The Real DAO Opportunity
As a founder and business owner, there are a number of places where I believe Web3 will bring new efficiencies to running businesses. I'm not thinking of smart contracts for legal agreements — which have been somewhat overhyped over the years given the challenges with enforcing code as law, but decentralized autonomous organisations (DAOs).
What is a DAO and how does it work?
A DAO, or Decentralized Autonomous Organization, is an organization represented by rules encoded as a computer program that is transparent, controlled by the organization members, and not influenced by a central government. DAOs are typically associated with blockchain technology, particularly on platforms like Ethereum.
In a DAO, the rules of the organization are typically written in smart contracts, which are self-executing contracts with the terms of the agreement directly written into code. Members of the DAO interact with the organization and make decisions through voting mechanisms encoded in the smart contracts. The decentralized nature of DAOs means that decisions are made by consensus, often through a voting process where each member's influence is proportional to their stake or voting power in the organization.
DAOs can be used for a variety of purposes, such as managing funds, making investment decisions, or governing decentralized applications (DApps).
While DAOs are enjoying a lot of attention currently, I believe this is the tip of the iceberg, as they can ultimately provide an operating model for all businesses to be run upon in the future. The transparency of public blockchain ledgers is generally considered a bad thing for businesses. After all, businesses have sensitive and competitive data they need to protect. This could be customer information in the former case, and proprietary technology in the latter.
Traditional organizations
However, there is a lot of standardized financial reporting that both public and private limited liability companies need to undertake and public ledgers would be an ideal place for this to reside. For instance, Web3 Labs is a UK domiciled company, and there are two government organisations that it needs to disclose information to on an ongoing basis:
- HMRC - the UK tax authority
- Companies House - the UK companies’ registrar
There are other government organisations we have to deal with, but these are the main ones that all companies have dealings with. Whilst these are UK-specific organisations, there are equivalents in other markets. In the US you have the Inland Revenue Service and corporate registry websites on a per-state basis which could be substituted into this discussion.
With Web3 Labs we have to publicly disclose the following:
- Earnings — our annual statement of accounts
- Tax — corporation tax, sales tax (VAT), payroll tax, etc
- Details of all directors and shareholders
For our financials — accounts and tax, what this means is that we have to work with our accountants who extract the relevant revenue and expenses data out of our book-keeping system, which we have to approve and ultimately submit to HMRC.
We then have to file documents with Companies House when changes happen to the company's share allocations or directors. This is time-consuming administration that every company in the UK has to undertake. That's 5.6 million businesses in the UK alone.
DAOs vs Traditional organizations
Now, let's flip the narrative to DAOs. A DAO is similar to a company, except its represented as code that lives on a blockchain. It is made up of shareholders — the token holders, who participate in the governance of the DAO.
Just like a company, they can accept payment for services performed. These payments can be in cryptocurrency or stablecoins like USDC. But unlike a company, all of this information is public by default.
DAOs don't necessarily have company directors, with executive control, but there's no reason why they couldn't — after all, they're only code that can easily be enhanced.
Imagine if the 5.6 million businesses in the UK were DAOs? This could save immense amounts of reporting time for not only business owners but also for the government agencies that oversee them — Companies House and HMRC.
By existing as a DAO, all reporting can be performed in real-time. For instance, when a payment for services is made to a DAO, a portion of this can be put to one side to cover the tax obligations in the jurisdiction it is operating out of. Likewise, when shareholder changes are made, or company updates take place, details of these can be tracked on-chain, so there is a permanent record of the activity performed.
This on-chain record of business activities would make life far simpler for government agencies to obtain the information they care about too, resulting in a win-win outcome for all involved.
It is important to note that using a DAO structure doesn't necessarily mean that all of a company's activities need to be made public. Ensuring the privacy of regulatory or commercially sensitive information will still be crucial to their business. For instance, companies don't want their competitors to see the specific source of all of their funds, and customers don't always want others to know which companies' services they are paying for. These are challenges that can be addressed with privacy technologies such as zero-knowledge proofs.
Whilst privacy technologies are not yet the mainstay of public ledgers (solutions do already exist, however), intermediaries or potentially mixing services could be used as a mechanism to provide transaction anonymity if businesses don't want other entities to track their funds. Zero-knowledge proofs could then easily be used to prove who sent the transactions subsequently for accountability and audit purposes to keep legislators happy.
DAO downside
Right now we are in a highly experimental phase of the adoption of DAOs. There are a number of decentralized protocols that have successfully transitioned to a DAO based governance model, but there are a number of issues they still suffer from such as:
- Vulnerability to being hacked or drained of funds
- All decision making takes place in a fully transparent manner — it is possible to see how any token holders vote even on contentious issues
- Challenges with removing staff
- Limited recognition as legal entities
- Lack of regulation in some jurisdictions for companies dealing with cryptocurrencies
Over time these teething issues will be addressed. Having appropriate legal frameworks in place to recognise DAOs as legal entities (such as is already the case in Wyoming) and greater regulatory support for stable coins could go a long way here. The technical challenges will become less insurmountable over time too.
However, the benefits for both governments and companies of supporting such a DAO structure are gargantuan, and this is one area in my mind where the potential of Web3 is absolutely huge.
Whilst I don't believe we'll see DAOs as commonplace for several years, I cannot fathom a reason why anyone would not wish to see such standardized software-based structures on public blockchains in place, for the majority of the world’s companies.
In the nearer term, there are both governance and technical challenges to overcome but I do not doubt that this will happen before regulators broadly embrace these structures. The real question becomes, how soon will support at the national level become widespread for these? As that's when the DAO will hit critical mass and Web3 technology will be a core fabric underpinning our society.
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