Blockchain as the New Corporation – Moving to a Decentralized Autonomous Organization (DAO)

image showing companies operating under a decentralized autonomous organization through the power of blockchain technology

If you have not heard of the term DAO, it is the short form of Decentralized Autonomous Organization. You are going to hear it frequently in the blockchain era. Blockchain technology has acquired tremendous traction in almost all industries. For instance, the financial sector was reliant on intermediaries, such as banks and trusted third parties, before Blockchain’s advent. Thus the processes were slowly backed by hefty fees. Blockchain is a distributed ledger technology, demonstrating that multiple entities can rely on a single secure, shared system of records with rich features. The idea of developing DAOs with the Blockchain represents a fair and cost-effective business model that effectively addresses the challenges of outdated centralized businesses with the help of blockchain features. Traditional centralized business frameworks involve middlemen and complex stakeholder requirements. As a decentralized world, Blockchain is transiting to make every business a new corporation moving to a DAO model.

An Overview

Bitcoin is the first real-world application of a “decentralized autonomous organization” (DAO), providing a revolutionary organization design model. Think of working in a global business structure with routine tasks controlled by software protocol rather than managers and employees’ management. In this model, an algorithm drives randomized job assignments and incentives. Information and data flow safely and immutably through a recorded and transparent public ledger named “blockchain,” rather than via a corporate hierarchy.

Moreover, the organization makes decisions on design and strategy developments through a democratic voting mechanism involving a previously hidden class of stakeholders named “miners.” Agreements should be at an organizational level for any planned protocol changes to be agreed with and implemented. This approach is something we can call a DAO corporation.

DAO – A Revolutionary Design

A decentralized autonomous organization (DAO) is considered the most revolutionary organization design, based on distributed ledger technology and smart contracts to initiate governance being run solely by computer code. DAOs are multifaceted mechanisms that work autonomously. Compliance standards evolve automatically and significantly change decision-making in businesses.

The DAO is a novel form of organization design. Members have the power to propose changes in the organization and where technology determines how to shape activity. Ultimately, these new organizations can change society by allowing peer-to-peer collaboration and eliminating the intermediaries. While this might seem new for some, the first DAO (named the DAO) formed in 2016. Though it failed in its original incarnation, further attempts to develop and manifest a successful DAO will undoubtedly emerge in the coming years.

DAO Changing Decision Making

Organizations are part of complex environments. Over the past years, decision-making shifted from imposing processes to cooperative effort and egalitarian decision-making. However, the influx of distributed ledger technology and consequent consensus mechanisms and smart contracts is again changing the idea of decision-making significantly.

Transforming the Organization Design

Smart contracts apply to a broad range of applications, not just those linked with financial markets and self-enforcing autonomous applications. So, Blockchain’s potentials are almost endless. It enables businesses to develop novel, distributed products and services that will lead to efficiency gains in operations and progressively automated decision-making capabilities. These blockchain-enabled products and services share many of the same characteristics as decentralized applications (dApps).

Decentralized Applications

A dApp has usually two distinctive features:

  • any alteration in its protocol must be approved by consensus only;
  • the application must use a cryptographic token, or cryptocurrency generated according to a set algorithm.

Henceforth, the consensus mechanisms and cryptographic primitives lead to a new organization design: the decentralized organization.

An organization developed on dApps is a decentralized organization. Decision-making occurs through consensus made between decentralized actors. The foundation of trust among these actors evolves cryptographically, and power emanates within the code. Decentralized applications do not need a centralized authority for record and maintenance. With records saved on thousands or millions of decentralized computers, data-driven decision-making becomes a key driver of success within the business.

The decentralized infrastructure makes sure that even a single case of misconduct leading to the point of failure does not impact the whole network. Because a trustless system relies on cryptography, Blockchain, and smart contracts, organizations maintain better control, decrease opportunism, and positively affect its influence.

A Delegative Leadership – The Gist of DAOs

Decentralized organizations rely extensively on a delegative style backed by widespread applications of IT. The more a firm applies distributed ledger technology, the more it adopts a delegated style. More of its decisions are delegated and automated, while trust is built on a mathematic foundation rather than opinion. When that happens, the autonomous software algorithms solely direct the actors’ interactions—organizations transit from ‘social entities’ to ‘artificial entities. Individuals do not represent an essential component of an organization, but code does. A DAO is a next-generation organization design, which will necessitate new research to comprehend how current theories are affected by this new kind of organization.

The Concluding Thoughts

Organizations adopting Blockchain are progressively unifying with a distributed network organization. Using smart contracts deployed on a blockchain, they will move towards becoming a DAO where all actors can self-organize to produce value. DAOs need to ensure compliance with all regulatory requirements, which might or might not be contradictory.

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