How companies can start experimenting with DAOs
An interview with blockchain explorer Maarten Smakman.
What is the first thing you think of when describing what "a company" is? Maybe you think of a friendly office. A board of directors and a CEO decide what course the company will take. Employees receive some euros or dollars at the end of the month. It's a system that has worked for centuries. Or not?
In theory, it is a perfect system. In reality, there are many shortcomings. Take decision-making: a selected minority determines what should happen to the company. Subsequently, a lot of tedious and repetitive human work is involved. Enter the Decentralized Autonomous Organization or DAO for short.
'In the simplest definitions, a DAO is an organization, but on the internet,' says Maarten Smakman. The Dutch entrepreneur has experimented with DAOs for years and is the perfect person to explain this unique organization. 'A DAO is wholly owned and managed by its members. These members need to vote to implement any changes. Unlike traditional organizations, no one has the authority to decide changes without the group's approval.'
The organization's rules are written down in a smart contract, chunks of code that automatically execute whenever a set of criteria are met. So, in theory, a DAO can operate entirely autonomously. Indeed: once the organization is set up and the smart contract is determined, there is not necessarily a human being to intervene.
How DAO is a DAO?
The word "Decentralized Autonomous Organization" has many layers, although there is something to be said about each of those three words. 'Complete decentralization can come with certain inertia, where no one takes responsibility for an action. When people take responsibility, they are gaining power. That sounds more negative than it actually is, because taking the initiative comes with a certain position. You need people to take action, but others should balance their influence. The organization should be as flat as possible. Anyone who wants to participate should be able to participate.'
In reality, a DAO is also rarely autonomous, says Smakman. 'The technology and the user experience are not yet at the point where they can handle many things completely autonomously. People are also increasingly realizing that you can't automate all social processes. That's why in a DAO, one records the consensus in the blockchain every once in a while. But you don't want to have a vote on every issue, nor permanently record it on the blockchain or write code for every exception. You want to remain flexible.'
And then there's the last concept, "Organization". Smakman: ‘We are no longer talking about a top-down pyramid that a small group of people leads. With a DAO, energy arises from below - I call it the dictatorship of good ideas. It's more of an organism than an organization, a flock of birds that moves along to where the good ideas arise.'
Own the Ape
Between theory and reality, there is still a tiny gap, Smakman said. Yet there are already very large DAOs. BitDAO is worth more than 2 billion dollars, and Uniswap has more than 300,000 token holders. 'Often these are groups of people who invest together in NFTs, for example. The token holders can vote with each new purchase, and the rest is automatic. By organizing that as a DAO, you are more transparent about what you manage and how you make decisions.'
For now, few traditional companies are experimenting with DAOs. Smakman says it is too early for that, but on the other hand, there are already possibilities to explore. 'Cooperatives between farmers, for example, are already decentralized and relatively autonomous organizations. In the future they should perfectly be able to transform into a DAO.'
Creating your own DAO can be done through platforms like DAOstack, Aragon or Colony. You set the correct parameters and enter the necessary information, after which your legal entity is ready. It's similar to going outside at a notary public: this is just the beginning.
'There is still a big potential downside to DAOs. That's why it's not recommended for all traditional businesses. The legal framework is lacking, for example. You want organizations to be accountable when something goes wrong. You will see that it will become more and more interesting to set up a DAO as that legal framework is better established. Very interesting experiments are conducted in the US in so-called LLAOs. These Limited Liability Autonomous Organizations seek to build the legal bridge between organizations in the old and the new world’ says Smakman.
A new way to interact
Still, according to Smakman, companies have several options to experiment with DAOs. 'For example, you can buy tokens and vote on important decisions. Look at the Bored Ape Yacht Club, which started as an NFT collection. Whoever owns a Bored Ape has the intellectual property of that Ape. Yet, there is also a logo of the collective of Apes that the group manages as a DAO collective. Everyone who owns an ape gets to vote what happens to it and thus also earns income from commercial deals. Adidas itself bought a Bored Ape and thus became part of this DAO. I expect a lot from NFTs when it comes to interaction with fans of your company, for example, by working with loyalty tokens. By buying a few tokens now, you as a company get to know the do's and don'ts of the world.’