How to think about a DAO

A pear

The three most important inventions mankind has made are, in my opinion, fire, money, and the organization. The latter being the coordination of the activities of a group of people towards a common aim.

All three of those inventions are still work in progress, and regarding two of them, things like crypto, the blockchain, tokens, and smart contracts have been proposed as a means to raise them to a new level. When it comes to organizations, the thing to talk about is the DAO.

What is a DAO?

To find out what a DAO is, one might be inclined to look at what the abbreviation stands for: Decentralized Autonomous Organization.

Of course, every single word in this name is wrong, misleading, or at least wildly exaggerated. Certainly, for the current iterations of DAOs. One might, however, think of it as an aspiration, as something that is, one day, going to be. Let’s break it down.

A DAO is or at least can be, as claimed by the “O”, a form of organization. As legal thinking has been going for centuries, if not millennia: something only exists if a label can be put on it. DAOs as such are, at least in any sane jurisdiction, not a thing in itself but rather a form or part of some pre-existing form of organization. This may be a partnership, an association, an LLC / Ltd / GmbH, or, in fact, any other entity structure. At least one US-State (Wyoming, of course) has recognized DAOs as an entity structure per se. On closer inspection, however, the legislation made it an LLC with the word “DAO” attached to its name: basically, a legal gimmick.

A DAO is decentralized – the “D” – insofar as there is no central authority but decision-making and most execution is distributed across the stakeholders. One might think of those as shareholders in a corporation where the same distribution structure is to be found. The difference is that in a DAO many more tasks of the management may be distributed in a similar fashion, while in a more traditional corporation a centralized management may make most day-to-day decisions top-down. 

The “autonomous” part of the abbreviation is the most misleading: the DAO does nothing autonomously, and, most crucially, it does not own itself. On the opposite: it provides a wonderful mechanism for making and executing decisions, done by the participants. The decisions are made online, often using tokens, and stored immutably on a blockchain or similar ledger (technically, a DAO “just” needs code execution, blockchain and tokens are optional). But what the “A” really means is that no management execution is, in theory, needed. That is because a DAO should have its processes implemented in self-executing smart contracts. Therefore, the decision is already the execution.

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