Simple Explanation of DAOs

The tech community often complicates straightforward ideas. DAOs, however, represent a simple concept: they are the means by which individuals unite digitally to make collective decisions. They achieve this through two principal mechanisms. Firstly, the governance rules of the organization are encoded as digital “IF/THEN” statements on a blockchain, ensuring they are both transparent and immutable. Secondly, stakeholders receive voting rights in the form of “digital governance tokens,” which are also recorded on the blockchain. This approach aims to eliminate the legal complexities and hierarchical structures typical of traditional organizations.

In theory, various types of work arrangements can emerge as DAOs—ranging from investment firms to engineering consultancies. However, the practical application tends to be more intricate and engaging.

1. Elimination of Interviews

Today’s DAOs consist of two main participant types: Core Contributors and Edge Contributors. Core Contributors are akin to employees, while Edge Contributors can join any DAO’s Discord and begin contributing, whether through coding, sharing updates, or organizing discussions. This is because most DAOs operate on a permissionless basis, allowing anyone to engage with their code, smart contracts, and contributor lists openly.

Consequently, these digital organizations lack traditional recruitment processes. Anyone can step in and start contributing in any way they are capable of. A significant advantage is that individuals who consistently provide value are often invited to join the core contributor team. This approach eliminates the need for resumes and cover letters: the DAOs' opt-in membership model fundamentally transforms talent acquisition.

This shift is beneficial for three reasons: 1. Traditional hiring practices often disadvantage minorities due to biases, and removing these processes allows for a focus on skills. 2. It continues the trend of work flexibility initiated by the gig economy. 3. It may help reduce frictional unemployment, as individuals can begin working immediately without delays.

2. Opportunity to Collaborate with Multiple Organizations

Working within permissionless structures allows contributors to engage with one or many DAOs simultaneously. The possibilities are boundless. While some may find the absence of exclusive relationships intimidating, many tech workers seek such flexibility. After all, companies can let us go at their discretion—why shouldn’t we have the same freedom?

Consider a film production: directors, producers, actors, and crew members come together for a project, then disperse to work on various other films once the project concludes. Similarly, in DAOs, developers, community managers, and consultants can shift between projects. This analogy is particularly fitting as many DAOs are driven by narratives.

This non-exclusivity can spark discussions about “Missionaries Vs Mercenaries,” given that DAOs are often mission-oriented. However, it’s unlikely that one project will provide sufficient income for a living wage. Such discussions can be unproductive, as human motivations exist on a spectrum between these two extremes.

3. A More Equitable Payment Structure

While the idea of self-initiated work is appealing, many will wonder how compensation is determined in such a framework. Contributors naturally expect remuneration for their efforts.

In a DAO, payment works by selling products or services and designating a portion of the revenue for salaries and rewards. Without formal contracts, determining fair compensation can be challenging. To address this, many DAOs utilize tools like Coordinape, which allows contributors to form “circles” (similar to teams). Each circle member allocates points to fellow members based on perceived contributions over a specific time frame. The greater the recognized value of one’s work, the more points—and subsequently, financial reward—are earned.

This approach offers several advantages. It facilitates a redefinition of value within an online community, incentivizes alignment with the DAO’s mission, and ensures that contributors maintain a stake in the organization’s success, even after their departure. Additionally, it helps eliminate the presence of free-riders commonly found in traditional corporate structures.

4. Innovative Decision-Making Processes

As previously mentioned, contributors in DAOs often receive governance tokens as a form of compensation. These tokens serve both as tradable assets and as votes for decision-making within the organization. In this system, each token equals one vote, ensuring that everyone has a voice proportional to their investment in the project. This structure encourages contributors to act in the best interests of the DAO.

Many DAO founders recognize that voting can lead to tyranny if mismanaged, prompting experimentation with alternative models. Quadratic voting, for instance, allows voters to express varying degrees of preference for options. However, I advocate for Sociocracy, where decisions are reached through consensus among stakeholders organized into semi-autonomous circles, preventing one group from unduly influencing another.

