DAOs vs. Traditional Organizations
Aug 31, 2021
Last updated on Aug 31, 2021
DAOs are not completely replacing traditional organizations just yet, but they are bringing some fresh offerings to the table. By leveraging blockchain and smart contracts, DAOs are flattening the traditional corporate hierarchy. And unlike many companies in this age of social media, DAOs are truly community-first organizations. This is not a simple afterthought or PR technique — community is the soil from which DAOs grow.
So if they’re such a big deal, where are they all?
Truth be told, DAOs are very much a work in progress. But like the rest of the crypto world, there is an abundance of enthusiasm and capital hard at work behind the scenes. To see how DAOs are breaking the mold and ushering in a new type of workforce, let’s start with the first step - how they’re formed.
Both DAOs and traditional organizations need an initial founder, or group of founders, to light the first match. In the case of a traditional organization, this role might be filled by an entrepreneur who sees a gap in the market and sets out to fill it with a new product or service. Similarly, a DAO might be spun up by a small group looking to bring value to a certain community through a new product, service, or protocol.
This is largely where the similarities end.
Forming a Traditional Organization
For starters, let’s say you want to form an LLC. You’ll need to create and submit articles of organization, which outline details like your LLC’s name, address, and purpose. These get shipped off to the secretary of state, along with a filing fee. Once these forms are filed and approved, the state issues you a certificate finalizing the formation of the LLC. Your newly formed business will also need insurance, potentially some licenses, and of course, a bank account. Finally, a celebration involving champagne is optional, but recommended.
Forming a DAO
In contrast to this, forming a DAO is currently a much less formal process. Technically, there is no paperwork necessary to form a DAO, although some will incorporate as LLCs to further protect their members. This is becoming increasingly easy as states like Wyoming move to recognize DAOs as new forms of LLCs. For the purpose of this article, though, we will assume that forming a DAO does not require this step.
In place of the articles of organization, you’ll typically start by creating a meeting place for conversing and planning, like a Discord group or Telegram channel. While this alone might be sufficient for the early phases of a DAO, the ultimate goal is to bring decisions onto the blockchain. When you’re ready, this is done with smart contracts. These smart contracts, which are collections of self-executing code that live on the blockchain, form the backbone of any DAO. Your DAO’s smart contracts should clearly lay out everything from how new members can join to how the treasury can be accessed and allocated, and even how voting should be conducted. Coding your guidelines into smart contracts makes them transparent and verifiable by all of your DAO’s members. This bakes in a level of trust, as members don’t need to have blind faith in one another. Instead, everyone can trust the code.
As the number of DAOs has increased, so too have the tools available for establishing them. Protocols like OpenLaw, Gnosis, and Aragon can help you easily create on-chain systems for voting, adding members, managing treasuries, and other necessary functions. Using these protocols makes forming DAOs much simpler, allowing you to focus on the next piece of the puzzle. Funding.
Full disclaimer here: funding any type of crypto-based project is a sticky subject right now. The SEC may consider processes like initial coin offerings (ICOs) to be security offerings, which would fall under their jurisdiction. For the most up to date information, check the SEC website.
With that fun stuff out of the way, let’s first look at how you might secure funding for your LLC.
Funding an LLC
The first contributions to your LLC are probably going to come from you and any partners who will be joining you on your new venture. These initial investments are called capital contributions, and should at least cover your initial operating expenses. Each members’ contributions should also be recorded and used to value their percentage of ownership. If you put up 30% of the funds, then you own 30% of the company.
Even with those capital contributions, you may find yourself in need of some extra cash to really get things going. If this is the case, you have a handful of options. You could take out a business loan from a bank or crowdfund your business through a site like Kickstarter. Both of these options would allow you to retain full ownership of your LLC. Alternatively, you could turn to a venture capitalist or angel investor, but they will take a slice of ownership for themselves in exchange for their investment.
While none of these options are bad, they can have some less than desirable side effects. When an outside investor puts money into your new business, they will surely expect a return on that investment. This can sometimes lead to businesses having to make some unsavory decisions in order to generate revenue and pay back investors. We see this all the time - gig job platforms cutting wages to increase their profit margin, social media sites exploiting user data, the growing presence of microtransactions in video games - the list goes on. You might point out that this is just business as usual, and honestly, you’d be right.
