What are DAOs and How Will They Influence the Startup World?

What are DAOs and How Will They Influence the Startup World?

Pop quiz: does anyone remember what the first company in Canada was called? Time for a story refresh.

Long ago on May 2, 1670, the Royal Charter granted exclusive trading rights to a fur trading business known by the name as Hudson’s Bay Company. With that decision, it became the oldest incorporated merchandising company on record in the English-speaking world.

This step was important at the time because it paved a new path of how a business vehicle could protect shareholders from their personal assets in the case of an emergency.

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Some 300 years later, we now sit at the inception of a new form of organization called a Decentralized Autonomous Organization, or DAOs for short.

The question I want to discuss today is: will it be as revolutionary as incorporation 300 years ago? Let’s dig in.

What’s a DAO?

It’s like most organizations (a community of people collected for a common purpose), but it’s completely decentralized: all the decisions are digitally constructed by smart contracts written into blockchain.

These smart contracts means that the actions of a DAO are automated.

It’s also completely transparent because all the policies and finances are public, and any changes to the smart contracts are also tracked and public.

DAOs are pure democracy. Instead of having a board and an executive team making all the decisions, a DAO works by letting all the members vote and then the majority response is automatically implemented by the smart contracts.

This means that:

  • All the members hold equal power based on their membership status
  • The majority wins, even if it’s not what the “leader” wants
  • It levels the playing field so that all can participate
  • All activity is available to the public

DAOs are a way for people around the world to easily and efficiently make decisions without managers and secrets.

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The membership of a DAO is either token-based or share-based. Their voting power is correlated to the percentage of membership shares that they own.

So, Do DAOs Actually Work?

Yes... but not always.

Originating as a way for people to automate decisions behind crypto transactions, an ethereum-based DAO raised $150 million in $ETH through crowdfunding in 2016, promising members an easy, anonymous way to make trades void of human error.

Unfortunately, a month later hackers took roughly $50 million worth of Ethereum due to some security vulnerabilities and shortly after the DAO disbanded.

According to Forbes, however, the first fully functional DAO is Bitcoin, because “it has programmed rules, functions autonomously, and is coordinated through a consensual protocol.”

You can view a list of functioning DAOs and explore the top DAO tokens.

What Does This Mean for Startups?

Primarily, similar to a VC fund, it allows for people to pool their resources to reach an outcome that wouldn’t be possible individually. However, there are differences in speed, trust, and transparency.

I think DAOs are an interesting blend of co-op governance (think REI) made more effective via web 3.0. It feels like societally this is something that people are looking for, and I’d expect new startups to lead in adoption vs existing businesses making a transition.

The big question will be whether they will be more effective and therefore more competitive than their traditional LLC cousins.

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Will DAOs Take Over the World?

CEOs and investors should be paying attention because if DAOs prove effective in the long term, there will be implications across every sector. For example:

Technology: This is the most obvious, as there are currently DAOs that collectively buy NFTs, fund ethereum development, or create web3 product demos. The list goes on.

Government: Although it seems unlikely, it is possible that governments could choose to eliminate bureaucracy in favour of a decentralized system for passing legislation.

Philanthropy: How will a DAO impact philanthropy? Well, consider that decisions affecting a DAOs treasury are voted on by the members, and the funds are automatically distributed based on the result. This has significant implications for foundations that previously needed managers.

Real estate: The collective membership can buy a property together, own a sports stadium or even launch a cabin centre for creators.

Finance: There are already a significant number of DAOs in finance, and they govern “most of the multi-billion dollar decentralized finance (“DeFi”) protocols, like Uniswap, Aave, and Curve” although most began as private foundations and adopted DAO principles after.

Oh, and there’s even a DAO committed to replacing banking.

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Think this is too difficult to regulate?

Currently, DAOs are widely unrecognized by universal governing bodies. This means that the members have to carry the liability and any incurred debt or fees on their own.

However, Wyoming ruled that as of July 1, 2021, DAOs can now register as LLCs within the state, starting with the recently approved American CryptoFed DAO, which intends to create a “monetary system with zero inflation, zero deflation and zero transaction costs.”

As a result, Wyoming joins a small list of regions with beneficial blockchain jurisdiction, including Delaware and the European island Malta.

Many in the legal profession are starting to speculate how to create law for DAOs. According to CoinDesk, the Wyoming ruling is considered to be “an attempt to close the gap between formalized corporate structures and unincorporated groups governed by rules coded in smart contracts.”

Lawmakers elsewhere are being encouraged to create similar legislation to protect those involved in or affected by DAOs.

Regardless of how fast policies get approved in your backyard, this topic is worth keeping an eye on. If this interests you, I encourage you to spend some time exploring your own questions on the topic.

Questions to Close:

I’m curious to know if you would want to join a DAO, and how you see the rise of DAOs impacting your specific industry.

Let us know by emailing us here or tweeting us @kernal_ideas.