Why DAOs Will Take Over the World

Subtitle: A paradigm shift is coming for major corporations, governments, and your portfolio.

“How did you go bankrupt?” Bill asked. 

“Two ways,” Mike said. “Gradually, then suddenly.” - Hemingway

There's a major disruption approaching from the crypto world. It's an innovation not being talked about, because its implications are dangerous to understand. However, if you aren't paying close attention to it, you may be swept off your feet when this change comes, as will many major companies, governments, and other organizations.

This innovation is the Decentralized Autonomous Organization (DAO). What is a DAO though?

A DAO is an organization that is governed through the blockchain. Rather than all decisions being made by an organization's executives or board of directors, a DAO is decentralized, and its decisions are often voted on by the many holders of the DAO's token.

However, the true innovation of the DAO is that it inverts the power and incentive structures of traditional organizations. Rather than being dictated to in a top-down regime, DAO members have the full power to govern in an organic, bottom-up manner.

DAOs are typically built as blockchain protocols that enable the rules and functions of the organization to be fully administered and automated by code via smart contracts. They eliminate the need for central authority, which also reduces the possibility of corruption. DAOs are enabled by smart contracts, token-gated membership, and often have a crypto-backed treasury or warchest.

Most importantly, DAOs give all of its participants ownership and governance powers over the organization. Every major proposal is put to a vote. If members want to change the way a rule works, they can vote on what to change, and the smart contract for the org will be adjusted according to the winning decision.

Why does all this matter though? And how will DAOs actually eat the world, in all practical reality? There'll be a few driving factors that power transition.

Talent.

The first tectonic shift we'll see on the path to DAO dominance is DAO's attracting the best talent. Talented people often prioritize two things:

1. Massive impact

2. Enormous upside

For people joining already large, established companies, there's little opportunity for either. On the impact side, major decisions are governed by a small set of VPs and executives. It is difficult to bubble up an initiative from a lower role, and to get buy-in from leaders who may have a completely different mentality on what constitutes a good idea. And typically, almost no major decisions are put to a vote.

Within a DAO, all ideas enter on an equal playing field, and each proposed idea has the potential to grow like wildfire based on its merits alone. This presents immense potential to make an impact for DAO members, many of whom will have near-equal ability to contribute and vote on ideas. 

As for enormous upside, that is also typically greatly diminished. Joining Amazon or Microsoft today is nothing like joining them 20 years ago, so talented people usually must either take a high risk joining a small, unproven startup, or go through dozens of hoops to start their own.

With DAOs, talented people no longer have to join an extremely small startup to gain that high level of autonomy or upside. DAOs enable the instantaneous creation of multi-thousand member organizations, but are organized in a way that everyone can continue to have large impact and contribute wherever they see fit. In a sense, DAOs are like a mission-driven internet mob.

Unrestricted Crowdfunding

It's never been easier for these organizations to receive funding. Thanks to IDOs (Initial DAO Offering), anyone can send their crypto to a smart contract during the minting period to fund the DAO, and receive some percentage of tokens in return, and the crypto can often come from any country in the world. In contrast, to invest in a startup in the U.S., you must be an accredited investor with at least 1.1 million USD on hand.

This isn't the only way DAOs can receive funding or distribute membership though. DAOs can also exchange coins in support of one-another's mission. For instance, Developer DAO is a DAO of over 5,000 software developers and product managers aiming to build out the decentralized infrastructure that web3 will be built on. Rather than an IDO, members initially minted a limited NFT which is used to enter the community, and will be airdropped governance tokens.

Developer DAO is now aiming to create a startup incubator, where DAO members vote with their tokens to decide which products the DAO will support, help build, and fund. A different DAO named GitCoin, which has built out a decentralized GitHub to better reward open source contributors, recognized the potential strategic alliance of developers, and funded Developer DAO's treasury with $500k worth of Gitcoin, in exchange for 5% of Developer DAO's tokens.

Eventually, as Developer DAO funds various projects in exchange for those project's tokens, its treasury will grow, and its tokens will also begin to rise in value as the DAO acts as an index fund or major VC firm.

Better Product Incentives

Web3 products are moving fast. Part of the reason for this is that web2 companies have already validated which web products consumers actually want to use. The issue with many of those companies is that they maintain centralized control and revenue capture over all content. They try to build walled gardens to prevent users from leaving their systems, and to force creatives to depend on them.

Web3 shakes that model up. For instance, a decentralized social media platform functioning as a DAO can give creators full control over distribution of their content, while also giving users an open say in changes that will be made to the platform. 

On top of that, users get to maintain full control over their data across every application. It will be hard for centralized companies to compete with products that offer users direct rewards, full autonomy, and complete control over their data, and it's part of why every major tech company has been so resistant to adopting any blockchain protocols.

The other reason for their hesitance is a keen awareness that if they build a protocol and it gets rejected due their centralized ownership over it, it will clearly indicate to shareholders that they'll  be losing customer mindshare during the web3 transition. For now, their main strategy is to pretend these disruptive protocols simply don't exist.

The Transition

“You never change things by fighting the existing reality.

To change something, build a new model that makes the existing model obsolete.”  ― Buckminster Fuller

So what does the future look like for DAOs? And how will we get there? What type of orgs will be replaced?