But what if there was a better way to raise capital? Can it be done in a way that benefits investors, employees, and customers?
This is where DAOs can shine.
Funding a DAO
Back in 2016, The DAO took the idea of crowdfunding to a whole new level. In exchange for a financial contribution to The DAO, investors received tokens that represented both their financial stake and governance over The DAO. Essentially, The DAOs’s investors became its owners and operators. All eleven thousand of them. While The DAO hit a bit of a snag and went defunct shortly after it began, it did manage to create a new blueprint for funding organizations.
Funding your DAO starts with creating your own token, which can be done through dapps like the aforementioned Aragon. You then make your DAO token available for purchase by the public, similar to launching a Kickstarter project for donations. By purchasing these tokens, new members receive a financial stake in the DAO, along with voting rights, and your DAO receives funds in its treasury. In place of a traditional bank account, your DAO will probably lock its treasury into a multisig wallet like Gnosis Safe. A multisig is a wallet that requires approval from multiple people before any transaction takes place. Requiring multiple keys to access your DAO’s funds increases security and takes power out of the hands of a single individual.
So, how exactly does this differ from crowdfunding a traditional organization? And why is it better? By purchasing a DAO’s token, individuals become more than just supporters - they become owners. Because a DAO’s members all share in its upside, they have added incentive to contribute and ensure the health of the organization. Does that mean everyone always contributes equally? Definitely not, but we’ll come back to that.
When we dig a little deeper, we see that this style of funding offers an additional benefit. One of the most compelling arguments for DAO funding over traditional VC funding is its ability to be exclusively merit-based. In the Web3 world, where many founders and developers are anonymous, raising capital is based almost entirely on the potential of the project itself. Race, gender, wealth - all of that goes out the window. All that matters is the product. In an age where about 1% of venture capital goes to black founders, and 2% goes to women-led startups, this is a true game changer.
In the case of protocol DAOs like Uniswap and SuperRare, many of the members are also users of the protocol itself. Who better to shepherd an application than the very individuals who use it? Unlike the world of traditional corporations, the idea of owners and investors exploiting their users and employees becomes ridiculous, as they are often one in the same.
This distinction is where things start getting interesting.
Organizations are like Jenga towers. The stability of any organization, be it a global corporation, local coffee shop, or DAO that collects computer-generated squiggles, relies on all of its pieces working together properly. If one of those pieces gets too far out of line, the entire tower is at risk of tumbling. A traditional organization keeps its Jenga tower standing through a hierarchical structure, organizing its managers and employees in a pyramid. Those at the top make decisions, and those at the bottom carry out the tasks necessary to bring those decisions to life. With the rise of DAOs and remote work, traditional hierarchies have been getting a bad rap. But do they still have something to offer? Let’s see.
Let’s start with the pros. Through their tiered, top-down approach, hierarchies at least let everyone know where they stand and what their roles are. This can be very advantageous, if not necessary, in big companies with hundreds of employees. Everyone knows what they're responsible for, who to go to for questions and guidance, and can easily understand where they fit in the grand scheme of things. While hierarchies can seem limiting, they can also be a great way to organize very large teams. If everyone at Coca-Cola was trying to make decisions for themselves, we’d probably all be drinking Pepsi.
However, these hierarchical systems are prone to some downsides that most people are familiar with. In a business with little two-way communication, where commands simply trickle down from the top, employees can feel insignificant and unheard. Not only does this negatively affect their mental health, but it stifles creativity, innovation, collaboration, and ultimately, success. Throw in a boss or middle manager with a swelling ego, and you’ve got yourself a miserable workplace.
DAOs are still experimenting with how to structure themselves, but in general, they are very flat relative to traditional organizations. There are no CEOs calling the shots, and a noticeable lack of middle managers. In their place is a system where all members have the ability to propose and vote on changes to the DAO. This is made possible through smart contracts.
