Decentralized Autonomous Organizations

Decentralized

The use of blockchain networks has seriously changed the existing financial infrastructure. And not only it, because high reliability and resistance to external influences have been useful for other areas of human activity. For example, for the management sphere. Using the principle of the blockchain allowed the creation of the so-called “decentralized autonomous organizations” that fully cope with the operation without any central governing body.

What is DAO?

In a simplified form, a decentralized autonomous organization - DAO - an organization controlled by computer code and software algorithms. This allows it to work autonomously, without the need for control by the central governing organisation.

In many aspects, this is realized through smart contracts - they allow associations of this type to work with changing external information and respond effectively to it. In addition, the user community, regulated by various token-based mechanisms, plays a significant role.

All important information - work rules, algorithms, transactions made - all this is stored within the blockchain. That means, each node has a full copy of this information, and each network member can get acquainted with it.

Regarding making changes to the work process, it is approved collegially - by an open vote of interested parties. And if the majority (or a different percentage, depending on the consensus algorithm established by the DAO) is in favour, then the change will be made.

In essence, DAOs work like classical corporations, only without a traditional hierarchy and bureaucracy. Everything is done totally due to the economic mechanisms of coordination and various aspects of game theory.

There are no formal contracts between individual members of the DAO - only a common goal and incentives adopted in the system. And since there are no formal restrictions on the work of such organizations, their activities may simultaneously fall under several different jurisdictions.

In addition, the DAO allows a large number of individuals and institutions to cooperate without the need for mutual trust - the established interaction algorithm still cannot be violated.

DAO and the problem of relations "principal-agent"

In traditional management, there is an extremely difficult and inconvenient problem - the principal-agent dilemma. It arises in those situations when one individual or legal entity - the agent - gets the opportunity to act on behalf of another individual or legal entity - the principal. Officially - within the framework of his interests, but in practice - based on his needs and motivation.

This is facilitated by the asymmetry of the distribution of information - the principal knows about the agent’s activity only what he tells him. And that gives a lot of space for abuse. Most often, such situations arise during interactions: the deputy and the society that chose him; an investor and a broker buying up shares and other assets on his behalf; shareholders and managers appointed to represent their interests.

DAOs allow this dilemma to some degree. Thanks to the embodied principle of transparency, the principal can at any time receive a report on the activities of his agent. And thanks to the invariance of the system, the agent does not have the ability to somehow mask or distort the nature of his activities.

Examples of such organizations

Perhaps one of the first examples of an efficiently functioning DAO is the Bitcoin network. This includes decentralization, consensus algorithms, and collegial management, and common interests in the form of specific economic benefits.

However, financial organizations are not the only that can be decentralized. There are cases of effective application of the principle of DAO in the management of tokens, venture funds and social networks. In addition, this principle goes well with the Internet of Things (IoT).

There is also a private subspecies of this principle - decentralized autonomous corporations. They do the same thing as ordinary ones, but without a corporate structure and related bureaucracy.

"The DAO"

Despite all its advantages, DAO has some disadvantages. They can be clearly seen on the example of one of the first such organizations, which was not too originally named “The DAO” - an autonomous venture capital fund operating on the basis of the Ethereum blockchain.

DAO tokens that gave ownership and votes in the management of this organization were initially actively distributed as part of the initial coin offer (ICO). However, shortly after the launch, approximately a third part of the funds was instantly withdrawn from the accounts of the organization as part of one of the largest hacks in the history of cryptocurrencies.

This led to the fact that the Ethereum blockchain underwent a hard fork - a hard separation into two different branches. In the framework of one, the illegal transaction was cancelled, and in the framework of the second, they considered that the “principle of immutability is more important” and left everything as it is. The second branch is now called Ethereum Classic.

Problems related to DAO

Legal issues. A very small number of regulations concern the regulation of the work of decentralized autonomous organizations. This “legal uncertainty” prevents many large organizations from actively using this principle.

Confronting a coordinated attack. As was seen in the example of The DAO, such organizations are not immune to thoughtful attacks. And due to the small scale, it is much more difficult for them to resist the traditional “51% attacks”.

Decentralization points. In the context of the DAO, decentralization means that a wider range of users is allowed to perform regulatory functions. However, this is also a kind of centralization, only on a large scale. However, the principle of transparency partially compensates for this.

Conclusions

Using the principle of DAO allows you to work without the traditional control of the governing institutions. Automated execution of rules, common goals and specific incentives control the system no worse, and in many ways even better. However, without a thorough study of the rules of interaction, consensus algorithms and smart contracts, nothing really effective will work. In addition, DAO very often encounters problems that are not technical, but exclusively social in nature. But in general - this is a great alternative to traditional management methods.