The Benefits of a DAO
Note: Data in this section last updated July 3rd, 2022
This all changed in 2015 with the launch of Ethereum and its “smart contracts”.
Smart contracts are digital agreements that execute automatically when pre-determined conditions are met. For instance, you could program a smart contract to automatically pay an employee each time she launched a new product or feature, or automatically pay a supplier each time a product is delivered.
Unlike traditional contracts, smart contracts don’t rely on corporations, banks, lawyers, courts or local laws to guarantee their enforcement. Instead, users trust the technology and its pre-programmed code to automatically execute when they’ve upheld their end of the deal.
Smart Contracts Don’t Need Lawyers, Brokers, Banks, Courts or Governments
The terms of a smart contract are fully transparent and accessible to all parties, and they will always execute exactly as programmed. Because they are created using blockchains, no one can alter these terms without consent from everyone involved. For a more detailed explanation of how smart contracts work, check out the following article: )
Smart contracts make it possible – for the first time in history – to organize a global and diverse group of economic actors without relying on third parties such as corporations, banks, governments and courts to establish trust.
The effect of this cannot be overstated and requires a bit of tabula rasa thinking. Imagine for a bit, how you would design a corporation if you no longer needed traditional contracts or intermediaries:
After all, what’s the point of registering as a legal entity if you can enforce your own laws through smart contracts?
What’s the point of partnership agreements if you know that ownership is fairly distributed?
What’s the point of employment contracts if workers are guaranteed to get paid when they complete their work?
What’s the point of entering into a banking relationship if you can hold your own funds and pay your workers directly?
What’s the point having investment banks draft complicated Private Placement Memoranda if you can raise your own capital?
What’s the point of a CEO and management team if there’s no legal and regulatory bureaucracy to manage?
If you’re like me, you’re probably envisioning something much simpler and more elegant than what we have today…
In short, a “corporation” without managers, employment contracts, banks or legal and regulatory restrictions.
That entity is known as a DAO, and it may allow us to reap all the benefits of a traditional corporation – namely trust, security and growth – while removing most of the downsides. Indeed, DAOs are:
Global: DAOs are composed of individuals with different backgrounds, skills and viewpoints from all over the world
Democratic: Decisions are made democratically, and each member can propose, discuss and vote on initiatives
Aligned: In an ideal DAO, every member is an owner. Unlike traditional hourly or salaried workers, DAO contributors are all incentivized to contribute to a common goal – the overall growth of the enterprise
Open: Many DAOs don’t have a hiring process, anyone can join, work and get paid
Flexible: DAO “employees” are free to come and go as they please, work for multiple DAOs and work as little or as much as they want
Transparent: All of a DAOs rules and transactions are recorded on a blockchain and its smart contracts, making them easy for anyone to audit and review. In addition, unlike traditional corporations, this information is accessible in real-time
Sovereign: DAOs exist outside of the purview of the traditional financial and legal systems. While this may not seem very important in certain parts of the world, it can be a huge benefit to citizens of developing nations who face a very real threat of arbitrary regulation (e.g. because they hold political views that oppose the current administration)
Self-Custodied: In the current financial system, corporations don’t really hold their funds – the banks do. This means that they can shut down, freeze and even seize an organization’s asset at will. While this may seem far-fetched, consider that in 2013, the Government of Cyprus seized 47.5% of all bank accounts over €100,000 to bail-out its failing banking system
Faster: Because smart contracts execute instantly, they can save hours of various business processes
Cheaper: Smart contracts remove the needs for lawyers, bankers and brokers, making them much cheaper
I know this is a lot to take in. Crypto is so unique, so transformative, so unintuitive that I’ve been studying it for years now and sometimes I feel like I only partially get it.
But to help you understand more about how DAOs can transform the world, let’s go a bit deeper down the rabbit hole…
Last updated