To go back to our Jenga tower, smart contracts remove layers of precarious little Jenga pieces and replace them with solid, dependable blocks. In other words, processes that may be prone to human error and corruption, like quality assurance and capital management, are instead handled by ever-reliable code. But keep in mind that there is A LOT riding on this code, and altering it will likely require a collective vote. Your smart contracts run your DAO, so make sure they’re written correctly and free of bugs. Granted, this is easier said than done.
This bottom-up approach makes for organizations where collaboration across traditional verticals is not only possible, but encouraged. DAOs benefit from their open dialogue, usually taking place on Discord and Telegram, and enjoy a level of transparency that few traditional organizations offer.
While flatter organizations might facilitate more collaborative workforces, they are not without their issues. Organizing a crew can be difficult, even with a strong leader steering the ship. When you remove that leader and leave the crew to their own devices, things can get a little messy. For this reason, it is crucial for DAO members to communicate constantly and be honest with each other, as there are likely fewer checks and balances in place relative to a traditional corporation. This might lead to DAO members operating in small teams, with a core group of organizers at the center. This way, they can forgo the traditional hierarchical pyramid and still maintain a level of organization.
We can see this in action in communities like the Bored Ape Yacht Club. While not necessarily a DAO, BAYC is a large, decentralized community made up of the owners of Bored Ape NFTs. These NFTs act similar to a DAO’s tokens. While members are free to use the IP rights baked into their Ape NFTs however they choose, they are not the sole drivers of their value. Instead, much of the project’s value comes from the small group of developers who started the project. This group of founders continues to create new spinoff projects and build alongside the rest of their community, increasing the value of the underlying NFTs in the process. While the Bored Apes certainly benefit from their large reach and decentralized nature, they also benefit greatly from having a core team at the helm.
Why Join a DAO?
At the center of all of this is one big question - why does anyone want to be part of these organizations?
For traditional companies, that answer is seemingly simple. Most people are looking for a source of income, healthcare, maybe status, and past that, maybe even some personal fulfillment. While DAOs will almost certainly grow to offer all of these benefits as well, there is something deeper at play.
Due to the speed and ease with which DAOs can be established, they are allowing small groups to come together around niche goals that may be too small for traditional businesses to address. While crowdfunding sites have allowed anyone to receive donations for a specific cause, DAOs allow actual workforces to form around those causes. As we’ve seen, these workforces can simply set up a Telegram group, pool their funds into a Gnosis multisig safe, and get to work. The cumbersome process of establishing a traditional organization - filing legal papers, paying fees, setting up a bank account - is becoming a thing of the past.
So, what’s the catch?
Like with any group, member participation varies. Depending on how a DAO’s ownership is structured, this can lead to certain members treating their buy-in as speculative investments. They’ll join a DAO, then sit back and rely on everyone else to actually do the work and increase the value of their stake. This person would probably just get fired in a traditional organization, but in a DAO, that process is yet to be sorted out.
There is also a fair amount of ambiguity around the financial aspects of DAOs, as cited earlier. If the SEC decides to lump coins and tokens in with traditional stocks, that would be quite the curveball. Even if this were to happen, DAOs are likely agile enough to adapt to any legislation that comes their way.
Finally, how big is too big? It’s easy to picture a DAO like a children’s soccer game - everyone running around in circles, no sense of planning or coordination, the T-shirts are way too big, you get the picture. To keep this from being the case, DAOs need to balance their contributors on the edges with a strong team at the center. According to Cooper Turley, the de facto DAO master, DAOs operate best with a core working group of 5-10 members. The rest of the DAO’s contributors then form a web around this core group, creating a network of support.
DAOs are more than just a new form of business. They not only allow people to pool their funds and energy, but they allow them to share their social capital. In this light, DAOs might be seen as purpose-driven social clubs with shared bank accounts. The social capital that comes with contributing to a DAO can be just as valuable as the potential financial payoff.
What does this mean for the future of work? Individuals will increasingly seek out organizations that they truly align with. We are already seeing the so-called Great Resignation as employees everywhere rethink their professional paths. People want more meaningful opportunities that actually fit into their lives. DAOs may offer exactly that.