensus norms. These guidelines are totally visible and written in the organisation’s open-source software. DAOs may be subject to different legal regimes because they operate without borders.

A DAO is a decentralised and autonomous organisation, as its name suggests. Because no single entity has the authority to make and enforce decisions, it is decentralised. It’s also self-contained because it can run on its own.

A single entity cannot control a DAO once it has been deployed; instead, it is administered by a community of members. If the protocol’s governance rules are well-designed, they should guide actors toward the best possible outcome for the network.

Simply put, DAOs are an open collaborative operating system. Individuals and institutions can collaborate using this operating system without having to know or trust each other.

The Principal-Agent Dilemma
The principal-agent dilemma is a problem in economics that DAOs address. When a person or entity (the “agent”) has the authority to make decisions and execute actions on behalf of another person or entity (the “principal”), this is known as delegation. The agent may reject the principal’s interests if it is motivated to behave in its own self-interest.

The agent is able to accept a risk on behalf of the principal in this case. The difficulty is exacerbated by the possibility of information imbalance between the principal and the agent. The principal may never realise that it is being exploited and has no way of knowing whether or not the agent is acting in their best interests.

Elected politicians representing citizens, brokers representing investors, and managers representing shareholders are all examples of this problem.

Well-designed incentive models underlying DAOs can eliminate aspects of this problem by permitting a higher degree of transparency afforded by blockchains. There is little (or no) knowledge asymmetry inside the company, and incentives are aligned. DAOs’ operations are totally transparent, and they are theoretically incorruptible, because all transactions are recorded on a blockchain.

DAO Functionality
To be fully functioning, DAOs require the following components: A set of rules under which the organisation will operate, as well as funding in the form of tokens that the organisation can use to reward members for particular acts and to grant voting rights for creating the operating rules. Also, and perhaps most importantly, is a well-designed and secure framework that allows each investor to customise the company.

One potential issue with the voting mechanism is that even if a security flaw is discovered in its initial coding, it cannot be fixed unless the majority agrees. Hackers can take advantage of a flaw in the code while the voting process is in progress.

DAO Utility and Examples
Here are a few examples of how you might utilise a DAO to help you understand:

A charity can accept membership and donations from people all over the world, and the group can select how the money is spent.

A freelancer network – You may form a group of contractors who pool their funds to pay for office space and software.

Grants and ventures – You may set up a venture fund that pools investment funds and votes on which enterprises to support. Money that has been repaid could be redistributed among DAO members in the future.

The Bitcoin network may be regarded as the first example of a DAO, albeit a very basic one. It works in a decentralised manner, with no hierarchy between players, and is coordinated by a consensus process.

The Bitcoin protocol establishes the organisation’s regulations, while bitcoins serve as a motivator for users to keep the network safe. This means that all members may collaborate in order to maintain Bitcoin working as a decentralised autonomous organisation.

Security: DAOs have substantial performance and security drawbacks due to their desirable qualities (decentralisation, immutability, and trustlessness). While some of the possible companies that can emerge as DAOs are certainly fascinating, they also bring with them a significant amount of risk that isn’t present in traditional organisations.

Centralised Organization v/s DAO: It may be argued that decentralisation is more of a range, with each level suited to a distinct type of use case. Full autonomy or decentralisation may not be practicable or desirable in some instances. DAOs may allow a greater number of people to interact than ever before, but the protocol’s governance rules will always be a source of centralisation. It might be argued that centralised organisations can operate more efficiently while sacrificing the benefits of open participation.

Final Thoughts
Organisations can use DAOs to break free from traditional organisations. Instead of a central body directing members, governance rules are automated and direct participants to the network’s appropriate outcome.

The Bitcoin network can be thought of as a simple DAO, and other implementations are currently scarce. Putting down an effective set of consensus rules that solves complicated participant coordination challenges is the key to developing good DAOs. The true issue in implementing DAOs may not be technological, but rather sociological in nature.

Manit, our Crypto Techie, has been in the space for a decade building strategies that keep his adrenaline rushing. When he’s not at the work desk, he loves travelling and binge-watching movies.

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