Companies (Software, then Hardware)

The obvious first winners in the web3 war are going to be software and DeFi products. Talented people are turning down and leaving jobs from The Big 5 Silicon Valley software companies left and right to join crypto organizations. After getting the best talent, in turn, these crypto protocols will be composed together to create the best products. 

Content is king on the internet, so with a better incentive structure for both creators and users alike, many creators and users will follow shortly after these products are built. We're already seeing decentralized social media, content writing, and music streaming platforms taking hold. It's likely we'll see many more products – such as a decentralized Netflix competitor – take hold, with DAOs crowdfunding creators and purchasing exclusive streaming rights.

DAOs as tooling for general organizations are likely to move fast to other types of companies. An example I like to use is that of a Tractor DAO as a competitor to John Deere.

John Deere keeps all of their tractor-hardware closed-source, and makes it nearly impossible to repair their tractors without special tools and software that only John Deere owns.

It's feasible to imagine that a group of people may form a Tractor DAO. They could join forces to build an open-source tractor, and DAO owners could provide democratic governance on which features to include on the machinery. The DAO could crowdsource their funding, and become financially well-resourced enough to actually see its product through to production, disrupting the entire tractor industry.

At some point, DAOs may become so competitive and capital-intensive, that traditional companies may decide to reform as DAOs to become listed on Decentralized Exchanges (which are often DAOs themselves) and keep up with their new competitors.

Considering that nearly all of the largest crowdfunding campaigns in the world have been through blockchain projects, it's also possible that we will see DAOs perform hostile-takeovers of existing public companies – literally consuming these companies and reforming them as DAOs. OpenAccessDAO is in the beginning phases of attempting this with research-paper publishing companies. And just recently, ConstitutionDAO crowdfunded $43 million in a matter of days to purchase a copy of the constitution, though they lost by $200k to the CEO of Citadel because they announced their buying price beforehand.

VC Firms and Index Funds

Because DAOs are already native to the crypto space, they are certain to make highly-informed investment decisions on the ground floor for various web3 projects. These DAOs will become brand-name investment partners for crypto projects, with the DAO's token tracking as an index to its treasury. I wouldn't rule out a DAO outcompeting Sequoia Capital or YCombinator when it comes to web3 projects, especially when it comes to teams picking their earliest investment partners.

Some DAOs already do this, such as DAO Maker ($DAO) which provides the tooling for DAOs to form, while also letting its members stake tokens with the fund to provide capital to seed-stage crypto projects. Other projects, such as Merit Circle ($MC) and PathDAO ($PATH) index on a shared treasury of Play-To-Earn gaming tokens, where members might receive funding to form teams in games and share some percentage of earnings back with the DAO.

Governments

Governance is a perfect use-case for DAOs and blockchain. Governments are supposed to provide an uncorrupted way for groups of people to vote on decisions, and provide services for managing property and title transfers, while also managing a collective treasury to meet the collective needs of the group. A DAO provides all of these, with complete transparency and incorruptible safety.

Governmental DAOs will start small. They will begin as villages built out in the middle of ungoverned areas. Eventually we'll see small town DAOs, and if those models succeed, we'll start to see forward-thinking and new cities adopt them. Overall, their success is what will draw more people to them, and encourage the model to be replicated on larger and larger scales. Blockchain depends on composability, so we may even see federations form with many layers of sub-DAOs, from the village all the way up to a global level.

University DAOs

The decentralized university is the perfect example of how DAOs invert traditional power structures. Typical universities are administered from the top-down, with inefficient administrators typically focused on far different objectives from the various academic departments that make up the university.

A University DAO may not be a university at all, but rather a cross-discipline network of discipline-focused sub-DAOs. These discipline-DAOs would be composed of experts within their respective field, each voting on which courses satisfy learning certain topics.

The courses themselves could even live on the blockchain; A professor or even an obscure autodidact could independently upload their course materials onto a decentralized course-creation platform. When the student completes all the coursework, the course platform could issue an NFT to the student, indicating they successfully learned a certain topic. Employers could instantly verify the student learned those relevant topics, and students can advance to higher levels within the DAO based on their level of learning and contribution.

Discipline DAOs could also become a method for every expert in the field to organize on a global scale, pool and scout resources, coordinate research and research funding. One could see a Computer-Science DAO forming to coordinate and share resources between tens of thousands of professors globally. Cross-discipline DAOs could form for various combinations of disciplines, such as Computer Science and Neuroscience, and everyone in the world interested in that combination of studies could form their DAO and directly fund their own research, while sharing learning materials. Cross-discipline DAOs, in effect, would become supra-organizations, a natural consequence of the Discipline-DAO as the building block for the decentralized university.

How Do I Get Started?

The best way to get started with DAOs is to find one you like, acquire its governance tokens through an exchange, and begin participating. Great DAOs to explore are MakerDAO and OlympusDAO (governance over an algorithmically-backed / collateral-backed stablecoins), CityDAO (​​an experiment in decentralized land ownership), KrauseHouseDAO (DAO purchasing an NBA team through crowdfunding), Magnet DAO (yield-generating investment and incubator DAO), and Klima (crowdfunded carbon credit markets to accelerate carbon capture). A very comprehensive list of DAOs is also maintained by DAO Masters here.