What is a DAO?

Lesson 1

DAO = Decentralized Autonomous Organization

Lot to unpack there - let's try and wrap our heads around what a DAO is at its core and why we should care, particularly in the context of community management and growth.  We'll take apart the three aspects that make up the acronym and consider the implications of each.

Organizations and Governance

As humans, we gather and organize, forming communities around common interests and causes at varying degrees of complexity.  These communities can be very loosely organized with next to no community governance structure or they can be highly organized with some complex set of rules that define community interactions and decision making.

What is Community Governance?

Community governance is the complete set of structures, systems, and practices a community uses to:

  • establish strategic direction - defining why the community exists and broad guidelines of how it will achieve its mission or mandate (reason for being)
  • determine who makes decisions for the community in pursuit of its objectives
  • define how decisions are made
  • oversee implementation of decisions and resource allocation including policies, plans, programs, and projects while mitigating any associated risks
  • report on performance in achieving intended results - ideally using that performance data to continually evolve and improve the community

Communities have common goods or resources that can be either economic or non-economic and they manage those resources through the community's governance process.  

It doesn't really matter what we call them - communities, groups, gatherings, collectives, co-ops - they are all types of organizations and all organizations will have some set of formal or informal rules and procedures that govern how they operate.

Decentralization vs Centralization

If we think about how a traditional business operates, business resources and decision making authorities are typically vested in a Chief Executive Officer (CEO) or a council, board, or committee made up of a relatively small number of individuals.  We can say that decision making power in these instances is very centralized.  Different organizational structures in government, business, or other situations will have different levels of centralization depending on how they set themselves up.

Organizations (and parts thereof) exist somewhere on the spectrum at any given time.

Decentralization and decentralized ownership is a principle component of the open web, but in reality, many DAOs start off in a very centralized manner or even maintain centralization.  Some gradually move closer towards the decentralized side of the spectrum.  Even those that start off fully decentralized can see movement towards centralization based on proposals introduced by its members.

I personally believe that regardless of how the organization comes into being, we should consider them fluid entities if a DAO can provide options for customizable configuration.  They will morph and evolve to meet the needs of the community within the constraints of the general governance framework they are built on until they reach the optimal state for that organization.  

If people have freedom to come and go as they please, the community's survival and growth depends on that optimization.  

We'll explore concepts relating to exit, voice, and loyalty in this context later on, but video here can give you a quick understanding of the tensions that exist allowing a DAO to achieve its mandate.

For example, a fully decentralized DAO that provides every member one vote may appear to be a true  democracy at the outset.  50% +1 will determine what proposals pass.  Some people won't vote or participate - that in itself increases centralization.  Some people may propose to delegate votes to others to vote on their behalf - again increasing centralization (all the opposite is also true, of course).  Other proposals may decide to implement a council or give certain participants more voting weight based on expertise, resource contribution, or other.  All of these things can shift what was initially a democratic framework towards other governance frameworks like oligarchies, autocracies, plutocracies, republics, and so on.

And that might be completely acceptable for the community - it is arguable that full decentralization is neither desirable, nor makes sense in many use cases.  Ask around and see how many people you know want to be involved in every decision.  Look at voter turnout and voter apathy and consider whether some people are simply happy with going along with what others decide for them.  How many people attempt to run for office or assume leadership positions vs those that desire a role that minimizes responsibility over the actions of others?

The Idea of Autonomy

Autonomy is embodied in the concept of independence, but what exactly is a DAO autonomous or independent from?

Hard to say as even a DAO that purports to be completely independent and autonomous is still subject to the laws and regulations in the jurisdictions in which it operates.  It is certainly not independent from the jurisdiction of its participants and members.  Those people reside somewhere and even if they are participating in a DAO, they need to abide by the laws applicable to them in their area.

The idea of autonomy is more realistically considered as the DAO's ability to function on its own.  That is, it operates according to how it has been programmed without any human input or interference in executing and implementing decisions.

The Potential of DAOs

DAOs offer a simple organizational structure that is necessarily well-defined as a result of the immutable smart contracts they are built on.  These smart contracts define the governance rules and procedures and execute them automatically when triggered.  There is no question about when or how a process or procedure is completed - it's a guarantee built into the very fabric of the DAO itself.

While it is still early days for DAOs, they provide an interesting and promising future for the emergence of new forms of organizations and communities.  DAOs may even emerge from inside existing organizational structures providing flexibility, agility, and unprecedented levels of efficient decentralized decision-making in a centralized, hierarchical institution.  A bit later in this course, we're actually going to take a look at how that type of DAO integration might look within one of the most traditional/hierarchical/rigid and bureaucratical organizational structures out there - a military environment - with a view to making it more efficient, agile, and capable of keeping up with ever-increasing rapid developments applicable to the world of warfare.

Decentralized finance (DEFI) is currently one of the catalysts spurring on DAO evolution - especially in investment/for-profit situations.  The first DAO showed up in early 2016.  It operated as a venture capital fund to drive cryptocurrency project development and amassed an equivalent USD value of approx $250M at the time.  It became pretty clear, pretty quick that DAOs had a future for capital management and development has accelerated ever since.  The top 100 DAOs currently hold almost a billion dollars worth of assets under management (AUM) ($830M).

It's kind of surreal to think about what that means.  Large numbers of people are sending very large amounts of money to a contract that exists and operates (in the ideal situation) completely independently on a blockchain.  They are doing it with total trust that its going to operate transparently and expectedly even though they may not know or trust anyone else involved in the DAO - and they don't have to. Consensus and trust is built in.  They can act in their own self-interest and by doing so simultaneously contribute to the overall well-being of the community.  Where else does that happen?

Organizational collaboration, interactions, revenue sharing, and risk mitigations are programmable for the first time ever.  Previous models of centralizing data and controlling the data layer no longer apply given the globally, shared and completely transparent/public state provided by blockchain technology.  This decentralized state means any advantage previously realized by hoarding and compartmentalizing data is disappearing.

The potential for DAOs seems immense and not a day goes by where I don't see a DAO being able to improve a process or enable entirely new forms of community interaction and structures to emerge.  It's a super exciting time to be watching and participating in the accelerating evolution of DAOs.