A new organizational form created by Practical Blockchain: The mechanism and possibilities of DAO

What is DAO

The emergence of blockchain technology has led to the birth of operational models that are completely different from traditional companies and organizations. This is the decentralized autonomous organization, commonly known as DAO.

A DAO is an organization that does not require a central administrator or management team. Instead, the organization's operations are automatically controlled by computer code and smart contracts. In other words, the organization functions based on the logic of programs rather than human management.

In 2016, the first DAO “The DAO” was launched on the Ethereum blockchain, aiming to serve as a venture capital fund. This led to the concept of DAO becoming widely adopted in the cryptocurrency industry.

Reasons Why DAOs Differ from Traditional Organizations

The smart contract is the center of governance

In a typical company, the management makes significant decisions. However, in a DAO, pre-programmed rules determine everything. This is a smart contract. Smart contracts are executed automatically when conditions are met, leaving no room for human judgment or tampering.

democratic decision-making

In a DAO, all members have voting rights. Important decisions such as changes to the organization's policies and allocation of funds are made by the entire community. The number of tokens held determines voting power, so members with more tokens have greater influence.

Complete transparency

As a characteristic of blockchain, all transactions and voting results are recorded in a public ledger. Anyone can verify the transaction history, and concealment or tampering is impossible. This transparency fosters trust among members and serves as a powerful mechanism to deter fraud.

How DAO Operates in Practice

For a DAO to function, several key elements are necessary. First, tokens serve as the “shares” of the organization. By holding these tokens, members gain the right to participate in decision-making.

When an organization needs to make a decision, members propose and vote. For example, voting occurs within the community regarding expenditures from the funding pool or investments in new projects. Once the voting results are approved, the smart contract automatically executes actions such as moving funds or generating new tokens.

This process ensures that no one can unilaterally exert power, and a system is established where the will of the majority is reflected.

Countermeasures Against the Principal-Agent Problem

In economics, there is a concept known as the “principal-agent problem.” This refers to the issue where some individuals (agents) act on behalf of others (principals) but tend to prioritize their own interests. In a typical company, management should act for the shareholders, but in reality, they often prioritize their own benefits.

DAO significantly mitigates this issue. The transparency of the blockchain ensures that all actions are recorded and cannot be tampered with. Furthermore, by realizing true democratic decision-making, it eliminates the arbitrary domination by a few powerful individuals.

Practical Examples of DAO

Currently, several important projects are being operated in DAO format.

MakerDAO is a DeFi project that issues a stablecoin called DAI backed by cryptocurrency collateral. This protocol is managed by MKR token holders.

Aave is an Ethereum-based lending protocol that enables the lending and borrowing of various digital assets. AAVE token holders determine the future direction of the protocol.

Uniswap is a decentralized exchange (DEX) that serves as a platform for swapping multiple cryptocurrencies through smart contracts. UNI token holders vote on protocol updates.

Yearn.Finance is a DeFi platform that automates yield farming strategies and is governed by YFI token holders.

Bitcoin is a prototype DAO

The Bitcoin network is also an entity that can be considered an early DAO. Bitcoin has no central administrator, and participants cooperate through a decentralized consensus mechanism to maintain the network. The rules of the protocol govern the entire system, and rewards (mining rewards) serve as incentives for users.

Challenges Facing DAO

legal ambiguity

In many countries around the world, the legal treatment of DAOs remains undefined. This has become a significant barrier to adoption and hinders organizational growth.

Security Risk

The hacking incident of the DAO demonstrated that flaws in the design can lead to significant damage. While decentralization and immutability are the strengths of the DAO, once a bug is embedded in the program, it becomes difficult to fix.

The True Difficulty of Decentralization

In theory, DAOs should be completely decentralized, but in practice, the governance rules themselves may become centralized. Additionally, making all decisions completely decentralized can be inefficient, and some degree of centralization may be unavoidable.

The Future and Development of DAO

The concept of DAO extends beyond the financial sector. Various use cases are being considered, such as decentralized venture funds, social media platforms, and even the management of IoT (Internet of Things) devices.

The sub-concept known as Decentralized Autonomous Companies (DAC) has also emerged, making it theoretically possible to operate businesses that were traditionally managed by humans, such as ride-sharing services, in a fully autonomous manner. These systems utilize blockchain oracles to obtain off-chain data and trigger smart contracts.

The split event of Ethereum and “The DAO”

In May 2016, shortly after The DAO raised funds through its ICO, one of the largest hacks in cryptocurrency history occurred. Approximately one third of the funds were stolen.

This incident caused the Ethereum blockchain to split into two. The chain that reversed the hack is the current Ethereum, while the chain that left the fraudulent transactions intact became Ethereum Classic. This event also symbolizes the conflict between the principle of “code is law” and practical necessity.

Summary

A DAO is an innovative model that utilizes blockchain technology to achieve more democratic and transparent organizational operations. It breaks away from traditional hierarchical corporate structures, allowing for decision-making that reflects the will of the entire community.

However, the success of a DAO relies on the efficient design of governance rules that coordinate the complex interests of participants. It can be said that social and legal consensus formation will be key to the future development of DAOs, more so than technical challenges. Blockchain and DAOs are not merely technological innovations; they are entities that question the very essence of organizations.