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Blog posts, Thought leadership | 09/29/2023

Are DAOs The Future of Corporations?

The rise of blockchain technologies could introduce the most significant disruption to organizational structures since the early days of the Industrial Revolution. In this article, we explore how.

The rise of blockchain technologies could introduce the most significant disruption to organizational structures since the early days of the Industrial Revolution. Before exploring why, let’s take a long-term historical perspective on companies’ shifting shapes.  

The 15th and 17th centuries saw the democratization of “joint-stock companies.” These models allowed multiple investors to pool their capital into a single, large enterprise — a concept tailor-made for an era where “few people had the money to fit out several ships for a transatlantic journey,” as Alex Tapscott explains.  

Fast forward to the early 1800s, the Industrial Revolution and the vast influx of capital necessitated “a change to laws to make it easier to incorporate businesses to pursue manufacturing, railroad construction, and other high capital-expenditure.” This led to new forms of corporate structure known as “limited-liability companies,” where investors could only risk their invested amount. This framework gradually became foundational to modern capitalism and has governed how the private sector functions since then. 

However, the crux of the matter is a question adequately begged by Alex Tapscott: “Have the limited-liability companies reached the end of their useful lives in a digital age?” There is compelling reason to believe the answer is affirmative. With the exponential growth of tech innovation, how corporations are created, ruled, and governed is bound to go through a similar shift. 

But how? 

Enter DAOs. These blockchain-based governance models could be to the digital age what “limited-liability companies” were to the industrial age. In essence, DAOs are internet-native, decentralized organizations built on token-based incentives. Instead of relying on vertical and bureaucratic models, they enable user-centric forms of corporations where code automates governance, tokens orchestrate ownership, and smart contracts enforce rules.

To be clear, DAOs share some features with limited-liability companies, especially since they allow individuals to “share the risks and potential reward in a commercial undertaking.” Still, a key difference is the low amount of capital needed to form DAOs, and their extreme user-centricity, all factors positioning them as the de facto model for the next digital age.

DAOs have experienced rapid growth in recent years, despite recently receding due to the crypto bear market. Their applications span diverse industries, from Uniswap in the DeFi sector, to Decentraland, an online virtual world governed by a DAO, or Friends with Benefits (FWB), an innovative decentralized social club where token holders collaborate and network. 

There has been skepticism around DAOs’ efficiency, too. For some, the most adapted governance structures will always be models with boards and CEOs. But for Vitalik Buterin, co-founder of Ethereum, two frameworks must be distinguished: “convex” and “concave” situations. The first, including pandemic responses, military strategy, and technology choices, require “coin-flips” decision-making more prone to be solved by top-down structures. The second, such as judicial decisions, public goods, and tax rates, require compromise and are more adapted for decentralized governance. 

Let’s face the reality. While blockchain technologies rapidly advance, DAOs still belong to a cryptopian ideal. DAOs are formidable instruments to eliminate entry barriers (even tiny investments can buy governance tokens), but in parallel, their technical complexity and regulatory uncertainty surrounding their implementations have tempered their mainstream adoption. Only time will tell whether this ideal will reshape how people collaborate forever. 

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