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  • Writer's pictureJulija Kazanavičiūtė

Understanding the Concept of DAO

Updated: Jun 13

What is a DAO? 

 

Let's delve into the world of DAO, but not the ancient philosophical concept of Daoism dating back to the 4th century BCE. Today, we want to explore Decentralized Autonomous Organizations, or DAOs, which emerged in 2016. Let’s dig in! 

 

Communities and organizations where everyone has an accessible and inbuilt opportunity to participate in the decision-making process is not a utopian thing, it is an idea that is actively propagated by Web3 enthusiasts. 

 

“A Decentralized Autonomous Organization (DAO) is an entity structure that operates using smart contracts and blockchain technology. What sets a DAO apart from traditional organizations is the absence of a centralized managerial role,” says Vytautas Kašėta, Co-Founder and CIO of SUPER HOW? 

 

So, is a DAO just like any other corporation, but without a board or C-level management? Not quite. While there are similarities between DAOs and traditional entities, the differences run much deeper. This article aims to help you grasp a DAO through various examples and comparisons. 

 

DAO vs. Traditional Entity 

 

Asset Pooling:  Both DAOs and traditional organizations rely on contributions from multiple investors, individuals, or entities. However, DAOs often prefer cryptocurrencies for asset pooling, while traditional entities typically use conventional currencies like dollars or euros. 

 

Tokenholders:  Just like traditional entities have shareholders, DAOs have tokenholders. To become a tokenholder, you purchase tokens, while shares are used to become a shareholder. The currencies used for these purchases may differ, but the goal remains the same: participating in the decision-making process and gaining value. 

 

Decision Making:  While voting is an optional part of traditional organizations' decision-making process, it's the primary managerial function in a DAO. Without central authority, decision-making power is distributed among tokenholders who cast votes, resulting in decentralized governance. In a sense, it works just like a referendum, just smaller in scale and more frequently than we are used to. 

 

Anonymity and Transparency:  Traditional entities often make decisions behind closed doors to protect their market secrets. In a DAO, all information is recorded on a blockchain, enhancing transparency but potentially exposing company secrets to the public. 

 

Regulation:  DAOs face regulatory challenges due to their lack of a legal entity and members' anonymity. Many countries consider this structure illegal, although some, such as Switzerland, Malta, Estonia, and some US states like Wyoming, have recognized DAOs. 

 

Is Your Business Suitable to Become a DAO?

 

Beyond regulatory considerations, creating a DAO can be an innovative move for certain businesses. However, not all industries are well-suited for this decentralized approach. Highly regulated sectors like finance, healthcare, and legal services may require centralized oversight for regulatory compliance. Industries reliant on protecting trade secrets, such as the manufacturing or food industry, may also find DAOs less desirable. 

 

The amount of free time, that can be invested into DAO is also a crucial part to consider. Active participation is essential in DAOs, with members expected to dedicate time to conduct research, create proposals, perform due diligence, and engage in governance procedures. Even before all this, time has to be invested into understanding how the DAO works from the technological point of view.  

 

Even if you work in an industry suitable for a decentralized approach and can fully dedicate yourself to its governance there is still one thing to consider – the country of registration. We already mentioned that only a handful of countries consider DAOs legal, therefore you must determine whether the location factor is satisfactory.  

 

Why DAOs are Unfavorable to Most Governments?

 

Decentralization is a fundamental aspect of DAOs, which traditional governments and financial institutions may find challenging to control. This leads to concerns about financial stability and consumer protection. Additionally, the borderless nature of cryptocurrencies can pose taxation and anti-money laundering (AML) compliance challenges. 

 

Governments face difficulties when seeking information from a DAO due to the absence of a legal entity. Demanding institutions may need to buy tokens within the DAO and request information through a voting process, which can be resource-intensive and may not guarantee the desired outcome. 

 

In conclusion, DAOs represent a unique approach to organizational structure, offering both opportunities and challenges. Understanding their suitability for different industries and the demands they place on active participants is essential, as is considering the regulatory landscape in your region. The ongoing developments of this technology and regulatory environment add an extra layer of complexity to the discussion. 

 

Traditional entity and DAO

Summary

 

DAOs offer a unique approach to organizational structure, presenting both opportunities and challenges. As you consider the potential adoption of a DAO for your business, it's crucial to recognize the suitability of your industry and the level of commitment required from members. The world of DAOs is dynamic and continuously evolving, with some countries embracing this innovative model while others approach it with caution. The global regulatory landscape for DAOs is a work in progress, making it essential for businesses to stay informed about the latest developments and engage in an active dialogue with relevant authorities. 




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