Blockchain technology is continuing to transform fundamental institutions. We saw this first with cyber currency and related financial systems, then with art and entertainment, and now you can add organizational structures to that list.

Since blockchain can encrypt and securely store smart contracts, it can be used to establish the governance of an organization that’s based on those immutable, contractual agreements. Organizations that use this governance system are called Decentralized Autonomous Organization (DAO), pronounced “Dow.”

Instead of a hierarchy of employees, managers, and leaders, governance of a DAO, its name states, is decentralized and subject to the smart contract-based rules, policies, and procedures for everything from conflict resolution to profit sharing – all stored and viewable on the blockchain. No need to enforce or monitor the processes. Each person is regulated and guided by the decentralized autonomous organization’s contracts.

In many ways, DAOs enable an automated form of democratization for organizations.

Boss-Less Businesses

As more DAOs come online, we’ll be hearing more about “stakeholder economies” instead of shareholder economies. “Work ecosystems” will replace work platforms as the daily method of interaction with these cutting-edge companies.

Just because they’re decentralized and even metaverse-based, though, doesn’t mean DAOs will be loosely organized and haphazardly run. DAO smart contracts have staying power; they can’t be changed except by a vote of the members of the decentralized autonomous organization, however they choose to establish those voting procedures. Their smart contracts are transparent, which means there’s no wiggle room for any participant to veer from the DAO’s mission or subvert their processes in any way.

How DAOs Work

DAOs are participatory and dynamic. Today’s DAOs are mostly formed around cryptocurrency and NFT financial investments. DAO participants earn a financial stake, and therefore a “say,” in these DAOs through buy-in in the form of cryptocurrency-based “governance tokens” or similar mechanisms. Each stakeholder’s voting rights reflect their level of financial buy-in. In some cases, the stakeholders are simply investors. In other instances, they take on roles to support the organization.

After the initial rules of the decentralized autonomous organization are defined, members are recruited, and offered a stake and a voice in the operation of the organization, voting on specific investment opportunities as well as the DAO’s overall direction. Members can submit proposals, participate in votes, and share in the tasks and success of the decentralized autonomous organization.

To the extent that governance tokens are limited, and the DAO prospers, the tokens can grow in value similar to a traditional equity instrument. Smart contracts often address how the tokens or ownership stake can or can’t be sold and the implications for the voting rights connected with that sold ownership token.

The Future – DAO-2.0

As mentioned earlier, DAOs have tended to be crypto-oriented in their missions and purposes. They’re oriented around a shared treasury, and their decision making revolves around how to invest or spend those funds. For example, many DAOs have been formed around non-fungible tokens (NFTs) and other cryptocurrency investment ventures. Most of today’s DAOs are essentially “internet communities with a shared bank account,” as one investor has described them.

But since the key ingredients of a DAO are transparency and shared decision making, all ensured by their blockchain-enabled smart contracts, the decentralized autonomous organization model can and will be used in many other business sectors beyond cryptocurrency and investing.

As is true with more and more blockchain applications (e.g., cryptocurrency investing), it won’t be necessary to understand the underlying technology and related processes. Those will remain behind the curtain. Participants will just see the very viable, democratized operating and decision-making processes inherent in the DAOs.

Not all DAOs in the future will be virtual, impersonal, and 100% online as they are today. Post-COVID, we’ll continue to see a mix of remote and in-person employee engagement within companies and project teams. DAOs will serve as a unifying structure to ensure continued shared accountability and an inclusive decision-making system in these hybrid arrangements.

DAOs will, in many cases, replace the LLC model for the formation of midsized companies. This model won’t be workable for all businesses or in all industries, though. It would be difficult to transition large corporate entities into a DAO structure. Rather, the model will most likely be used for nonprofits, social networks, and new ventures.

In DAO.2, more participants will be employees or active daily contributors to the venture rather than simply investors. They’ll earn governance tokens for their work along with “regular” compensation, even if they weren’t initial investors.

The new DAOs will be best-suited for well-focused companies and those with time-limited projects and initiatives. And while it may not be the right model for large, conglomerate, multinational corporations, certain processes, projects, and sub-businesses within those larger entities – R&D functions for example – will most certainly be candidates for DAO-oriented management structures.

Beyond Business

The metaverse gaming industry is embracing the DAO operating structure as they increasingly are providing forums for players to make suggestions on game rules, form committees to debate proposals, and even weigh in on the structure of voting rights.

Given their empowering and inclusive nature, blockchain-enabled DAOs will be an ideal underlying structure for informal groups, clubs, and even public sector governing bodies. Enforced organizational transparency, inclusion, joint decision making – these guiding principles that are inherent in DAOs will be valuable for nearly any collective structure of human beings that share a common purpose.

While this represents a radical departure from the traditional way businesses operate, we will be discovering fairer and more impactful ways for managing our organizations in the future.

Truly democratic systems tend to fail when numbers get large and the inclusive processes become unmanageable and impractical. But in the future, DAOs will be an important new tool for large and small organizations that want to offer a democratically run experience.