Leading differently: what are DAOs and how do they work?

Blockchain technology has profoundly reshaped the digital transaction and governance landscape, fostering innovative organisational structures. Central to the promise of blockchain is the principle of decentralisation, which eliminates centralised control, distributing authority across an entire network. This foundational technology supports not only cryptocurrencies but has also given rise to a new, novel way of organising and governing organisations. Welcome to the new, democratic system for company decision making: Decentralised Autonomous Organisations (DAOs).

How do DAOs work?

DAOs provide an alternative to conventional governance models, which often rely on complex and multi-layered bureaucracies. Built on blockchain technology and employing smart contracts, these organisations are transformative. Contracts are automated agreements - executing the terms encoded directly within the blockchain, which allows DAOs to operate independently from traditional managerial hierarchies.

Transactions and decisions within DAOs are recorded on a blockchain, accessible and visible to all, ensuring actions are transparent and accountable. This visibility reduces the potential for mismanagement and builds trust among participants. Moreover, the automation provided by smart contracts removes human errors and biases, adhering to predetermined rules.

Democracy in action

DAOs also democratise organisational participation, breaking down barriers found in traditional structures. They enable stakeholders from any location to contribute to decision-making processes, free from geographical or socio-economic constraints. This inclusivity enhances democratic engagement and encourages broader community involvement and collaboration.

Efficiency and agility are further hallmarks of DAO governance. By using blockchain technology, DAOs reduce administrative overhead and eliminate the need for intermediaries. The quick adaptability of DAOs to new conditions or information through automated decision-making processes significantly outpaces traditional organisations.

Different types of DAOs

A new paper from Henley titled “Decentralized Autonomous Organisations (DAOs): Stewardship Talks but Agency Walks” by Asma Alawadi, Professor Nada Kakabadse, Professor Andrew Kakabadse and Sam Zuckerbraun delves into the complexities of DAO governance. It examines how different voting structures affect fairness and inclusivity, how proposal management can dictate an organisation's adaptability and transparency, and how tokenomics align stakeholder interests with organisational goals. In essence, these types of organisations come in many shapes and sizes – for example, when it comes to voting on proposals, some have a ‘one token, one vote’ structure, while others use a delegation system whereby stakeholders can delegate their token to a representative. These insights reveal the delicate balance necessary between ideological stewardship and practical agency mechanisms for effective governance.

DAOs mark a significant shift from traditional governance models, offering a combination of transparency, inclusivity, and efficiency. Despite facing challenges like regulatory compliance and security issues, the transformative potential of DAOs to revolutionise organisational governance is clear. These systems – however – are still in their infancy, and the technology continues to evolve. As it does, it may set new standards for managing and governing businesses across the globe.