The transformation of the traditional financial system through blockchain technology has led to the possibility of creating autonomous organizations made up of individuals who may not know each other personally. Decentralized Autonomous Organizations (DAOs) have become the most effective way to manage investments and projects with like-minded people around the world.
Let’s take a closer look at what they are, their basic operating principles and global advantages. We suggest you check out our glossary of terms before reading the article.
“Today, the DAO allows uniting the two most important factors of production, finances and people, without being limited by geographical and jurisdictional aspects.
The principle of consensus, which underpins the DAO, is achieved through voting. XDAO uses a quorum voting model. All DAO participants who agree with the proposal being put forward vote; if a quorum is reached, the proposal is accepted. For example, a quorum of 51% means that an absolute majority takes decisions,” explains Zurab Shavlidze, CAO and Co-Founder of XDAO.
"Actually, a DAO is a set of smart contracts on a blockchain that defines some of the rules: the number of participants in the organization, the number of votes each participant has, and what they can vote on."
Zurab Shavlidze, CAO and Co-Founder of XDAO.
“This form of an organization significantly speeds up the decision-making process and makes the management system as transparent as possible. For instance, on the XDAO platform, any vote is recorded on a blockchain, thus allowing information about it to be stored. The same applies to the agreements between the project participants — everything is recorded on a blockchain, managed by smart contracts and cannot be compromised.”
Vladislav Shavlidze, CEO and Founder of XDAO.
Classical corporate law loses its relevance when it comes to DAOs. As the main element of the DAO, smart contracts change the usual rules in the traditional corporate sphere. The code is the basic law for the DAO and its participants. Smart contracts shape and enforce the “laws” within the organization. Thus, DAOs embody crypto-anarchism, as they wholly or partially abandon the influence of public authorities, using an autonomous digital structure.
At the same time, a new task appears: a) to encourage participants to take an active part in DAOs and b) to motivate investors to invest their money.
Voting incentives can be implemented through voting rewards. Meanwhile, the main incentive for investors is the transparency and ease of use of the DAO model.
“Such a system is ideal for investment funds, for example. In this context, the key problem that the DAO solves is the trust between investors who invest money in the fund and fund managers,” explains Vladislav Shavlidze.
“DAOs are well suited for collective management of cryptocurrencies, eliminating the risks associated with the loss of a private key from the fund or project wallet,” says Egor Gavrilov, CTO and Co-Founder of XDAO.
Despite all the advantages of this type of organization, the legal aspects of DAOs and all the legal aspects of working with cryptocurrencies remain rather unclear.
“There are no clear variants of DAO registration legally right now,” explains Egor. — “For the most part, they are registered as an LLC, that is, a limited liability company with partnership elements. But different jurisdictions provide different conditions, so each case has to be worked out individually. There is no general world practice so far.”
However, regardless of all the challenges and problems to be solved, DAOs can fundamentally overturn existing management methods in organizations, corporations, and communities. The traditional vertical system can be replaced by a more horizontal, open, accessible and decentralized system.
Decentralized autonomous organizations, according to Messari, could compete with the metaverse platforms for the title of the leading trend in the crypto industry in 2022. In particular, the structure of the DAO could be used within the Internet of Things. With the help of DAOs, every electronic device has the opportunity to become a full-fledged participant of the global economy. And the automation of everyday life through smart contracts and blockchain technology could take the software infrastructure of DAOs to a new level.
“The DAO is now an experiment in more democratic and productive organizational management. After The DAO case, the bright ideas of joint management had to be put on hold for a while. Only five years later, the subject of the DAO is back again, but with more conservative management models.
In the short term, more DAOs aimed at a small circle of individuals will emerge. In the medium and long term, DAOs will develop as multi-level systems, for example, company management systems with multiple departments and even city DAOs. Why not? One step from dream to realization! In any case, such organizations will be more and more integrated with the real world.” Anna Godovnikova, CMO of the XDAO project.