Blockchain is one of the major augmentation tools of the modern day, standing alongside AI, IoT and other advanced technology concepts that change the world around us. Distributed ledgers offer the ability to build complex and secure systems at scale, and it’s not just about networks. Organizational units are starting to adopt the blockchain, and this approach led us as far as creating a Decentralized Autonomous Organization model.
Before discussing a concept that complex, let’s start with the basics – what blockchain is and how smart contracts relate to it. As we discussed in several previous blog entries, a blockchain is a growing list of records (also called blocks) which are linked using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. By design, a blockchain is resistant to data manipulation and modification. It is an open, distributed ledger that can record transactions between two parties efficiently and securely. Once recorded, the data in any given block cannot be altered retroactively without alteration of all subsequent blocks, which requires consensus of the participating majority. Completing transactions does not require intermediaries or third parties, therefore it saves your time and resources.
Now, on to the smart contract and its value for the blockchain. A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Basically, it’s a digitized set of terms that allows participants to achieve an agreement without involving any intermediaries. In the case of dispute, there’s no need to pay a fee to a bank or a lawyer. The terms of a smart contract are written in computer code, so it can’t be misinterpreted. For example, the Ethereum smart contract concept allows you to create your own smart contracts that better suit the needs of your business.
What is a DAO?
A decentralized autonomous organization (DAO), sometimes labeled a decentralized autonomous corporation, is an organization represented by rules encoded as a computer program that is transparent, controlled by shareholders and not influenced by a central government. Much like many blockchains, the precise legal status of this type of business organization is still unclear and varies across the world.
Decentralized autonomous organizations are typified by the use of blockchain technology to provide a secure digital ledger to track financial interactions across the Internet, secured against forgery by timestamping and utilization of a distributed database. The blockchain data replaces public documents such as deeds and titles, and the blockchain approach allows internal parties to enter smart contract collaboration. DAOs aim to be open platforms where individuals control their identities and their personal data.
Vitalik Buterin, the founder of Ethereum, proposed that after a DAO was launched, it might be run without human management provided the smart contracts were supported by a Turing complete platform. The DAO is one of the best-known examples of such a technological and organizational fusion, but probably its fame can be attributed to all the wrong reasons. Intended for venture capital funding, it launched in June 2016 with $150M in crowdfunding. The whole thing was immediately hacked, with $50M in cryptocurrency siphoned away by the hackers. It was later reversed via a hard fork of the Ethereum blockchain.
DAOS vs traditional organization
The fundamental flaw of modern organizations and corporations lies within the lack of personal accountability, immovable hierarchy, and closed business practices. In that regard, DAOs are inherently more efficient, secure, and autonomous from outside controls or pressure. Let’s look at some of the features that make DAOs superior to traditional organizations.
Resistant to failure
Blockchains run on a distributed storage foundation, and if it’s robust and scalable enough, it can support the sheer size of a DAO. Much like the nature of the blockchain, if a single, or even multiple, parts of the DAO experience downtime, the whole system remains operational until the units in question resume their routine.
DAOs can be resistant to corruption since the core principles and laws can be encoded directly into smart contracts. A Turing complete blockchain to create smart contracts like Ethereum makes the most sense for a DAO since its Solidity smart contract language is Turing complete.
Most large-scale software systems are easily hacked due to the programming exploits and human factor involved. Look no further than the ongoing Facebook hack saga, with major breaches happening every other month. Blockchain features make that threat irrelevant since an identity on the distributed network comes with proof encoded within the system itself and ensured by all parties participating in the DAO.
Internal distributed economy
The newly created DAO can pick either a single cryptocurrency, multiple variations or even create an own token based on one of the popular options to run an internal DAO economy. The blockchain makes sure that all transactions are secure and immutable, and instead of a paper trail all parties have access to an instantly verifiable track record of all transactions.
This is still far off in the future, but DAOs will eventually become the norm and start replacing some of the more dated structures within governments and corporations. It will be interesting to see how they interact with each other and create more complex, and possibly, even better systems for both the business world and civil society.
Platforms for building DAOs
There are three open-source blockchain projects leading the charge in the DAOs space: Aragon, Colony, and District0x. Let’s look at each one and try to understand some of the differences in approaches and how all of the three stack up against each other.
The project aims to simplify the process of founding a new company, making it a plug-and-play experience of sorts. Company ownership can be created and ascribed via tokens. This approach accelerates fundraising for a project to just minutes. New company governance is managed by a set of rules for which tokens have voting rights and what percentage of tokens need to vote on a motion or rule for it to become law.
Employees and investors who double as token holders get their ROI as the new entity gains traction, thus token holders have a direct interest in improving the functionality and efficiency of the company to get to the breakeven point as soon as possible. Aragon founders also claim that users will benefit from the Aragon Network, the world’s first digital jurisdiction.
If you feel like it’s time to collaborate with a co-founder on a new project, open a non-profit, or just organize an online community, you can play around with the Aragon software on Windows, Mac, or any other supported platform. According to the project team, there’s also a new version coming soon.
This project helps decentralized businesses create and manage a distributed marketplace. Capabilities include listings, search and filtering, ranking and reputation, as well as payments and invoicing – all of which enable entrepreneurs to set up a cutomized marketplace in no time. Another interesting aspect of District0x is that it actually leverages Aragon as a base governance feature, which already shows how some DAO platforms can interact for mutual benefit.
Some of the notable examples of marketplaces based on District0x tech include Ethlance (a freelancer acquisition platform) and NameBazaar (a peer-to-peer marketplace for the exchange of names registered via the Ethereum Name Service). Whoever wants to participate in these District0x marketplaces (called “districts”) required a DNT token, which gives you the right to vote on the strategic direction of the marketplace development as well as benefit from the value of the platform’s growth.
This project is focusing on the problem of performance, visibility, and rewards culture within any given group. As Colony’s founders explain: “Instead of being monitored and evaluated by someone higher up the hierarchy, any individual’s merit within a colony is calculated through systematic peer review of completed work and represented numerically on the blockchain.”
While DAOs built on District0x are called districts, same goes for ‘colonies’ built on the Colony platform. The premise and purpose of these DAOs are simple – you are rewarded with tokens anytime you contribute to a project. The number of tokens you hold reflects your overall reputation. As your reputation grows, so does your influence in the form of improved voting rights.
So far, Aragon proves to be the most formidable platform that generates viable DAO ideas and actually implements some of them in concert with similar projects. It uses blockchains to automate existing organizational and governance structures, providing the ability to freely organize and collaborate without borders or intermediaries.
The Dot-com bubble was detrimental to the business world and the economy, and yet the Internet reshaped everything for the better in the long run. In the 90s, new businesses emerged thanks to the arrival of that new technology. It became progressively clear how a digitally native Amazon was different from a brick-and-mortar Walmart.
The blockchain-based DAOs built on platforms like Aragon, Colony, and District0x are going to pose a threat to existing systems that are slow to react to rapid change. With DAOs, we are witnessing the birth of entirely new ways of coordinating, aligning, and rewarding work that is not mired in the bureaucracy of legacy organizational models. More importantly, they will enable completely new types of organizations to change the world as Facebook and Google did in their own time.
What’s your take on the future of DAOs? Comment in the section below!