WTF are DAOs anyway [PART 1]

5 min readJul 23, 2021

A DAO is not an investment thesis. It is a crypto-native org structure designed for the new digital economy.

The Nature of the Firm

When the crypto community rushes to worship the DAO, many forget why people form organizations in the first place. To understand DAOs, we need to understand the origin of firms.

As Ronald Coase pointed out in “The Nature of the Firm,” companies emerge because they are better equipped to deal with the transaction costs inherent in production and exchanges than individuals are.

In plain English, companies exist because they offer quality products and services at competitive cost structures. This economic explanation is the foundation of why people are willing to give up individual freedom, and join together for greater efficiency.

DAOs are not a decorative format, but their very existence touches upon the core efficiency of a new digital economy.

The Changing Nature of the Workforce

The rise of the DAO is built on the emergence of a new class of digital nomads. Born and raised on the internet, they are crypto-natives poised to shape and build a borderless and permissionless digital economy.

The DAO is an ideal structure because it leverages blockchain and smart contract technology to enable people around the globe to freely interact with each other with aligned interests, incentives, and payment structures.

Companies today are designed for the legacy jurisdiction-based system. The current corporate structure has embedded issues: costs for legal, accounting, international payments, principal-agency problems stemming from concentrated ownership, and worst of them all, centuries of regulatory red-tape, bribery and lobbying.

When the corporate structure was invented, nearly five hundred years ago, these “bugs” were actually features. The juridical system that evolved back then, which gave birth to concepts like ‘property rights’ and ‘nation-states’ as well as ‘corporations’, was actually a massively disruptive innovation: it kicked off the Industrial Age, allowing for more resilient and trustworthy forms of economic organization than what had come before.

But one century’s competitive advantages gradually turned into another century’s problems. As we move out of the Industrial Age and into the Information Age, we need a new property rights system native to the era.

DAO is native to the Information Age

DAOs will be the new form of organization for the new property system. Ethereum (and other smart-contract platforms) will be its enforcement mechanism.

DAOs can also solve another problem pervasive to companies: concentrated ownership. In the Industrial Age, success was about scale. Centralization (i.e. concentration) of power, authority, and wealth were the natural byproducts.

On the contrary, DAOs are the form of organization that distribute ownership to a new class of workers that want skin in the game. In many DeFi Bluechips DAOs, VCs are not the majority owners anymore. Instead, these are community owned organization, by and for those who contribute to the DAO.

Every DAO functions like its own decentralized economy. It has its own currency, voting rights, economic behavior, marketplace, code of conduct, memes, and most importantly, culture. Governance is just the power to propose and approve economic and political decisions for that economy.

What are DAOs good for?

DAOs will be just as common in the crypto world, as LLCs are in the real world today, but we should also be cautious and not to DAOify everything. One question community can ask is: are there more benefits brought by the DAO structure than the costs involved?

To help answer that question, let’s put some systematic thinking in the various structure of “Systems.” The following chart illustrates three major types of organizations.

Centralized System

This is where most of the companies are today.

Centralized systems run at the highest efficiency, yet they lack robustness. These systems could easily fail when as few as one central node is turned off. The market runs with strong human intervention.

Decentralized System

Truly decentralized systems are very expensive and inefficient. All nodes need to be running the same computation, storing the same data, and communicating to each other on a peer-to-peer basis. However, these systems are the most resilient. The organization will only disappear when the last node is turned off. It is also more open and dynamic: any player can join and quit anytime. This is where Bitcoin, Ethereum, and some of the truly decentralized DeFi projects are today.

Representative System

A representative system sits in the middle. It is more efficient than a decentralized system, since it restricts governance participation to a concentrated group of delegates, but neither does it allow all players to participate on an equal footing.

Representative systems are relatively rare in modern society. They are mostly found in Western governments, like the U.S. Senate or the House of Representatives, but are rare in economic organizations.

One example in the crypto world is delegated-proof-of-stake (DPOS) blockchains like EOS. While they are more efficient than decentralized chains like Bitcoin and Ethereum, they are easily corrupted, because the “representatives” control significant network power and can monetize the power for their own needs.

Strong DAOs,Weak DOs

Most of the DAOs today are either representative or fully decentralized systems. They are in fact, Decentralized OrganizationS, or DOs.

DOs are digital organizations that bring people on-chain but still run as a company, driven by human decisions and management for profit maximization and incentive alignment.

DAOs are autonomous because the organizational structure shifts according to rules and algorithms written in the smart contract. It is the native organizational structure as human society swarms into the crypto world.

The key distinction is whether to trust humans or computer algos. Which one provides better certainty?

It’s likely that most LLC-registered DAO are DOs. This is precisely what is happening in Wyoming.

That is not to say that DOs should not exist. On the contrary, they are an ideal transitory state that will carry society from LLCs to DAOs, similar to how crypto has gone from private consortium chains, to CeDeFi, to a truly decentralized ecosystem where anyone can trade and coordinate across the globe.

The journey to building truly decentralized DAOs is long and hard. At AladdinDAO, we are approaching this transformation from both intellectual and empirical perspectives. We like to write down our ideas, but more importantly, build a community of like-minded pioneers to bring the ideas to live

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