Understanding DAOs: Colbeck Capital Management on the Future of Decentralized Autonomous Organizations

When Satoshi Nakamoto introduced Bitcoin to the world in 2009, everything changed. As Bitcoin helped usher in an entirely new era of blockchain technology, larger conversations surrounding decentralized digital currencies began to take place.

With rapid technological advancements, we are coming ever closer to more fully realizing alternative financial solutions, but that is not the sole purview of Decentralized Autonomous Organizations (DAO). As Colbeck Capital Management shared on their blog, DAOs present one of the most exciting, innovative concepts in organizational theory since Ronald Coase’s earlier work regarding the theory.

DAOs seek to change the very way we interact with one another in a financial setting where goods and services are bartered. Let’s explore this concept together in more depth by starting from the beginning.

Understanding DAO

In the same way that the industrial age gave way to stockbrokers, commercial banks and escrow agents for added trust, the digital era is quickly becoming beholden to the public ledger. The public ledger exists to provide trust to individuals utilizing cryptocurrency. Anyone can look at blockchain information to see when, where and for how much each transaction is occurring. Trust is built into the record through decentralization.

What Is Decentralization?

Spend any amount of time reading about cryptocurrency, and you will come across decentralization. Decentralization means that there is no controlling institution, such as a government or individual bank, that all others are beholden to for regulation or administration. Most virtual currencies will embrace decentralization status to enhance privacy and security.

How Do DAOs Work?

Colbeck Capital commented that DAOs could be seen as the natural successor to the old-school limited liability company of the 21st century. Even more exciting is that DAOs offer automation and convenience. Imagine a store that automatically restocked shelves, reordered goods, cleaned itself and paid the rent. This is what a DAO could become, but they must follow a set of prerequisites to get there.

  • Codifying a Set of Rules: A DAO must have a coded set of rules by which it will operate. Typically, these rules are coded to autonomously exist on the internet as a smart contract.
  • Entering the Funding Phase: After a smart contract is encoded, a DAO enters a funding phase where it offers property, typically tokens, that can be distributed in response to certain activities. Users who acquire tokens by investing in a DAO gain voting rights and the ability to influence its operation.
  • Deployment: With funding and financing completed, a DAO is deployed as a fully independent and autonomous creation. Open source and visible to everyone, rules and transactions can be found within the blockchain. Users can verify all transactions for an incorruptible and transparent record of data.

Ethereum, Security Exploits and the Original DAO

While some may argue that Bitcoin was the first DAO, there is some controversy in that regard. Vitalik Buterin is the co-founder of Ethereum as well as one of the most vocal advocates for decentralization. Buterin’s work alongside a host of Ethereum developers lead to the first-ever DAO.

In 2013, Buterin outlined the original Ethereum whitepaper, arguing that he could “create an inviolable contract that generates revenue, pays people to perform some function, and find hardware for itself to run on.” Of course, Buterin’s position came from the perspective that top-down human direction would be unnecessary.

The DAO would issue Ethereum tokens (ETH) to investors, signifying ownership and voting rights proportional to their investment. In less than one month, the DAO acquired more than 18,000 token holders and a valuation north of $150 million. At the time, this was the biggest venture in crowdfunding history. Unfortunately, the massive project left security faults in the Ethereum blockchain, leading to a hack that shocked the entire industry.

While Ethereum recovered the lost funds by forking its blockchain, pretending the event never happened, the moment still received a ton of attention. At its core, the DAO’s objective had succeeded. Ethereum had helped to develop a form of capital creation and organization that allowed strangers to raise money without the use of a traditional middleman.

Future of Finance: Transparency and Control

DAOs offer a radical take on an old business model. By prioritizing public transparency and openly replicable public ledgers, DAOs seek to take back control from the Oracles and Bridgewaters of the past. With a decentralized autonomous organization, business logic is codified and offered to the public on a convenient and accessible platform. There can be no secrets hidden behind paranoia firms and no cloak-and-dagger corporate politics.

Ultimately, DAOs will provide businesses and the public with an open-source revolution not dissimilar to traditional coding. The public at large will be invited to participate, improve upon and take ownership of DAOs.

DAOs may also provide a few other key advantages for consideration:

  • Agnostic Leadership: DAOs do not cater to the behavior of bad actors or accounts, nor do they take stock of user intentions. Instead, built-in reward systems allow for an egalitarian approach to employee advocacy. The protocol in the DAO has more sway than a random and potentially subjective manager at an office.
  • Limitless Potential: Chris Dixon, a general partner at Andreesen Horowitz, believes DAOs may become what social networks were always meant to be. Dixon points out as an example that a DAO led by its community could decide the rules of the U.S. election.
  • Data Ownership: DAO advocates also believe that the approach may put power back into the hands of the people especially concerning data. Dixon points out that third-party policies are set in a system that nobody reads. He argues that the best system is one where users control their data, have access to encryption and can rely upon built-in governance. A DAO can provide for all these things.

Attention will remain on this topic as DAOs and blockchain technology become a larger part of the public’s conversation. Just like any other technology iteration, the first generation can always present obstacles that quickly transition into memory as better forms take their place. We will all be watching to see where DAOs will go from here and what the future has in store for blockchain technology.

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