Moreover, customers who purchase tokens to access a DAO's offerings gain voting rights regarding its direction. This may be unsettling for some, but it signifies a shift where customers could also become colleagues—or even bosses—if they acquire sufficient tokens. Such democratic practices are rarely seen in traditional corporations, and workers will need to adapt to this new reality.

5. Emphasis on Community Values

DAOs are fundamentally digital communities where individuals gather around shared values and work towards common objectives, facilitated by smart contracts. This illustrates the concept of emergence in organizational development: a mission evolves into an organization. If this signals the decline of Facebook Groups, that may be a positive outcome.

While DAOs are often heralded as the future of corporations, I propose a more modest vision. Take fandoms, for instance: many struggle to thrive under algorithms that prioritize virality. DAOs could offer a lifeline by allowing stakeholders to become customers, owners, and contributors, fostering passionate online communities that attract new members in a beneficial cycle. This enables creators of niche communities to flourish and adapt alongside their supporters.

Furthermore, DAOs address some challenges inherent in open-source projects. Users must acquire tokens to access these projects, which compensates contributors while granting users a voice in the project’s direction. In essence, this allows individuals to pursue their passions while earning a living.

6. A Global, Asynchronous Work Environment

DAOs are inherently remote, accessible to anyone with an internet connection. This development marks a shift from localized gig economies to a global landscape.

This transition will yield unforeseen impacts for workers. By being global and remote, digital organizations open doors for participation from individuals worldwide. While globalization has previously pressured blue-collar workers in Western nations, DAOs could similarly affect white-collar workers. The asynchronous nature of DAOs may also render the traditional 9-to-5 workday obsolete.

Such flexibility can benefit marginalized groups. In environments where presence is often overvalued, the focus can shift to the value generated for the community. This is especially advantageous for young parents seeking to structure their workdays as they see fit. The adjustments brought on by the COVID pandemic demonstrated our capacity for this; it’s time to fully embrace this evolution.

7. Reduced Hierarchies and Colleagues

DAOs promote transparency but also anonymity. As payments are made to crypto wallets and identities are often represented by avatars on Discord, there is less need to present one's full self in a workplace setting.

This anonymity means that traditional colleague relationships are diminished. While this presents challenges, it also offers an opportunity for organizations to foster community intentionally. The future of DAOs may depend heavily on how well they build and maintain team cohesion.

Without the structure of knowing colleagues, the absence of a boss can be disconcerting, as contributors often have the freedom to choose their work. This shift towards self-management is significant and may be uncomfortable for many, but it promises substantial personal growth.

8. Transparency and Anonymity in the Workplace

As mentioned, DAOs exemplify both transparency and anonymity through blockchain technology and smart contracts. Every decision and action can be audited—a level of scrutiny that many employees in large organizations do not experience. This could help mitigate the Principal/Agent problem faced by conventional corporations but also raises concerns about potential negative consequences.

Linking a crypto wallet to a DAO allows for visibility of all transactions associated with that wallet. This may be acceptable for those who prefer anonymity, but not everyone will feel comfortable with this exposure. While maintaining separate wallets could be a solution, it introduces complexity that many may not want to navigate. Additionally, the identification of individual contributors on blockchains could lead to unintended repercussions for actions taken on behalf of the DAO, stifling risk-taking that could inspire innovation.

Anonymity can alleviate some of these issues, but DAOs thrive on community collaboration. Trust among members is essential for success, and individuals naturally prefer to connect personally rather than through avatars. As a result, many may opt for transparency, necessitating awareness of the potential pitfalls discussed.

Conclusion

When viewed through key metrics, DAOs appear to be gaining traction, with over $10 billion in treasury assets, 60,000 decisions made, 4 million votes cast, and 700,000 active participants.

However, these figures pale in comparison to traditional corporations. While one might argue that DAOs will continue to flourish as conventional companies falter, such a scenario is improbable. Instead, we may witness the emergence of a broader spectrum of corporate structures, each with varied working modalities. My hope is that we can preserve the beneficial aspects of each model while discarding the detrimental ones—though history suggests this may be a tall order.

Best of luck navigating this evolving landscape.

This article was originally published on Honeypot.io, Europe’s job platform focused on developers.